Tandy Leather Factory Inc (TLF) 2010 Q3 法說會逐字稿

Good day, Ladies and Gentlemen. And thank you for standing by. And welcome to the Tandy Leather Factory Third Quarter 2010 earnings Conference Call. At this time all participants are in a listen only mode. Later we'll conduct a question and answer session, and instructions will follow at that time. (Operator Instructions) As a reminder this conference may be recorded. And now I would like to turn the program over to Ms. Shannon Greene. Please go ahead.

Thank you. Good afternoon. Thank you for joining us for our Third Quarter 2010 earnings Conference Call. I'm Shannon Greene, Chief Financial Officer of Tandy Leather Factory. And I'm joined today by Mark Angus, our Senior Vice President. Jon Thompson, our Chief Executive Officer, is traveling on business this week. I call your attention to the fact that these conversations will contain forward-looking statements to the extent we speak today of any future event or make other forward-looking statements. You are reminded of the inherent uncertainties of looking into the future, that there are risks to Tandy Leather Factory that could prevent these events from occurring in the manner foreseen. Please see our Form 10-K for 2009, and subsequent forms 10-Q for a discussion of some of these risks.

Copies of these documents are available through the SEC's Edgar system, and from our Investor Relations office. Also statements made today by us as Management of Tandy Leather Factory, are made as of this moment, and we disclaim any duty to the update of those statements.

Our third quarter was somewhat out of the norm for us. And I'm saying that more from a Balance Sheet perspective than from an income statement perspective. We started the quarter with $13 million in cash, and ended the quarter with $3.5 million in cash. That $10 million was spent on a $7.6 million onetime dividend, and almost $3 million of additional inventory. In the third quarter we began construction on a small building on the back of our property. Which will cost approximately $800,000, and should be completed in the next few months. Its purpose is twofold. Expansion of our manufacturing capabilities, and staging of drop shipments of specialty purchased product to our stores.

We executed an agreement with the bank for a $2.5 million line of credit in July. It expires in June, the interest rate is LIBOR plus 2, and we pay no unused line fees. With the dividend paid in July, which used more than half of our available cash at the time, the decision to aggressively pursue special purchases of inventory, and the construction of the building, resulted in the need in our minds to have a small line of credit available, as we began rebuilding our cash position. We have made no borrowings on the line at this point. Our other current assets are up $1.7 million from year-end 2009. This increase consists of $1.3 million of merchandise that we had to pay for in advance, but wasn't shipped and/or received before September 30th. We also renewed licenses for our point-of-sale software for three years, which added another $260,000. And finally, we've got $75,000 in prepaid insurance at September 30th, that will be fully expensed by year-end 2010.

There are several things going on that have effected our inventory levels. First, as we stated last quarter, we made the intentional decision to increase the level of inventory maintained at the stores. Simply stated, our stores can't sell what they don't have. Legally we have a better chance of maintaining our sales momentum, if our customers have more variety and quantity of products to choose from. Secondly, we have had several opportunities to purchase various leathers at very competitive prices during the quarter. To take advantage of those opportunities, can take a lot of pressure off of gross margins in future quarters, since leather is the lowest margin item we sell. We expect purchases will decrease in the fourth and first quarters, as a result of these opportunistic purchases in the third quarter, so our inventory levels should return to a more normal level over the next two quarters. Consolidated sales for the quarter were up almost 8%.

Operating income from continuing operations was up 25%, and net income was up 7%. All three operating divisions reported sales gains and operating income increases. We believe we are well positioned for the fourth quarter. However the comps are tough, having reported a 12% sales gain in last year's fourth quarter. We have our work cut out for us to repeat that level of success in this year's fourth quarter.

Now for the numbers from today's Press Release. Third quarter sales increased 8%. Current quarter sales were $13.6 million, compared to last year's third quarter sales of $12.7 million. Wholesale leathercraft sales were $6 million this quarter, up 2% from $5.9 million in the third quarter last year. The distribution centers posted a 3% sales increase, reporting sales of $5.2 million, compared to $5 million in the third quarter 2009. Our national account group sales were $820,000 for the quarter, equal to that of the third quarter of last year.

Retail leathercraft reported sales of $7.2 million, a 12% increase over last year's third quarter sales of $6.4 million. Sales from the one new store was $49,000 this quarter. The 75 comparable stores posted sales of $7.2 million, an increase of 11% compared to last year. Our international leathercraft segment reported sales of $415,000 for the quarter, compared to $342,000 in last year's third quarter, a gain of 21%. Consolidated gross profit margin for the quarter was 60%, a slight improvement from last year's margin of 59.7%. Wholesale leathercraft gross profit margin was 61.5%, compared to 57.5% in the third quarter of 2009. Retail leathercraft gross profit margin fell from 61.3% in last year's third quarter, to 58.8% in this year's third quarter. International leathercraft gross profit margin for the third quarter was 58.9%, down from 67.2% last year.

Consolidated operating expenses were $7.1 million, or 52% of sales in the current quarter, compared to $6.7 million, or 53% of sales last year. An increase of $411,000 or 6%. Wholesale leathercraft reported operating expenses totaling 53% of its sales, versus 52% last year. Retail leathercraft reported operating expenses totaling 52% of its sales, compared to 54% of its sales last year. And international leathercraft operating expenses for the quarter were 48% of its sales, compared to 52% last year. Income from operations was $1.1 million for the third quarter, up 25% or $212,000, compared to the third quarter of 2009's operating income.

In other income and expense, our interest income is down by more than $30,000 this quarter, due to the reduction in our cash. Income tax expense is high for the quarter, due to some book to tax differences that affected the second and third quarters. The year-to-date expenses correct, reflecting a reasonable effective rate, and should remain so as we finish the year. On a year-to-date basis consolidated sales were up 9%. 2010 sales were $42.6 million, compared to 2009 sales of $38.9 million.

Wholesale leathercraft sales were $18.8 million this year, up 3% from last year's sales of $18.3 million. The increase is the result of a 5% sales increase at the stores, with sales this year of $16.5 million, compared to $15.8 million last year, offset somewhat by a 7% sales decline for national accounts, with sales at this year of $2.3 million versus $2.5 million in 2009. Our retail leathercraft division reported sales of $22.5 million, a 15% gain over last year's sales of $19.7 million. Sales from the two new stores, were $301,000 this year.

The 74 comparable stores posted sales of $22.2 million, an increase of 13%, compared to last year's sales of $19.6 million. Our international leathercraft segment reported sales of $1.2 million so far this year, compared to $943,000 last year, an improvement of 27%. Consolidated gross profit margin for the year was 60.8%, an improvement from 2009 gross profit margin of 59.1%. Wholesale leathercraft gross profit margin improved from 57.2% to 60.9%. Retail leathercraft gross profit margin this year of 60.6% matches that of last year.

International leathercraft gross profit margin fell from 63.5% last year, to 61.3% this year. Consolidated operating expenses were $21.8 million, or 51.2% of sales in the current year, compared to $20 million, or 51.4% of sales last year, an increase of $1.8 million. Wholesale leathercraft reported operating expenses totaling 52.1% of its sales, compared to 50.6% last year. Retail leathercraft reported operating expenses totaling 50.8% of its sales currently, versus 52.1% last year.

On a consolidated basis, the most significant expense increases were in Manager bonuses, advertising, freight out, and credit card fees. These expenses are tied to sales and profit increases. Legal fees are also higher than last year, due to foreign trademark registrations that we are currently working on. Income from operations was $4.1 million, up 37% compared to 2009. In the third quarter of 2010, average sales per store per month at the Tandy stores, was $31,000.

There are seven stores with operating losses as of the end of September totaling $102,000. One of the stores is new, was opened in March. We've made three Manager changes in three of the other six stores, and expect to see substantial improvement in store performance as a result. All of our Leather Factory stores are profitable as of September 30th.

We announced in early October, that we were closing Mid-Continent Leather Sales, a wholesale store located in Coweta, Oklahoma, due to weak sales and lack of profit. It posted an average monthly sales of $30,000 through the end of September, and reported a year-to-date operating loss of $28,000. We also indicated that we expect to incur approximately $300,000, as a charge to earnings in the fourth quarter, as a result of that store closing. That amount consists of $225,000 in goodwill, $20,000 for a non-compete agreement, and approximately $30,000 for the remaining lease expense for that location.

The decision to close the store was a difficult one. However, we seriously considered all options, and determined that closing the store was the best option. To summarize, we are relatively pleased with our performance through the first three quarters of the year. We continue to see strength in our retail business, while our wholesale business continues to show signs of weakness. The last quarter of 2010 will be a challenge from a sales perspective. The comps are tough. With that said, we still expect to beat last year's sales.

As mentioned earlier in the call, we will incur the onetime expense of $300,000 due to the closing of Mid-Continent, so it will be that much more important to monitor and control expenses well, as we finish up the year. That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions) Our first question in queue come from Graeme Rein with Bares Capital. Please go ahead.

Good afternoon.

Hi, Graeme.

Shannon, could you talk about the bench of managers you have ready and what expansion looks like domestically and internationally in the next year or so? Has it changed materially since last quarter?

No, not really. We have hired some more trainees. We are, as we indicated in the last quarter, I don't think from the discussions with Jon, I don't think you are going to see a whole lot of domestic expansion in the next 12 months. The focus right now is still internationally based [Spain] particularly and hope to have something to announce on that really soon. So a lot of the focus is there. We are looking at a couple of other countries as well. We are training as feverishly as we can domestically. Would love to open some more stores and I'm thinking realistically maybe we could possibly open a few in 2011, but I think more realistically we're probably looking at the beginning of 2012.

Okay. Then a few small detailed questions here. The capital spending you said $800,000 for a small building. How much of that has already been spent and what is the or do you have any other capital projects in the next year or so that would be material?

No other capital projects that will be material. We've spent a little over $500,000 of the $800,000 as of the end of September. That building should be completed. They're projecting the end of the year. If the weather holds, I suppose it could be early in First Quarter, but then it is going forward, no. No other plans. Still got the land for sale around the building that we would love to move if we could get the right price, but no significant expenditures that we expect in the foreseeable future.

Okay. And in the write-off for the Mid-Continent I didn't hear any number for inventory. Are you guys just moving that inventory to the retail stores or are you discontinuing those product lines? Can you just talk about how you're dealing with that?

Sure. No write-off of inventory. It's all current active product, so all we did was we moved it back here to Fort Worth and then we're redistributing it out to the stores. It's all part of the normal product line anyway, so there was nothing to write-off, nothing to get rid of there as far as inventory goes.

Okay. And then last thing. Can you just kind of, I'm not sure I understand how the purchasing of inventory actually works. Can you walk through what circumstances arise that sort of force you to buy inventory early? Are there competing buyers? How does the pricing work? Can you just kind of talk generally about how that works?

Hi, Graeme, this is Mark Angus. How are you?

Doing well.

Well, what happened this quarter is people come to us with different promotional products or different leathers that they have that are neither discontinued or available or sometimes many vendors just need to turn some inventory and this particular quarter we were fortunate enough to be able to take advantage of three or four really larger purchases that suppliers that came to us with and we knew that these were really key leathers in items that we use every day and so we were able to take advantage of those and, like I said, those will be used for different upcoming sales promotions, as well as manufacturing here in our factory. So we really just never know when they happen and we really just can't tell you know.

Okay, well thanks for taking my questions.

Thanks, Graeme.

You're welcome.

(Operator Instructions) Ms. Greene, I'm showing no further questions in the queue. I'd like to turn the program back over to you for any closing remarks.

On behalf of Mark Angus and myself, thank you for your participation in today's call. Have a good afternoon.

Thank you, ma'am. Ladies and Gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.