Tandy Leather Factory Inc (TLF) 2010 Q4 法說會逐字稿

And welcome to the Tandy Leather Factory fourth quarter 2010 conference call.

(Operator Instructions).

As a reminder, this conference may be recorded. And now, I'll turn the program over to Shannon Greene. The floor is yours.

Thank you. Thank you for joining us for our 2010 earnings conference call. I'm Shannon Greene, Chief Financial Officer, and I'm joined today, by Jon Thompson, CEO, and Mark Angus, Senior Vice President. We will be discussing our fourth quarter and year-end 2010 results, as well as our plans for 2011.

Before we get started, I call your attention to the fact 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 Form10-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 Relation's 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 update those statements.

2010 was a successful year for us. Our sales increased. Our gross profit margin increased, and our earnings increased. We opened one new retail store in Canada. We achieved a 10% sales gain in 2010, compared to 2009. 2010 was our 14th consecutive year of operating profits, increasing 30% from last year. Our consolidated gross profit margin improved for the 14th year in a row. Our UK store is doing extremely well. It's now three years old, and continues to report year-over-year sales gains, month after month.

We paid our first dividend in 2010, a special one-time dividend of $0.75 per share. We have debt on our balance sheet totaling $3.5 million, all related to the purchase of our corporate headquarters. We would pay it off today, if we could do so without incurring a pre-payment penalty. We closed a store for the first time in our history in 2010, Mid Continent Leather Sales, a wholesale store in Oklahoma. We have discussed it's poor sales and lack of profitability in prior calls and press releases, due we believe to it's location and the lack of name recognition.

A quick run through of the numbers for the fourth quarter, and the year. Quarter results are as follows, consolidated sales increased 11%, sales were $17.3 million this year, compared to $15.6 million in 2009. Wholesale leather craft sales were $7.1 million this quarter, compared to $6.8 million a year ago, an increase of 3%. Within the wholesale leather craft division, same-stores reported quarterly sales of $6.5 million in 2010, up $426,000 or 7% from the fourth quarter of 2009. Our national account group reported quarterly sales of $574,000, compared to $664,000 in the prior year fourth quarter, a decrease of 13%. Retail leather craft sales were $9.7 million for the quarter, compared to the prior year of $8.4 million, an increase of 16%. International leather craft sales for the quarter were $498,000, up $134,000 or 37% from 2009 fourth quarter sales of $365,000.

Consolidated gross profit margin for the quarter was 59.9%, down from 61.8% last year. Wholesale leather craft gross profit margin decreased from 62% last year, to 60.1% this year. Retail leather craft gross profit margin decreased from 61.5% in 2009, to 59.4% this year. International leather craft gross profit margin for the fourth quarter was 69.7%, up from last year's fourth quarter of 63.8%. Consolidated operating expenses increased $240,000 for the fourth quarter, but decreased as a percentage of sales to $7.8 million, or 45% of sales, compared to 48.5% of sales last year. Wholesale leather craft reported operating expenses totaling 45.6% of it's sales, versus 50.5% last year. Retail leather craft reported operating expenses totaling 45% of it's sales, compared to 56.9% last year. International leather craft operating expenses totaled 39% of it's sales this year, compared to 48.7% last year.

Income from operations was $2.6 million for the quarter, an increase of $502,000 or 24%, compared to the fourth quarter of 2009. For the 2010 annual results, consolidated sales were up 10% from 2009, sales were $59.9 million, compared to $54.5 million last year. Wholesale leather craft sales were $25.9 million, versus $25.1 million a year ago, up 3%. Within the division, same-stores reported sales of $22.7 million, an increase of 6% from 2009 sales of $21.5 million. The national account group reported sales of $2.9 million this year, compared to $3.1 million in 2009, a decrease of 8%.

Retail leather craft sales were $32.3 million, compared to last year of $28.1 million, an increase of 15%. We opened one new retail store in 2010. The new stores, which are just the new ones plus one opened in 2009, contributed sales of $453,000 in 2010. The 74 comparable stores contributed sales of $31.8 million in 2010, which translates to a same-store sales gain of 14% over 2009. International leather craft sales were $1.7 million, compared to last year of $1.3 million, an increase of 30%. Consolidated gross profit margin for the year is 60.5%, improving from 2009's consolidated gross profit margin of 59.9%. Wholesale leather craft gross profit margin increased to 60.7% this year, compared to 58.5% last year. Retail leather craft gross profit margin was 60.2%, down slightly from 2009's gross profit margin of 60.9%. International leather craft gross profit margin was 63.8% for 2010, up minimally from 2009's gross profit margin of 63.6%.

Consolidated operating expenses were $29.6 million or 49.5% of sales in the current year, up $2.1 million, compared to $27.5 million or 50.5% of it's -- of sales last year. Wholesale leather craft reported operating expenses totaling 50.3% of it's sales, versus 50.5% last year. Retail leather craft reported operating expenses totaling 49% of it's sales currently, compared to 50.6% last year. International leather craft operating expenses were 44.3% of it's sales this year, compared to 50.1% last year. Income from operations is $6.6 million this year, a 30% increase over 2009, of $5.1 million.

Total assets declined by 6% in 2010, compared to the end of 2009, as we ended the year with total assets of $40.6 million. We held $5.9 million in cash at year-end, including certificates of deposit, a 54% reduction from the end of 2009. The reduction in cash is due to the $7.7 million dividend paid during the year. Accounts receivable increased by $50,000, and inventory increased by $3.3 million. Current liabilities increased by $1.1 million. We paid down $202,000 of debt, and total liabilities increased by $866,000. Our debt, which consists of the bank debt related to our real estate purchase in 2007, is at $3.5 million. Our current ratio is 4.2, and EBITDA for 2010 was $7.7 million.

Some specifics about the Tandy retail stores performance in the fourth quarter, sales were $9.7 million, gross profit, 59.4%, operating income, 14.4%. Looking at the individual stores, average monthly sales in the fourth quarter range from $120,000 to $20,000, and operating margins ranged from positive 25% to a negative 25%. For the fourth quarter of 2010, average monthly sales per store was $42,000. For the year, average monthly sales per store was $35,000. There were five stores with operating losses in 2010, totaling $103,000. All of our Leather Factory stores are profitable.

Our balance sheet is in good shape. Cash is down from year-end 2009 by $7 million, due to the dividend paid, but it did increase by $2.4 million in the fourth quarter alone. Our accounts receivable balance is up 4% at the end of 2010, compared to the year-end 2009. Inventory is still high, down $600,000 in the fourth quarter, but it's down another $1 million as of the end of January, and we expect a further reduction of up to a $1 million by the end of the first quarter.

I think we did okay with managing operating expenses in 2010, as they increased at a slower pace than that of sales. We continue our focus on expenses, in order to maximize earnings. Compared to 2009, significant expense increases are in, employee compensation and benefits, travel expenses, credit card fees, rent utilities, and freight out. Looking at 2011, we are estimating sales to be up 5% to 8%, in the $63 million to $65 million range. Earnings are estimated to be up, approximately 10%. Our sales so far this year have been good, as we are up 9% through the end of February. Retail same-store sales are up 14%, and wholesale same-store sales are up 3%. We plan to open two to three stores internationally in 2011, in Spain and Australia. We also expect to open one new retail store in the US later this year.

We have proven that more inventory in the stores means higher sales, but some of our stores are limited in the amount of inventory they can carry, by the size of the store. We moved nine stores in 2010 into larger locations, and we have plans to move another ten or more 2011, as leases come up for renewal. We are also trying to upgrade the look and feel of the stores at the same time, and in some locations that we have not moved, we have remodeled them, so they are more inviting to customers and a nicer place to shop. And so far, we believe it's paying off for us. We are not talking about major remodels. We're spending on average less than $5,000 per store, but it is making a difference in the way our customers have responded.

Last thing before we go to questions. Our Annual meeting of stockholders is scheduled for May 18th at 10 AM, at our corporate offices in Fort Worth. The meeting is open to the public, and John, Mark and I, would welcome the opportunity to meet with you. Please consider yourselves personally invited. That concludes the prepared remarks. We appreciate your time today, and we'll be happy to answer whatever questions you may have. Operator? We are now ready to take questions.

Sure thing. (Operator Instructions) Allen Kaplan, private shareholder.

Yes, hi, I appreciate that your inventory is coming down, but in terms of months of supply, it's still quite high. And I remember that years ago, Jo-Ann Fabrics had months of supply, comparable to what you have now. And then they called in consultants, and they've gotten it down quite a bit. So I was wondering if you've ever considered calling in consultants?

No, not in this case. I mean everything that we have in inventory, we've done on purpose. We've built a lot of these items up towards the end of the year that were items we ran on the sale, or were planning for pushes in the first quarter of this year. So obviously, we also have stores that we're opening internationally, and that inventory is sitting here ready to go. We have containers that are waiting, obviously, to be shipped to those units. So you're going to see a large reduction, I think, going towards the summer.

There's not really anything that we feel in the -- especially in the top 200, that's not something we couldn't move, and they're all active items. And we certainly been very aggressive in what we bought, and in a lot of cases the items we do have are leather that can be converted into other stock-keeping units. So we're not really especially concerned at this time.

So when you report finished inventory in your SEC reports, you're saying that a lot of that really can be transformed into other SKUs? Is that what you're saying?

Well, you have to imagine, it's like the items I'm talking about, it's a leather hide. It could be converted into almost anything that we have in our active line. If I have a piece of strap leather, just three to four ounces, well, there's several kits I could also take that back and cut from that. So that's what we mean by that.

Okay. And so you'd call the leather hide finished inventory, though, in your SEC reports?

Yes, sir. That is finished inventory and active items.

Okay. If there's time, I have one other question.

Sure.

You sell over the internet?

Yes.

And I think most companies tend to break that out, but I don't think you do; is that right?

That's correct.

Why is that?

We do have a website with our full line on it. We don't have, like a lot of companies do that sell over the internet, we don't have a fulfillment house, or a central location that sets all of the internet orders. Those orders are all routed to the store closest to the customer, so the logistics is, the orders come in here to Fort Worth to the corporate office. Those orders are then routed to the bricks-and-mortar store closest to the customer. And then the store fulfills the order. So that way, our internet business is not competing against our bricks-and-mortar stores.

The store personnel, particularly the manager, can get in touch with the customer via phone or e-mail to add some personal attention, answer some questions, et cetera, et cetera, plus it gets the product to the customer faster. So that's the reason those sales are -- even though they're generated over the internet through our web, they are handled at the store just like a mail order from a customer, or a phone order, or almost like somebody walking in the door. And we structure that way on purpose, so that the stores and the internet website aren't competing against each other.

Okay, thank you.

Thank you.

Thank you, sir. Graeme Rein with Bares Capital.

Good afternoon.

Hi, Graeme.

The international growth, can you talk about why you picked Spain and Australia? And then also, are you confident you have the right people to lead those opportunities?

Yes, Graeme, this is Jon Thompson. We feel like we have a real good man in Spain. We did the same thing we did in England. We spent some time with people that we knew and dealt with already. But we've already contracted out someone to run that unit in Spain for us. Been in the business about 20 years, and very, very aggressive, and we feel real good about him.

We have people here, that we're probably going to transfer to the Australian operation. We'll probably have to train on the ground for that one. We looked at trying to make some alliances in Australia, for probably over two years. We never really found anybody that was willing to give up what they had, to come to work for us. So we're just going to go ahead and do it ourselves, and get on the ground and just train somebody.

Okay.

But send somebody from here, kind of like we did in UK, Graeme, if you remember, we sent John (inaudible), who was our Canadian guy to the UK for a year. We're going to do the same thing with Australia.

Okay. And is there any -- are you worried about the inventory logistics of stores isolated, or how are you planning on dealing with that?

The same way we do in the UK. Normally, they try and do an ocean shipment once a month, and then we have small air shipments once a week, and that's been working out fine for us in the UK.

Okay. And is it going to be like a domestic store, where most of the investment is made on the income statement, or is there any capital spending associated with the growth?

It will be basically, very similar to the US. We're leasing space, so we don't have any real estate. We'll put in the fixtures, the racks and things, and a couple of computers for the point-of-sale system. We'll have to buy a sign, just like we do here, but they are not capital intensive, even overseas. They are going to be very similar to what we're doing here.

Okay. And how do you weigh, opening another US store, where you have customer data, and all these historical information at your fingertips versus going into the new market?

Well, the issue we have here is a little bit different for us. And right now, we've been working on trying to clean up the stores, and like Shannon had in the memo, trying to change the look and feel of our stores. We've had some problems over the years trying to hire. And some of that, I think, goes with the fact that our stores have normally not been in very good locations, high crime areas, rundown looking. We're just trying to upgrade those units, trying to make sure that we have a little more appeal, to be able to hire people a little faster. Obviously, we also require our people to move anywhere once we hire them. So we're going to get back to that point where we're opening stores again.

Okay.

It's two different things.

And the decline in the gross margin in Q4, is that a price issue, or is that a mix issue, or something else?

Sales mix.

Okay.

Every time we run a special or an item, if we run it too aggressive, it just ends up affecting that margin.

Okay. And do you hold any cash in the UK, Shannon, or is it all in the US?

There is some. We have a bank account over there, and it has a little bit. We move most of Canada and UK, the foreign currency, we move that back generally quarterly, so there's a little bit over there, but not much.

Okay, great. Thanks for taking my questions.

You bet.

(Operator Instructions) I'm showing no further questions. Oh, I take that back. We have Suzie Schneider, who is a private investor. Please go ahead.

This is David Schneider, I'm Suzie's husband. You recently met with the Telsey Group. How did that go?

The conference, David, the conference is actually the end of this month.

Oh, okay.

Yes, the end of March, we're presenting March 31, I think about 11 o'clock. They do a three-day conference in New York from the 29th to the 31st.

Oh, okay. I had my dates mixed up, sorry.

Call me after the first of April, and I'll tell you how it went.

Okay, thank you.

Thanks.

Thank you. (Operator Instructions) Okay, there appears to be no additional questioners in the queue. I'd like to turn the program back over to Shannon Greene for any closing remarks.

Thank you. On behalf of Jon Thompson and Mark Angus, I'd like to thank you for participating in our 2010 earnings conference call today. We look forward to speaking with you again next quarter. Have a good afternoon.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.