Tandy Leather Factory Inc (TLF) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Tandy Leather Factory First-Quarter 2011 Earnings 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 is being recorded. I would now like to turn the call over to your host, Shannon Greene, CFO. You may begin.

Thanks. Good afternoon, everyone. Thank you for joining us for our first-quarter 2011 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Joining me on today's call is Jon Thompson, our Chief Executive Officer and Mark Angus, our Senior Vice President.

Before we begin, 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 and 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 2010 and subsequent Form 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.

We are pleased with the first quarter, having achieved a solid sales gain and an increase in earnings. Our operating expenses are trending well under sales. Gross margin declined 150 basis points, but we still ended the quarter at 60%. We expect continued pressure on gross margins as product costs continue to rise and we will talk about that more toward the end of the call.

Total cash is down approximately $700,000 in the first quarter, but that was expected, considering we pay manager bonuses in early March. This year we paid almost $1.2 million in bonuses for the 2010 store results compared to $800,000 paid in March of last year. In addition, I expect we're going to continue to buy leather when we can get it under current market price as long as prices remain high. These special purchases are our normal stock leathers, so we know we can sell it and, fortunately, leather has an extremely long shelf life, so we are not concerned about it becoming unsellable or obsolete. We will talk further about inventory in a few minutes.

Our Wholesale Leathercraft division posted a 2% sales gain this quarter, same-store sales were up 4%, while the National Account group was down 2%. Gross profit margin decreased 0.5 a percentage point, but operating margin was up 51%.

Our Retail Leathercraft division posted a 14% sales gain for the quarter, same stores posted a 13% gain. The number of stores in the chain total 76, with the latest new store opening occurring in March of 2010. Gross profit margin decreased 3.5 percentage points although operating margin increased 9%.

Our International Leather division posted a 32% sales gain for the quarter. Gross profit margin decreased three percentage points, while operating margin was up 26%.

Now for the numbers from today's press release -- our first-quarter consolidated sales increased 8.9% over 2010's first-quarter sales. The current quarter sales totalled $15.9 million compared to last year's first-quarter sales of $14.6 million. Wholesale Leathercraft sales were $6.7 million this quarter compared to $6.6 million a year ago, an increase of 2%. The same-stores posted a 4.2% sales gain, reporting sales of $5.9 million compared to $5.7 million in the first quarter of 2010.

The National Account group posted a 2.1% sales decline, reporting sales of $778,000 compared to $804,000 last year. Our Retail Leathercraft division reported sales of $8.6 million, up 13.6% from last year's first-quarter sales of $7.6 million. Sales from the one new store were $95,000 this quarter. The 75 comparable stores posted sales of $8.5 million, an increase of 13% compared to last year. International Leathercraft sales were $509,000 in the current quarter, increasing 32.5% from last year's first-quarter sales of $384,000.

Consolidated gross profit margin for the quarter was 60%, a decrease from last year's first-quarter gross profit margin of 61.5%. Wholesale Leathercraft's gross profit margin declined slightly from 59% to 58.6%. Retail Leathercraft's gross profit margin decreased from 63.5% last year to 60.9% this year and International Leathercraft's gross profit margin decreased from 65.4% last year to 61.9% this year.

Consolidated operating expenses were $7.6 million or 47.9% of sales in the current quarter compared to $7.4 million or 51% of sales last year. Wholesale Leathercraft reported operating expenses totaling 46.6% of its sales, an improvement from 51.4% last year. Retail Leathercraft reported operating expenses totaling 49.3% of its sales, improving from 51.4% last year and International Leathercraft reported operating expenses totaling 42.2% of its sales, an improvement from last year's 44.7%.

Our consolidated operating expenses increased $172,000 in the first quarter, compared to the same quarter last year. The increase occurred in employee compensation and benefits, legal and professional fees, trade out and credit card fees. Expense reductions occurred in advertising and marketing expenses and bad debt expense.

Income from operations was $1.9 million for the quarter, up 24% compared to operating income of $1.5 million in the first quarter of 2010. Looking at our balance sheet at March 31, 2011 compared to December 31, 2010, total assets and current assets are virtually unchanged. Cash declined $693,000 to $5.2 million in the first quarter. Accounts receivable increased $180,000 and inventory held steady at $20.2 million.

Current liabilities decreased $1.4 million, due to the decrease in inventory in transit at March 31 and the decrease in manager bonus payable, offset partially with the increase in accounts payable. As a reminder, we pay manager bonuses twice a year, in November and in March. The March payments totaled $1.2 million.

Our bank debt consists of one term note on our building. The current balance is $3.4 million and we are paying the debt down in accordance with the terms of the note. Our current ratio is 5.3. EBITDA for the first quarter of 2011 was $2.1 million.

In looking at the individual store performance of the Tandy Leather retail stores, gross profit margin ranged from 55% to 66% and operating income ranged from 23% to a negative 22%. Average monthly sales ranged from $99,000 per month to $18,000 per month.

In this first quarter of 2011, average sales per store per month was $38,000. There are five stores with operating losses as of the end of March, totaling $31,000. All five stores have new managers within the last six months. All of the wholesale stores are profitable as of March 31.

With regard to the inventory and gross margins, we ended the quarter with more inventory than we originally expected, however, there are several reasons for that. First, we can totally eliminate sales gains if we have limited inventory, so we are closely monitoring our inventory levels in relation to our sales trends. We want to make sure we're stocking sufficient product to keep the sales gains going as long as possible. We held a national open house in all of our stores in early April, so some of our inventory purchases in March were in anticipation of that sales event and above what we consider normal purchases.

Finally, as long as product costs continue to rise, our buyers will continue to aggressively look for deals, negotiating below market prices by buying in bulk when the opportunity arises. These special purchase opportunities can have a very positive impact on gross margins, as we saw last year. We absolutely understand the importance of maintaining a reasonable inventory level and will continue to monitor it closely to ensure we are maintaining the right balance of inventory to cash.

Based on the forecast we've seen and the discussions with our suppliers, we do not expect to see the rising product costs reverse this year. And the rising costs are not just in leather, we are seeing increases across our entire product line. We don't have much opportunity to adjust selling prices as costs increase during the year, particularly with our retail prices.

We produce an annual catalog in October each year and publish the retail prices at that time. It is almost impossible to change the selling prices until the next catalog comes out in October. As a result, we have little choice but to absorb cost increases until then.

To summarize, we are generally pleased with our performance in this first quarter. We are still working on store openings in Spain and Australia. We expect to have something specific to announce in the third quarter, if not sooner; although we are constantly reminded that opening stores in foreign countries seems to take longer than opening in the US.

That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions)

Graeme Rein, Bares Capital.

Good afternoon. Could you talk a little bit about the expectations for a retail store expansion in the next 12 to 18 months? I know it's dependent on the number of managers you have, but where do you see that going?

Graeme, right now, we've got one on the drawing board, we're opening another in Utah, I think slated to open in June. We'd like to continue to open stores as we can, obviously. Like I said, we're still working on trying to make sure that we have a good training program and make sure that we have enough people to go around. But, yes, we'd like to get back to probably three, four stores a year, if possible. But right now, we're just doing it when we have people available. But I think we still have plenty of room for growth.

Finally, I don't know what a good number total would be, but we certainly have a lot of room for expansion in the LA basin area. We still have some cities in the East that we could be in. So, I certainly think that we could do something, it's just right now we just don't have enough personnel.

Yes. And is about 120, is that still the number you're targeting or is it significantly higher or lower than that?

We've talked in ranges, anywhere from 120 to 150. It depends on what you look at. If our concept changes and we continue to increase the size of our stores or we try and have enough inventory and square footage to service the area, they need a little more of a base. So, yes, 120, maybe 140.

In the old days, Tandy, remember, at one time had 28 stores in the LA basin area. I don't know if we'd ever want to do that again, but I certainly don't think that we have it covered and I don't think that we really have the area around San Diego as well as we could either. We have a small Tandy store in San Diego. I think we certainly have some room for growth down there and/or larger stores because there's still some volume that we're missing from across the border.

So there's a lot of those type of things that we're looking at.

Okay. And does any international growth, is that -- are those tradeoffs or are those sort of independent decisions that you could do at the same time, given the right circumstances?

Those are more dependent certainly on finding people that are willing to move over there, either from here which, in England, we had people on the ground. Spain we have someone we're working with. Australia we've got someone we're having to send. So those are really more dependent, again, on finding partners, hopefully, that are there on the ground that speak the languages.

Once you get out of our realm where we can't -- where we get out of our own language, we're certainly dependent on locals. You've got, again, maybe 20 markets that we feel we can be in.

Okay. That's helpful. That's all I have. Thanks and congrats on the quarter. Great job with the operating expenses.

Thank you.

Thank you.

(Operator Instructions)

I'm showing no further questions at this time and would like to turn the conference back over to Management.

Thank you very much for your time today. I would also like to remind everyone about our 2011 Annual Meeting of Stockholders to be held next week on May 18 at our corporate offices in Fort Worth. Please consider yourselves personally invited.

On behalf of Jon Thompson, Mark Angus and the entire Company, thank you for your participation in today's call. Have a good day.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.