Tandy Leather Factory Inc (TLF) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the Tandy Leather Factory second quarter 2011 earnings conference call. Currently, all participants are in a listen-only mode. Later we will 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 we will turn the program over to Shannon Greene. Please go ahead.

Good afternoon. Thank you for joining us for our second quarter 2011 earnings conference call. I am Shannon Greene, Chief Financial Officer at Tandy Leather Factory, and I'm joined by Jon Thompson, our Chief Executive Officer, and Mark Angus, our Senior Vice President. Before I begin, I will 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 2010 and subsequent Forms 10-Q for a discussion of some of these risks.

Copies of these documents are available through the SEC 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 update those statements.

Our second quarter was good although I realize it doesn't appear that way at first glance. Net income was up only 1% compared to last year's second quarter. However, if you look a little further, here's what I think is a better report card of our second quarter performance.

Sales increased by 10%. Profit margin decreased only by 24 basis points and is still above 60%. Operating expenses increased 7% at a slower pace than that of sales. Operating income increased 23%.

Other income and expense, or the non-operating items, is where the greatest fluctuations occurred from last year. This interest income decreased $40,000 or 70% between this year second quarter and last year second quarter because of the reduction in our cash due to the dividend we paid last July. Royalty income related to the gas wells on our property is down $30,000, or 54%, due to the decrease in the price of natural gas.

Finally, the fluctuation of value of the US dollar against the local currencies in Canada and the United Kingdom resulted in an increased expense of $64,000, up 87% compared to the same expense in last year's second quarter. Compared to year-end 2010, our cash increased by approximately $600,000. Inventory was virtually unchanged at approximately $20 million.

We have 1 more quarter to get through before we can adjust our retail selling prices, so we have continued to take advantage of special inventory purchases when they are available. In addition, we have improved our fill rate at our stores from a low 90% to the high 90%, which we believe has a positive impact on sales.

Now for the numbers from today's press release. Our second quarter consolidated sales increased 11%. Current quarter sales were $15.9 million compared to last year's second quarter sales of $14.4 million. Also Leathercraft sales were $6.5 million this quarter, up 4% from $6.2 million in the second quarter last year.

The same-stores posted a 6% sales increase, reporting sales of $5.8 million compared to $5.5 million in the second quarter of 2010. Our national account group posted an 8% sales decline, reporting sales of $632,000 compared to $680,000 last year. Our Retail Leathercraft division reported sales of $8.9 million, a 16% increase over last year's second quarter sales of $7.7 million.

These are the same results for same-stores as there was only 1 new store opened in the second quarter, opened on June 13, so its sales of $9,000 had virtually no impact on the total sales for the quarter. Our International Leathercraft segment which consists of the 1 store in the UK reported sales of $529,000 for the quarter compared to $396,000 in last year's second quarter, a gain of 34%.

1 Consolidated gross profit margin for the quarter was 61.8%, up from last year's margin of 60.7%. Wholesale Leathercraft gross profit margin was 63.5% compared to 62.5% in second quarter 2010. Retail Leathercraft gross profit margin improved from 59.3% in last year's second quarter to 60.3% in this year's second quarter. International Leathercraft gross profit margin for the second quarter was 67.3%, up 59.9% last year.

Consolidated operating expenses were $8.1 million or 50.7% of sales in the current quarter compared to $7.3 million, also 50.7% of sales last year, an increase of $800,000 or 11%. Also Leathercraft reported operating expenses totaling 54.1% of its sales versus 52.5% last year.

Retail leathercraft reported operating expenses totaling 48.6% of its sales compared to 49.4% last year. International Leathercraft operating expenses for the quarter were 44.1% of its sales compared to 47% last year.

Income from operations was $1.7 million for the second quarter of 23% or $325,000 compared to second quarter 2010's operating income. On a year-to-date basis, consolidated sales increased 10%. 2011 sales were $31.8 million compared to 2010's sales of $28.9 million.

Wholesale Leathercraft sales were $13.2 million this year, up 3% from last year 's sales of $12.8 million. The increase is the result of a 5% same-store sales gain with sales this year at $11.8 million compared to $11.2 million last year, partially offset by a 4% sales decline for national accounts with sales this year at $1.4 million versus $1.5 million in 2010.

Our Retail Leathercraft division reported sales of $17.6 million, a 15% gain over last year's sales of $15.3 million. Sales from the two new stores were $177,000 this year. The 74 comparable stores posted sales of $17.4 million, an increase of 14% compared to last year's sales of $15.2 million. Our International Leathercraft segment reported sales of $1 million so far this year compared to $780,000 last year, an improvement of 33%.

Consolidated gross profit margin for the year was 60.9%, a slight decrease from 2010's gross profit margin of 61.1%. Also Leathercraft gross profit margin improved minimally from 60.7% to 61%. Retail Leathercraft gross profit margin decreased from 61.4% last year to 60.6% this year. International Leathercraft's gross profit margin improved from 62.6% last year to 64.6% this year.

Consolidated operating expenses were $15.7 million or 49.3% of sales in the current year compared to $14.7 million or 50.8% of sales last year, an increase of $977,000. Wholesale Leathercraft reported operating expenses totaling 50.3% of its sales compared to 51.7% last year.

Retail Leathercraft reported operating expenses totaling 48.9% of its sales currently versus 50.4% last year. International Leathercraft reported operating expenses totaling 43.2% of its sales this year compared to 45.9% last year.

On a consolidated basis, the most significant operating expense increases were in employee compensation and benefits, namely health benefits, legal fees and supplies. Freight out and credit card fees are also up as a result of the sales increases.

Income from operations was $3.7 million this year, up 24% compared to the same period in 2010. Regarding the Tandy stores, gross profit margin ranged from 66% to 53% and operating income ranged from 24% to a negative 25%. Average monthly sales ranged from $109,000 per month to $16,000 per month.

In the second quarter of 2011, average sales per store per month was $38,000. There are 8 Tandy stores with operating losses as of the end of June totaling $66,000. All of our Leather Factory stores are profitable as of June 30. We are still working on store openings in Spain and Australia. We expect the Australia store will be open in September so we intend to make an official announcement about that in a few weeks. At this point, it looks like the Spain stores will be open sometime in the fourth quarter.

To summarize, we are on target with our internal projections through the first half of the year. Our retail business continues to show strength and our wholesale business appears to be improving finally. There continues to be some uncertainty in the US from an economic and business perspective but we have been fortunate in that we have performed well and our customers continue to spend a portion of their discretionary dollars with us. That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions) 1 moment for questioners to queue. Graeme Rein with Bares Capital.

Could you guys talk about how the Internet sales are going and if that's trending differently in the last 6 months or year?

Let's see. I got the report, do you know Mark?

No.

You guys just lump those into the retail sales?

Total sales, yes. You might remember that all of the orders that we get over the Internet of which, still at several hundred a day, are routed out to the store closest to the customer for the purpose of getting those orders to the customers as quickly as possible.

So Internet sales, I've got the percentages here. For the month of June, it was up 10% for the month of May, it was up 53% compared to a year ago. So, it is definitely trending up. I'm looking for a consolidated or total year-to-date number. Here we go, through the end of June, Internet sales are up 33% from a year ago.

Okay. Has that been a point of emphasis or just an add-on to your retail business?

We look at it as an add-on to retail business. I think our website is in good shape. We get more inquiries and more hits to it all the time. But as we've talked for a very long time, it will never replace brick-and-mortar stores because people like to walk in and smell the leather and pick out the leathers that they want.

So, it is certainly an add-on and it has certainly been very beneficial. And I think it helps overall business from a geographic standpoint in terms of people being able to order off the Internet that aren't close enough to go to the store. But, it will always be a very nice add-on to what is happening in the stores.

And does that -- do those numbers in terms of where the orders are coming from influence where you open new stores at all? Or is it mainly orders coming from people that are already close to the retail stores?

Almost all of our -- right now, the way our stores are set up geographically, as almost everybody in the nation is within 1 day UPS anywhere. So, we haven't really seen enough data that would make us change our mind. We already had that information historically from Tandy when we assumed them so we pretty much knew the top areas to go into.

Okay. Has there been any incremental expenses associated with getting to Spain and Australia stores ready to go and if so, could you quantify the investments you've made on the income statement there?

Graeme, right now, with the exception of some travel expense to both of those countries that Jon and some of the other management teams have done and we're talking in a year's time, less than $10,000 each way, we bought computer equipment and staged some things that are ready to be installed at those locations. But, in terms of what's on the income statement right now, put the 2 together and I think you're probably now talking $25,000. Maybe travel expenses and the work that is involved that we're doing to get everything set up.

Okay, so it is a similar investment to a store in the US?

Yes. At this point, yes.

Okay. And I missed the gas royalty income. How much it was down and how much you are generating per month off of that?

Well, it goes down every month unfortunately. Let's see, the income is down $30,000 this year, which is a 54% decline from last year. When we first started getting royalty checks each month, it was -- the royalty checks were almost $4,000 a month and now they are down to, right now between $1,500 and $2000 a month.

We also got notice this week that they are going to drop again because the producer has the ability to include some post-production expenses or net those against the royalty income, I guess. So I heard, the last word I got is we may see those royalty checks drop by another 25% each month. Because they haven't been including some of those expenses in the past and are going to start doing that now.

They are not going to recoup what they didn't do but it is apparently legal for them to deduct certain other expenses against those royalty checks. So, with the price of gas down, natural gas down, it is dropping anyway even though the production looks good. And now they are going to include, net some other expenses against it. So, down $30,000 this year so far for the first 6 months like I said, it's down 54% from where we were a year ago.

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

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

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