Tandy Leather Factory Inc (TLF) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Tandy Leather Factory first-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions on how to participate will be given at that time.

( Operator Instructions)

And, as a reminder, today's conference is being recorded. Now, I would like to turn the conference over to your host, Shannon Greene.

Thank you. Good morning, everyone. Thank you for joining us for our first-quarter 2012 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.

We are generally pleased with the first quarter, having achieved a solid sales gain and an even better increase in earnings. Gross margin improved nicely up to 62.5% in the current quarter, the result of strong retail sales and successful efforts on the part of our buyers to negotiate competitive pricing of product. Operating expenses are little high, although the expenses associated with the new international stores where the cause of the increase being slightly higher than that of sales. That will correct itself as sales in those stores ramp up.

Total cash is down approximately $4.7 million from December 31, 2011, as a result of the $2.5 million cash dividend approved in the first quarter and $1.5 million paid out in store manager bonuses. In addition, I expect we are going to continue to buy leather when we can get it under current market prices, as long as we continue to have excess cash. At March 31, we have approximately $3 million of product on the water, on its way to us. These special purchase are of 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 the inventory at the end of the call.

Now, for the numbers from today's press release Our first-quarter consolidated sales increased 4.5% over 2011's first-quarter sales. The current quarter sales totaled $18.2 million compared to last year's first-quarter sales of $15.9 million. Wholesale Leathercraft posted a 6.4% sales increase, reporting sales of $7.1 million this quarter compared to $6.7 million in last year's first quarter. The same-stores posted a 6.9% sales gain. The national account group posted a 3.1% sales gain.

Our Retail Leathercraft division reported an $18.9 million sales increase, reporting sales of $10.3 million this quarter, versus $8.6 million in the same quarter last year. The same stores posted a $17.7 million sales gain, and the one new store added sales of $105,000 this quarter.

International Leathercraft posted a 45.7% sales increase, reporting sales of $742,000 this quarter compared to $509,000 in the first quarter of 2011. The one same-store achieved a 4.1% sales increase gain, and the two new stores contributed sales of $212,000 for the quarter.

Consolidated gross profit margin for the quarter was 62.5%, an increase from last year's first-quarter gross profit margin of 60%. Wholesale Leathercraft gross profit margin improved from 58.6% last year to 63.6% this year.

Retail Leathercraft gross profit margin increased from 60.9% last year to 62% this year. International Leathercraft gross profit margin improved from 61.9% last year to 62.5% this year. Consolidated operating expenses were $8.8 million, or 48.5% of sales, in the current quarter compared to $7.6 million, or 47.9% of sales last year. Wholesale Leathercraft reported operating expenses totaling 46.1% of its sales, a slight improvement from 46.6% last year.

Retail Leathercraft reported operating expenses totaling 48.8% of its sales, improving from 49.3% last year. International Leathercraft reported operating expenses totaling 67.6% of its sales, a decline from last year's 42.2%. The operating expenses associated with the two new stores in Australia and Spain caused a significant operating expenses in the International Leathercraft segment.

Our consolidated operating expenses increased $1.2 million in the first quarter compared to the same quarter last year. $286,000 was attributable to the new stores in Spain and Australia. Other expense increases occurred in employee compensation, advertising and marketing expenses, rent expense, travel and supplies. Income from operations was $2.6 million for the quarter, up 33% compared to operating income of $1.9 million in the first quarter of 2011.

Looking at our balance sheet at March 31 compared to December 31, 2011, total assets and current assets are virtually unchanged. Cash declined $4.7 million to $6.5 million at the end of the first quarter. $2.5 million of the decrease was due to the special one-time dividend that was paid to stockholders on April 2nd.

We also paid store manager bonuses of $1.5 million in March. Accounts receivable increased $120,000, and inventory increased $4.2 million. Current liabilities increased $912,000 due primarily to an increase in accounts payable of $725,000 compared to the year end 2011. Our bank debt consists of one-term note on our building. The current balance is $3.2 million, and we are paying the debt down in accordance with the terms of the note. Our current ration is 4.2, and EBITDA for the first quarter of 2012 was $2.8 million.

Looking at the individual store performance of the Tandy Leather retail stores, gross profit margin ranged from 56% to 71%, and operating income ranged from 24% to a negative 16%. Average monthly sales range from $112,000 per month to $22,000 per month. In the first quarter of 2012, average sales per store per month was $44,000. There are two stores with operating losses as of the end of March, totaling $13,000. All of the wholesale stores are profitable as of March 31.

Regarding inventory, I realize that $24 million is the most inventory we have ever had. However, it isn't as bad as it looks for several reasons. We can eliminate sales gains if we have limited inventory. So, we are closely monitoring our inventory levels in relation to our sales trend. Further, as we have discussed previously, we are increasing the size of some of our stores, and as a result, we have increased the target inventory levels in those stores. We believe that strategy is working as evidenced by the sales gains in the last year or so.

Secondly, we held our second annual national open house in April, so some of our inventory purchases in March were in anticipation of that sales event and above what we would consider normal purchases. Finally, we will continue to aggressively look for deals, negotiating below market prices by buying in bulk when the opportunity arises. Again, we believe that strategy is working, as evidenced in the improvement in gross margin. 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.

To summarize, we are generally pleased with our performance in this first quarter. The performance of our new stores in Australia and Spain are in line with our internal expectations. We are analyzing market opportunities in those countries, as well as the UK, as we hope to open a second store in at least two of those countries this year.

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

(Operator Instructions)

Alan Kaplan.

Hi. You say in the press release that first quarter met your expectations. I would have thought that it probably exceeded your expectations. Is that not true?

Slightly. Sales were a little bit stronger than what we expected in the first quarter. Earnings were just a tad bit stronger than what we were expecting in first quarter, but not by much.

Okay. I guess my one concern is -- you use FIFO to value your inventory, is that correct?

Correct.

So, you have been -- as I understand this from the Wall Street Journal, leather prices have been increasing quite a bit in recent years. Is that correct?

Yes.

They have, yes, but you have to understand, of course, in the financial crisis they had a big dip, but they are not any higher than they've been in the last 30 years.

oh, they are not? Okay. If you have been using LIFO rather than FIFO, would your earnings be significantly different?

I don't think so. Partly because what we were paying for leather a year ago or two years ago isn't that much different than, generally speaking, than what we are paying now. Partly because of our ability to buy in bulk and negotiate aggressive pricing. So, we buy all sorts of leathers at all sorts of prices.

Quality -- some of the high-end leathers and then the lower end. So, when you put it all together, I don't think it would be that much different if we were doing LIFO than doing FIFO. Leather prices shift, but they -- some of the leather prices on some of the leathers is down some, so it kind of balances out, I guess. It wouldn't be significantly different.

Okay, and my last comment is I just happened to be looking at your proxy statement. It seems like you guys should be getting stock options or a raise or something.

We appreciate that. We appreciate the vote of confidence. To be totally frank, Alan, could we be making more money? Maybe. Stock options or restricted stock, the compensation committee is specifically looking at that. That particular issue. As of late -- but I don't know --

While, look, if you enjoy your jobs, that's the important thing.

Well, and I think for the most part, we do. One of the things that we pride ourselves on in managing the Company and thinking about stockholders is what is reasonable and what is fair and what seems appropriate, as far as executive comp. From a personal standpoint, sure, we'd all like to be making a heck of a lot more money and have a whole lot more stock. Hopefully, we will eventually get there.

But, when we look at it from a management standpoint of the Company, it's important that we feel like that we are being fair to the stockholders. Part of that is we are going to try to do everything, spend as little money as possible, and so sometimes you have to put your management hat on and say what's best for the Company is, yes, your salary isn't maybe what you could get down the street, but it works. It's a great company to work for. We have all been here for a really long time. Obviously, we must enjoy it otherwise we wouldn't still be here.

Thanks for everything.

You bet. Thanks, Alan.

Thank you, and I am showing the no other questions on the phone lines.

Very good. We appreciate your time today. I would also like to remind everyone about our 2012 annual meeting of stockholders to be held on June 5 at our corporate offices here 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, thank you for joining today's conference. This does conclude the program, and you may now disconnect.