Tandy Leather Factory Inc (TLF) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Tandy Leather Factory second-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 will follow at that time. (Operator Instructions). As a reminder, this program is being recorded.

I would now like to introduce your host for today's program, Ms. Shannon Greene, Chief Financial Officer. Please go ahead, ma'am.

Thank you. Good afternoon, and thank you for joining us for our second-quarter 2012 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory, and I'm joined today by Jon Thompson, our Chief Executive Officer, and Mark Angus, our Senior Vice President.

Before we get started, 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 2011 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 update those statements.

We performed well in the second quarter. Sales are up 6% and earnings are up 43% compared to the second quarter of 2011. Gross profit margin was 64.7%, and operating income increased by 39%. Inventory is up to $30 million, up $10 million from year-end 2011. We will talk more about that toward the end of the call. Cash is down $7 million due to the inventory increase.

Now for the numbers from today's press release. Second-quarter consolidated sales increased 6%. Current-quarter sales were $16.9 million compared to last year's second-quarter sales of $15.9 million. Wholesale Leathercraft sales were $6.2 million this quarter, down 3% from $6.5 million in the second quarter last year.

The same stores posted a 4% sales increase, reporting sales of $6.1 million compared to $5.8 million in the second quarter of 2011. Our National Account group posted a 66% sales decline, reporting sales of $213,000 this quarter compared to $633,000 last year.

Our Retail Leathercraft division reported sales of $9.9 million, a 10% increase over last year's second-quarter sales of $8.9 million. The same stores posted a 10% sales increase and the one new store, which opened in June last year, added quarterly sales of $94,000.

Our International Leathercraft segment, which consists of three stores located outside of North America, reported sales of $758,000 for the quarter compared to $529,000 in last year's second quarter, a gain of 43%. The same store posted an 8% sales decline, reporting sales of $485,000 this quarter compared to $529,000 in the second quarter of 2011. The two new stores opened in October of 2011 and January 2012 added quarterly sales of $273,000.

Consolidated gross profit margin for the quarter was 64.7%, a nice improvement over last year's second-quarter margin of 61.8%. Wholesale Leathercraft gross profit margin was 68% compared to 63.5% in Q2 2011. Retail Leathercraft's gross profit margin improved from 60.3% in last year's second quarter to 62.3% in this year's second quarter. International Leathercraft gross profit margin for the second quarter was 68.7%, up from 67.3%.

Consolidated operating expenses were $8.5 million, or 50.1% of sales in the current quarter, compared to $8.1 million, or 50.7% of sales last year, an increase of $400,000 or 5%. Wholesale Leathercraft reported operating expenses totaling 50.5% of its sales versus 54.1% last year. Retail Leathercraft reported operating expenses totaling 49% of its sales compared to 48.6% last year. And International Leathercraft operating expenses for the quarter were 61.9% of its sales compared to 44.1% last year.

Income from operations was $2.5 million for the second quarter, up 39% or $695,000 compared to the second quarter of 2011's operating income.

On a year-to-date basis, consolidated sales increased 10%. 2012 sales were $35.1 million compared to 2011 sales of $31.8 million. Wholesale Leathercraft sales were $13.4 million this year, up 2% from last year's sales of $13.2 million. The increase is the result of a 5% same-store sales gain, with sales this year of $12.4 million compared to $11.8 million last year, partially offset with a 28% sales decline for National Accounts, with sales this year of $1 million versus $1.4 million in 2011.

Our Retail Leathercraft division reported sales of $20.1 million, a 15% gain over last year's sales of $17.6 million. Sales for the one new store was $199,000 this year compared to $9,000 last year. The 76 comparable stores posted sales of $19.9 million, an increase of 14% compared to last year's sales of $17.6 million.

Our International Leathercraft segment reported sales of $1.5 million so far this year compared to $1 million last year, an improvement of 45%. The same store posted a 2% sales decline, reporting sales of $1 million, $22,000 less than last year's sales. The two new stores added sales of $485,000 so far this year.

Consolidated gross profit margin for the year was 63.6%, an increase from 2011's gross profit margin of 60.9%. Wholesale Leathercraft's gross profit margin improved from 61% last year to 65.5% this year. Retail Leathercraft's gross profit margin increased from 60.6% last year to 62.1% this year. International Leathercraft's gross profit margin improved from 64.6% last year to 65.7% this year.

Consolidated operating expenses increased $1.3 million or 10.2% to $17.3 million or 49.3% of its sales in the current year compared to $15.7 million, also 49.3% of sales last year. Wholesale Leathercraft reported operating expenses totaling 48.1% of its sales compared to 50.3% last year. Retail Leathercraft reported operating expenses totaling 48.9% of its sales currently, matching that of last year's 48.9% of sales. International Leathercraft reported operating expenses totaling 64.7% of its sales this year compared to 43.2% last year.

On a consolidated basis, the most significant operating expense increases were employee compensation and benefits, mainly health benefits, travel and rent. [Trade-out] and credit card fees are also up as a result of the sales increases.

Income from operations was $5 million, up 36% compared to 2011. Looking at our balance sheet at June 30, 2012 compared to December 31, 2011, total assets and current assets are both up approximately $3 million. Cash declined $7 million to $3.9 million at the end of June. Inventory increased $10 million. Current liabilities increased $2.5 million due to the increase in accounts payable and accrued expenses, both up $1.4 million compared to year-end 2011. Our current ratio is 3.8. EBITDA for the first half of 2012 was $5.6 million.

There are four Tandy stores with operating losses as of the end of June totaling $40,000. All of our Leather Factory stores are profitable as of June 30.

A couple more things before we go to questions. We obtained a $4 million line of credit from our bank in July. It is a one-year deal with an interest rate of LIBOR plus two. The third quarter is historically our weakest quarter for cash generation and sales and with the significant amount of inventory purchases we've made in the last several months, we believe it makes sense to have a line of credit available.

We also started construction on a 23,000-square-foot building located on our corporate property here. It will house our flagship store currently located in rented space here in Fort Worth, as well as an extensive leathercraft training center. The building is expected to cost approximately $2.6 million and should be completed in the first quarter of 2013.

Regarding inventory, I realize we are beginning to sound like a broken record. $30 million is the most inventory we have ever had. However, as we discussed last quarter, we can eliminate sales gains if we have limited inventory. All of the stores are full of products and we believe that strategy is working, as evidenced by the sales gains.

Further, we have been fortunate to be able to take advantage of those special buying opportunities we keep talking about and there were a number of them in the second quarter, negotiating below market prices by buying large quantities. Again, we believe that strategy is working, as evidenced by the improvement in gross margins.

Fortunately, there is little to no risk of inventory obsolescence. We are only buying our stock leathers that sell consistently day in and day out. 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 and sales.

Regarding store openings in 2012, we still have one store to open domestically and are working on it for 2012. Besides the store opened in Spain in January this year, we were hoping to get another one open internationally this year. However, our customer bases in Spain and Australia need a little more time to grow before we can justify adding a second store in either of those countries.

The UK customer base could support a second store; however, we have not been successful finding affordable space yet. So realistically, given that it is already August, I think it is safe to say we won't get that second international store opened this year. With that said, it does not change our sales and earnings guidance for 2012.

To summarize, we are on target with our internal projections through the first half of the year. There continues to be some uncertainty from a global economic perspective, but we have been fortunate in that we have performed well and our customers continue to reward us by spending a portion of their discretionary dollars with us.

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

(Operator Instructions) Allan Kaplan, private investor.

Good quarter, but is there some limit to the amount of inventory you are likely to hold, regardless of what deals you get?

Yes, I think we are at it.

Okay, that's good. Thank you.

Yes, we are done.

Thank you.

[Peter Iwanowicz], private investor.

Good quarter. On the gross margin front, would you say that the increase was more due to scale, maybe fewer markdowns or maybe a mix shift? Just trying to get my head around the pretty sizable jump in gross margins this quarter.

It was really attributed to just the special purchases we were really able to make. Some of them were very good, and they all came through in the second quarter very strongly, as you can need. But that does represent some of that special purchase that we talk about all the time.

And would you say that pricing has been strong at the retail outlets? You guys are getting good pricing -- excuse me -- good sort of cost of goods from your suppliers that you buy. I guess you're not seeing the softness in the consumer sort of requiring more needed promotions?

Yes -- no, not at all. We do our very best and our buyers do every day to make sure we bring the best value and the best price we can on the products. And then our special purchases and the special buys enable us to offer some of those promotions and pass them on to them. And just depending upon the buys that we make really dictates the gross profit.

Okay, all right. That's all I had. Thanks, guys. Great quarter, by the way.

(Operator Instructions) (inaudible)

Does the fact that you are opening up a training center in your new building imply that you might be beginning a more aggressive store expansion?

No, not really. What this will allow us to do is -- this is just replacing a lease location that we've had. The Fort Worth east-side store has been there in that same location since '82. The area is just not very good. Obviously, we have the land here available; we have 28 acres. So we decided to move them to here.

It gets them right nearby us. We are just adding enough footage to add in a classroom area that would allow us to have some of our people that do some really nice classes and to do some more training with some of our prospective managers here. So in one regard, yes, it will help with stores, but it's not going to change any of our outlook in the foreseeable future. It is really just to try and replace that lease location.

Any thoughts on store openings for next year?

We still have one slated. I think we mentioned that we were going to try and open one before the end of the year, and we are still on board to do that. Next year, just again, depending how well we do with training and how many managers we can bring onboard I think will dictate that.

We have ideas still where we would like to be, but we're just going to make sure, too, that what we've got that we stay strong and don't end up hurting ourselves in our stores that we've got now.

Thank you.

[Russell Mullen, Bears Capital.]

You guys actually answered my question. It was kind of in regards to what you guys are seeing in terms of hiring additional store managers and that kind of thing.

We've always got ads out, and we are always in a hiring mode. So we always usually seem to keep about eight trainees on board at all times just to make sure. And you know, we just seem to sometimes fall victim sometimes to bad luck. Unfortunately, some of our guys develop health issues or move on to other fields, and we just always seem to be replacing a few here and there. But we're still going to try and open some stores as we can.

Let me clarify, too, based on Lenny's question. The training center that we envision in this new facility is like a classroom setting for customers, similar to what we do in our stores, the classes are providing. So when I said training center, I was thinking more of -- the reference there is not a training -- an employee staff training facility, but a customer -- places where we can really do some neat classes, bring in some artists, bring in some demos and things, and really have a nice facility to do some really nice classes in. So clarification there in terms of the definition of training center.

[Keith Rechenbach], private investor.

Great quarter. Question, had you -- had there been any more talk about a quarterly dividend, or is that something that you would hold off on until you work through some of the inventory and get the building built?

I think obviously until we can get this inventory worked down -- and we are not really concerned, obviously, about the inventory. We do make a lot of good buys. And it is not something we did on accident. But, yes, until we can get this worked down and see where we stand at the end of the year, it is obviously going to be on hold.

Okay, thank you.

This does conclude the question-and-answer session of today's program. I would like to turn the program back to Shannon Greene for any further remarks.

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

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.