Tandy Leather Factory Inc (TLF) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandy Leather Factory fourth-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 conference call may be recorded.

I would now like to introduce your host for today's conference, Shannon Greene, CFO. Ma'am, you may begin.

Thank you. Thank you, everyone, for joining us for our 2012 earnings conference call. We will be discussing our fourth-quarter and year-end 2012 results as well as our plans for 2013.

I am Shannon Greene, Chief Financial Officer, and I am joined today by Jon Thompson, our CEO; Mark Angus, our Senior Vice President. Also, Joe Mannes, while certainly not new to our Company, is also on today's call as our new Chairman. He will make a statement at the end of our prepared remarks and then will be available for questions.

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 events 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 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 update those statements.

2012 was a successful year for us. Our sales, gross profit margin, and earnings increased compared to 2011. We opened one new store in the US and one new store in Spain. We achieved a 10% sales gain in 2012 compared to 2011.

2012 was our 16th consecutive year of operating profit, increasing 18% from last year. Also, our consolidated gross profit margin improved for the 16th year in a row.

A quick run-through of the numbers for the fourth quarter and for the year. Quarterly results. Consolidated sales increased 9%. Sales were $20.6 million this year, compared to $18.9 million in 2011.

Wholesale Leathercraft sales were $7.2 million this quarter, down $27,000 or 0.37% compared to last year's fourth quarter. Within the Wholesale Leathercraft division, same stores reported quarterly sales of $6.9 million in 2012, up 8% from last year's fourth-quarter sales of $6.4 million.

Our national account group reported quarterly sales of $231,000 compared to $783,000 in the prior-year fourth quarter, a decrease of 71%. Retail Leathercraft sales were $12.5 million for the quarter compared to the prior year of $11.1 million, an increase of 13%. The same stores reported sales of $12.5 million for the fourth quarter of 2012, up 12% from the same quarter in 2011.

International Leathercraft sales for the quarter were $944,000, up 58% from 2011 fourth-quarter sales of $598,000. Same-store sales were up $228,000 or 38% compared to the same quarter last year.

Consolidated gross profit margin for the quarter was 63.9%, up from 62% last year. Wholesale Leathercraft gross profit margin increased from 62.3% last year to 71.8% this year.

Retail Leathercraft gross profit margin decreased from 61.4% in 2011 to 59.6% this year. International Leathercraft gross profit margin for the fourth quarter was 61.3%, down from last year's fourth quarter of 71.3%.

Consolidated operating expenses increased $789,000 for the fourth quarter to $9.7 million or 47% of sales, compared to $8.9 million or 47% of sales last year. Wholesale Leathercraft reported operating expenses totaling 48.2% of its sales versus 47.1% last year.

Retail Leathercraft reported operating expenses totaling 45.4% of its sales compared to 45.2% last year. International Leathercraft operating expenses totaled 60.6% of its sales this year compared to 86.2% last year.

Income from operations was $3.5 million for the quarter, an increase of $677,000 or 24% compared to the fourth quarter of 2011.

Now for the 2012 annual results. Consolidated sales were up 10% from 2011. Sales were $72.7 million compared to $66.1 million last year.

Wholesale Leathercraft sales were $26.8 million in the current year versus $26.5 million a year ago, up 1%. Within the division, same stores reported sales of $25.2 million, an increase of 7% from 2011 sales of $23.5 million.

The national account group reported sales of $1.7 million compared to $3 million in 2011, a decrease of 44%. Retail Leathercraft 2012 sales were $42.6 million compared to last year sales of $37.4 million, an increase of 14%.

We opened one new retail store in 2012. The new stores, which are this one plus the one opened in 2011, contributed sales of $508,000 in 2012. The 76 comparable stores contributed sales of $42.1 million in 2012, which translates to a same-store sales gain of 13% over 2011 sales of $37.3 million.

International Leathercraft sales were $3.3 million this year compared to last year's sales of $2.1 million, an increase of 53%. Same-store sales increased 3%, while the two new stores added sales of $1.2 million in 2012.

Consolidated gross profit margin for the year is 63.1%, improving from 2011's consolidated gross profit margin of 61%. Wholesale Leathercraft gross profit margin increased to 67.3% this year compared to 61.3% last year.

Retail Leathercraft gross profit margin was 60.6%, improving slightly from 2011's gross profit margin of 60.5%. International Leathercraft's gross profit margin was 61.7% for 2012, down from 2011's gross profit margin of 66.9%.

Consolidated operating expenses were $36.8 million or 50.6% of sales in the current year, up $4.1 million compared to $32.6 million or 49.4% of sales last year. Wholesale Leathercraft reported operating expenses totaling 53.4% of its sales versus 50.7% last year.

Retail Leathercraft reported operating expenses totaling 47.9% of its sales currently compared to 48% last year. And International Leathercraft operating expenses were 62.5% of its sales this year compared to 55.3% last year.

Income from operations is $9.1 million this year, an 18% increase over 2011's operating income of $7.7 million. Total assets increased by 8% in 2012 compared to the end of 2011, as we ended the current year with total assets of $49.1 million. We held $7.7 million in cash at year-end, a 28% decrease from the end of 2011, but up 119% in this latest quarter.

Accounts receivable decreased by $505,000. Inventory increased by $5.9 million.

Current liabilities increased by $752,000. We paid down $202,000 of debt during the year and total liabilities increased by $498,000. Our debt is $3.1 million.

We intend to take advantage of the opportunity at the end of April to pay down an extra 10% of the principal balance, or approximately $300,000, with no prepayment penalty in accordance with our credit agreement. This will be in addition to our regular monthly payments.

Our current ratio is 4.5, and EBITDA for 2012 was $10.1 million. There were four Tandy Leather stores with operating losses in 2012, totaling $90,000. All of our Leather Factory stores are profitable. The Australia and Spain stores were not profitable in 2012 and are not expected to be so for another year or so.

Our balance sheet is in good shape. While cash is still less than it was at year-end 2011 by $3 million, it more than doubled in the fourth quarter alone.

Our accounts receivable balance is down 38% at the end of 2012 compared to year-end 2011, primarily because of the decrease in sales to our national account customers. Inventory is in good shape, right in line with our internal targets.

I think we are doing a good job of keeping operating expenses in line. For 2012, operating expenses grew slightly faster than sales; however, that is due to the legal settlement that we recorded in the third quarter. Excluding that charge, expenses are trending below sales.

We understand the importance of keeping expenses in check in order to maximize earnings. Compared to 2011, significant expense increases are in employee compensation and benefits, advertising and marketing, rent and utilities, and insurance.

Looking ahead into 2013 we are estimating sales to be up 7% to 10% in the $78 million to $80 million range. Earnings are estimated to increase 25% to 30% over 2012.

Our sales so far this year have been respectable, up 6% through the end of February. Retail same-store sales are up 13%; Wholesale same-store sales are up 4%; and International same-store sales are up 34%.

We plan to open one to two stores this year in the US. We will also continue to relocate stores into larger space in 2013 as the leases come up for renewal. We moved 12 stores in 2012 into larger locations.

We have plans to move approximately 12 to 15 stores this year. We believe our customers are responding positively to the store moves.

Okay, switching gears a little bit here, as you know, we don't normally have our Chairman on our earnings call; however, due to the recent announcement regarding Wray Thompson's resignation, we thought the timing was appropriate to introduce Joe Mannes to you, give him a chance to say a few words, and be available to answer any questions. With that, I would like to turn the call over to Joe Mannes, our Chairman of the Board.

Thanks, Shannon. I joined this Board about 15 years ago and have served for over 10 years as chair of the Audit Committee, and I've had the great good fortune to work over much of this time with Wray Thompson as well as with our current management team.

Wray has been the Chairman of this Company for over 30 years and, until now, our only Chairman. Over the past year, he began contemplating the need to transition to a new Chairman of the Board. And I will tell you that, although I may succeed Wray Thompson in this position, he will be difficult to replace. He remains a resource for and a friend to our Company.

We are also fortunate to have an experienced Board and a management team with a demonstrated capability to successfully execute its growth plan. I look forward to meeting our stockholders as the opportunities arise. And, Shannon, I will turn it back to you.

Thanks, Joe. Last thing before we go to questions; our annual meeting of stockholders is scheduled for June 6 at 11 a.m. at our corporate offices in Fort Worth. The meeting is open to the public, and we welcome the opportunity to meet you. Please consider yourself personally invited.

That concludes our prepared remarks today. We appreciate your time and will be happy to answer whatever questions you may have. Operator, we are now ready to take questions.

(Operator Instructions) Steve Shaw, Sidoti & Company.

Hey, guys. How you doing? Can you guys just provide some color on what might happen in the gross margin as you guys expand internationally?

Could you repeat the question?

Can you guys provide some color on what we might see happen to the gross margins as you expand internationally?

Well, I would think they would be pretty close to the same as they currently are. They have leveled into a pretty firm area right now where we try to maintain. So I wouldn't think you would see anything differently as we expand.

Okay. Then, Shannon, you noted that you guys have been good at keeping operating expenses in check. What is the key to that, or what has it been? And then going forward as you guys grow, what is the key to keeping them in check?

Well, all three of us as senior management pay a lot of attention to expenses. We all are very heavily involved in what our operations are doing and how much money is being spent. The goal is always to have operating expenses at 50% or lower of sales, and obviously a function of how sales are growing.

But we manage line by line almost every item. Historically we have always done it that way.

Sales gains are great; but earnings tend to make a bigger impact on everyone. So the goal is below 50% of sales as operating margin and we handle it on a line by line basis. If things look out of whack in a particular type of expense, then we put our heads together and figure out what we need to do to get it in line, without damaging or hindering the growth that is happening at the store system.

Okay. All right. Thank you.

(Operator Instructions) Steve Shaw, Sidoti & Company.

Just one more for me, guys. You have a decent amount of cash on hand. It doesn't seem like there will be a share buyback, judging on the guidance. Besides investing in new stores, what do you guys see doing with cash?

Steve, as we have talked before, yes, cash is beginning to look good again. It obviously got pretty tight.

It doesn't make a lot of sense in the Board's discussion of -- about a share buyback. We have done it; we have tried it a couple of times. They are not very successful.

We have got the constant liquidity issue. There is not (multiple speakers) shares out there. So buying them back, I don't see that that really is going to help that issue or situation any.

We have done, as you probably know, we have done two one-time special dividends, one in 2010, one in 2012.

Right.

So far that has been, I think, our most successful approach. The Board has been real positive about that, when there is enough excess cash to warrant the dividend process.

We don't -- we have looked at acquisitions over the course or the (technical difficulty) there is just not a lot out there that we feel like is a fit. So we will continue to manage cash, invest it as well as we can.

Store openings don't really affect cash. They are not -- the store openings that we do are not expensive enough to really drain anything.

So there hasn't been any recent discussion at the Board level in terms of what to do with excess cash. But we are just now to the point where we are even noticing or anybody is noticing that there is cash on the balance sheet again. So no commitments; but historically it ends up being a dividend versus a buyback or anything else.

Right, okay. Thanks again.

Thank you. At this time I am not showing any further questions. I would like turn the call back to management for any further remarks.

Very good. On behalf of the entire management team I thank you for participating in our 2012 earnings conference call today. We look forward to speaking with you again next quarter. Have a good afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.