Tandy Leather Factory Inc (TLF) 2014 Q4 法說會逐字稿

Good) day, ladies and gentlemen, and welcome to the Tandy Leather Fourth quarter 2014 earnings 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, today's call will be recorded.

I would now like to introduce your host for today's conference, Ms. Shannon Greene, Chief Financial Officer.

Ma'am, you may begin.

Thank you. Thank you everyone for joining us for our 2014 earnings conference call. We will be discussing our fourth quarter and year-end 2014 results as well as some plans for 2015. I'm Shannon Greene, chief financial officer and I'm joined today by Jon Thompson, our CEO, 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 but there are risks to Tandy Leather Factory that could prevent these events from occurring in the manner foreseen. Please see our Form 10K for 2013 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.

Our goal, as always, that sales and earnings increase compared to the prior year, and we were able to meet that goal again in 2014. We opened three new stores and closed one.

2014 added another year to our consecutive year-over-year sales gain and with our 18th consecutive year operating profits increasing 6% in 2013.

In this morning's earning release, we provided our 2015 revenue and earnings guidance and will be discussing that in further detail a little later in the call.

Here's a quick run through of the numbers for the fourth quarter in the year. Quarterly results are as follows.

Consolidated sales increased 13%. Sales were $24.5 million this year compared to $21.5 million in the fourth quarter 2013.

Wholesale Leather Craft Sales were $7.7 million this quarter, up $260,000, or 3%, compared to last year's fourth quarter.

Within the Wholesale Leather Craft division, [site] stores reported quarterly sales of $7.7 million in 2014, up 8% from last year's fourth quarter of $7.1 million.

Our national account group had no sales in the fourth quarter compared to $220,000 in the prior year fourth quarter. As a reminder, sales to our national account group ended in April 2014, an intentional decision on our part.

Retail Leather Craft sales were $15.6 million for the quarter, compared to the prior year's fourth quarter of $13.1 million, an increase of 19%. The same-store reported sales of $14.9 million for the fourth quarter of 2014, up 16% from the same quarter in 2013.

International Leather Craft sales for the quarter were $1.2 million, up 14% from 2013's fourth quarter sales of $1 million. Same-store sales were up 14% as all three stores in this segment are included in the comps.

Consolidated gross profit margin for the quarter was 59.1%, declining from 63.9% in last year's fourth quarter. Wholesale Leather Craft gross profit margin decreased from 70.5% last year to 62.3% this year. Retail Leather Craft's gross profit margin did decrease from 60.1% in 2013 to 57.2% this year.

International Leather Craft's gross profit (technical difficulty) fourth quarter was 62.8%, down from last year's fourth quarter of 65.3%. Consolidated operating expenses increased $695,000 for the fourth quarter, and $10.6 million 43.2% of sales compared to $9.9 million, or 45.9% of sales last year.

Also, Leather Craft reported operating expenses totaling 38.7% of its sales versus 43.9% last year. Retail Leather Craft reported operating expenses totaling 44.9% of sales, compared to 46.4% last year.

And International Leather Craft operating expenses totaled 49.9% of its sales this year compared to 53.4% last year.

Income from operations was $3.9 million for the quarter, a decrease of $16,000, or 1/2%, compared to the fourth quarter of 2013.

Now, for the 2014 annual results.

Consolidated sales were up 7% from 2013. Sales were $83.4 million compared to $78.3 million last year.

Wholesale Leather Craft sales were $27.3 million in the current year versus $27.4 million a year ago, down .4%.

Within the division, same-stores reported sales of $26.5 million, an increase of 4% from 2013 sales of $25.5 million.

The national account group reported sales of $348,000 compared to $1.3 million in 2013, a decrease of 72%. Retail Leather Craft's 2014 sales were $51.8 million compared to last year's sales of $47 million, an increase of 10%.

We opened three new stores in 2014. The new stores contributed to sales of [$1.8 million] in 2014. Thirty-six comparable stores contributed $50 million in 2014, which translates to a same-store sales gain of 8% for 2013 sales of $46.3 million.

International Leather Craft sales $4.3 million this year compared to last year's sales of $3.9 million, an increase of 11%. Same-store sales were up 11% as all three stores in this segment are included in the comps.

Consolidated gross profit margin for the year is 62.5%, declining 0.5 percentage point from 2013 from consolidated gross profit margin of (technical difficulty).

Wholesale Leather Craft's gross profit margin for 2014 increased slightly to (technical difficulty) compared to 2013's gross profit margin of 67.3%.

Retail Leather Craft's 2014 gross profit margin was 59.6%, declining from 2013's gross profit margin of 60.5%. International Leather Craft's gross profit margin was 65.7% for 2014, up from 2013's gross profit margin of 63.3%.

Consolidated operating expenses were $40.2 million, or 48.1% of sales in the current year, up $2.1 million compared to $38.1 million, or 48.6% of sales last year. Wholesale Leather Craft reported operating expenses totaling 48% of its sales compared to 49.6% last year.

Retail Leather Craft reported operating expenses totaling 47.9% of its sales currently compared to 47.7% last year. And International Leather Craft's operating expenses were 52.3% of its sales this year, compared to 53.1% last year.

Income from operations is $12 million this year, a 6% increase over 2013 operating income of $11.3 million.

Total assets increased by 11% in 2014, compared to the end of 2013, as we ended the current year with total assets of $62.9 million. We held $10.6 million in cash at year-end, a 4% decrease from the end of 2013 but up 119% in this latest quarter.

Accounts receivable decreased by $137,000, while inventory increased by $6.6 million.

Current liabilities increased by $2.2 million. We had $6 million on our line of credit at the end of the third quarter of which we paid down $2.5 million in December. We paid down $456,000 of our other bank debt in accordance with its terms.

Total liabilities increased by $2 million. Our debt totals $5.6 million at December 31, $3.5 million left on the line of credit, and $2.1 million on our building debt. We paid off the entire line of credit in February 2015 and we intend to take advantage of the opportunity at the end of April to pay down an extra 10% of the principal balance on our building note, or approximately $210,000, with a pre-payment penalty in accordance with our credit agreement. This will be in addition to our regular monthly payments.

Current ratio of 4.5 EBITDA for 2014 was $13.4 million.

There are six US stores with operating losses in 2014 totaling $171,000. Five are stores that have been open 12 months or less, the other was the store that we closed in 2014.

Our Spain operation is not profitable yet but it is improving every month.

Our balance sheet is in good shape. Our cash balances recovered nicely this year, even though we ended the year with 4%, $446,000 less cash than at the end of 2013.

We increased our inventory by $6.6 million this year and we paid a $2.5 million dividend in August so having only $446,000 less cash is not bad.

Our accounts receivable balance is down 15% at the end of 2014 compared to the end of 2013, primarily because of a decrease in sales to our national count customers.

Regarding inventory, we stated in our third quarter conference call that our normal inventory level should be in the $32 million to $33 million range and that's exactly where we ended the year.

I think we did a decent job controlling operating expenses in 2014 as they grew at a slower pace than that of sales. As Jon commented in this morning's press release, we tried some new things this year, all of which worked but some affected our operating margin more than liked. Expense control is always important and will increase in importance as the sales gains get harder to match year-over-year.

Compared to 2013, significant expense increases are in employee comp, advertising and marketing, rent and utilities, and depreciation.

Looking ahead into 2015, we're estimating sales to be in the $88 million to $89 million range, an increase of 5% to 6%. Earnings are estimated to increase 5% to 6% as well. Our sales so far this year have been on track, up 6% through the end of February.

Retail and wholesale same-store sales are each up 9% while international same-store sales are down 13%. However, as mentioned in our February sales press release that went out last week, the sales loss in the international stores is largely on paper because of the fluctuation in exchange rates between the local currencies and the U.S. dollar compared to the year before. In their local currencies, the international stores sales are only down 2% year-to-date.

Our plans are to open two to three new stores this year in the US and as has been in the case in the past several years, we will continue to relocate stores into larger space in 2015 as leases come up for renewal and we can find appropriate space at the rental rates we're comfortable with.

We relocated or expanded six stores in 2014, and expect to move eight to 10 stores in 2015.

Regarding our 2015 capital expenditures, we're expecting CapEx to be approximately $1.2 million to $1.5 million, the cost to fixture the larger stores as we move them is approximately $100,000 each, so we expect to spend roughly $1 million on store fixtures.

Our budget for the normal computer equipment replacements is $250,000 to $300,000 per year.

Last thing before we go to questions, our annual meeting of stockholders is scheduled for June 2 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 yourselves personally invited.

That concludes our prepared remarks. We appreciate your time today and will be happy to answer whatever questions you may have.

Operator, we are now ready to take questions.

Thank you. (Operator Instructions)

We'll give just a moment for questions.

Our first question comes from Mike Neary with Neary Asset Management. Your line is open.

Hi, everybody, I just had a couple of quick questions. So CapEx for the year $1.2 to $1.5 million, depreciation should be about $1.5 million, is that right?

Yes.

Okay. And you mentioned that you're going to analyze your inventory investment. What do you mean by that?

You talking about the total dollar amount, Mike?

Yes, it just - you know, it says looking forward, expect to open two to three new stores and are analyzing our inventory investment and expense control. So do you anticipate doing anything significantly differently with inventory or do you think we'll end next year somewhere around where we are now.

No, you know, like that - we're trying to trim it back, you know. We ended up of course very heavy at year end. On the upside, you know, with the strike on the West Coast, it ended up working out very good for us. We ended up having plenty of inventory and had a nice gain. But we'd like to keep it down a little lower than that.

And I think we were estimating around - trying to keep it around $32 million or a little less. And we've certainly trimmed back our purchases going into this year. But our store levels will probably remain the same. You know, our idea is still the same, to keep them heavy. We don't sell anything in the warehouse, so.

So you think inventory should be roughly flat next year versus where it is now, or you think you'll trim it back from where it is now.

We'll continue to trim some items. We go into the summer, that's when we start looking at items that are slow movers, things that we need to change. And so, you know, that time's almost upon us and that's what we're looking at.

Okay. So, you know, when I look at it, let's say you do your $0.79, $0.80 and estimated earnings, that's $8 million in net income, depreciation is pretty much equal to CapEx, a little bit higher, actually. It sounds like working capital should be flat, maybe even a little down. So over the next 12 months if you hit your targets, you know, will generate another roughly $8 million of free cash flow. You know, we have $5 million of net cash right now. What do you anticipate doing with it?

I don't think that we have any plans at this time. I think that our - the amount of inventory and the opportunities that come to us, like last year, we had some buying opportunities and that's where some of our inventory came from in leather. We had a large purchase that we made from overseas and odd lots and, you know, we'd like to keep that money available for those opportunities where we can make a good purchase or a good buy.

Okay. And do you have any thoughts in terms of dividends versus share purchases or things like that?

You know, it's always discussed at these meetings but there's, you know, nothing on the books right now.

Okay. Thanks.

In the queue, our next question comes from Fabian Renauer who's a private investor. Your line is now open

Hi, everyone. How're you doing?

Good.

Good.

Good. Just a few questions about international. The first one is if you have any time plan regarding the opening of satellite stores in the UK. And if rent is still sort of the main prohibitive factor there.

Well, we do anticipate trying to get stores open in the UK, in Europe, and rent, you know, yeah, it's always high but we're a destination location, you know, and it depends where you look. If you look down around London, you know, the prices get pretty high but out in the other areas, Manchester, Birmingham, you know, they're not as - they're not as prohibitive, so it, you know, probably tend to stay out in those kind of cities for now. Unless something we just happen to find a...

Do you have any time sense, sort of, for that or is that still not decided yet?

Well, we haven't decided yet but we are still looking and, you know, we anticipate trying to get another location over there but we don't have a time frame.

Right.

We are actively looking for leases, yes.

Yes, but you don't have any properties, for example, that you are interested in yet? Like there's nothing that concrete yet other than you have the desire to do it?

No.

Okay. And then in terms of opening stores in any other countries, do you have any plans for that or, again, it's just sort of a desire but nothing concrete yet?

Nothing concrete yet.

Okay. And, lastly, for Spain, so what exactly are your plans to improve the unprofitability? What are sort of the initiatives that you're implementing there?

Well, like that store, you know, originally didn't have our dealers as customers and we've switched some of that over to that - to that store. The store in the UK got all of the US distributors that we used to have here. Spain had to start out from scratch and, you know, it's not really - it's not really unusual for a store to start out like it's done. They've done a lot of shows in Europe and they'll continue to do a lot of trade shows and keep going out and beating bushes to try and improve sales.

So do you have any sort of sense when you think that might be profitable? Like, are we getting close, are we still sort of far off, like what's the improvement been over the last couple of years there?

Well, it's steadily grown and, you know, I think with our - the people that we have in place there, then the shows that we have on the books to do, you know, hopefully, like I said, it'll come around, like I said, very soon.

Right. Great. And then just the last question about Japan. Do you have any specific plans there because there's been some rumors just through the grapevine about Japan? Any - any plans you would like to disclose there?

Not at this time.

Okay.

No.

Okay. Thank you.

Thank you. (Operator Instructions)

Our next question comes from Allan Kaplan who is a private investor. Your line is now open.

Hello. I'm interested in possible competition from online-only retailers. Has that been a factor, or is it a concern for the future?

Well, not - not really. I mean, we stay on top of that and kind of monitor everything all the time. We - we have quite a bit of our customers that operate their own online stores and always have.

But, you know, in our business, traditionally, you know, people like to touch and feel leather and - and that key brick and mortar approach has always been good for us and then it comes to be that way. People just want to come in and shop or - for the goods like that. They just don't feel comfortable buying it over - you know, over the internet.

Okay. Thank you.

Thank you. I'm showing no further questions. I would now like to hand the call back to Shannon Greene for closing remarks.

Thank you. On behalf of the entire management team, I would like to thank you for participating in our 2014 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 the program. You may all disconnect. Everyone, have a great day.