Tandy Leather Factory Inc (TLF) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandy Leather Factory Fourth Quarter 2016 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you. Good morning, and welcome to Tandy Leather's 2016 earnings conference call. We will be discussing our fourth quarter and year-end 2016 results as well as our plans and expectations for 2017. I'm Shannon Greene, CEO; and I'm joined today by Tina Castillo, CFO; and Mark Angus, President.

The earnings release and related SEC filings are available on our Investor Relations section of our website, and a replay of this webcast will be available later today.

I need to remind everyone that there may be forward-looking statements on the call today. Statements would include words like expect, believe, anticipate, plan, intend, target or words with similar meaning and are based on our beliefs and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from our forward-looking statements about those results. These risks are detailed in our various filings with the SEC, such as the most recent Form 10-K and 10-Q as well as in news releases and other communications. We do not undertake to update or revise any forward-looking statements, which speak only as of the time they are made.

As you saw in our earnings release, we delivered on our 2016 guidance. Our sales came in at the top end of our guidance range, while our earnings were at the lower end. While we were encouraged to see a better than expected response to our holiday promotions, the overall product mix compressed our gross profit margins.

Also, somewhat negatively impacting our results, in late November we announced to our store managers that their base salaries would be increased by almost 40% on December 1 to comply with the then-expected FLSA minimum salary. While that requirement was delayed shortly after our announcement, we followed through with what we told our managers.

Tina will take you more in depth through the financials. But before she does, I'd like to highlight some of our accomplishments from this past year and what we plan for 2017 that will continue positioning us for further growth.

Let's start with the change in management. I took over as CEO last February. And since then, I've personally visited about 25% of our stores. Listening to our store managers and associates and getting to meet our valuable customers, I've learned much about what it takes for us to be more competitive in this current retail landscape and to drive sustainable growth in traffic and sales. While Tandy Leather doesn't have a competitor with its product breadth and leathercraft expertise that is our legacy, that's just not enough in today's retail marketplace. For us to grow profitably, we've got to improve our customer experience, increase our brand awareness and strengthen our store performance.

So what are we doing to improve our customer experience? This year, we added public WiFi to our stores, invested in a new integrated credit card system to provide a more secure and faster checkout process. We've changed our preferred store layout to make our merchandise more accessible and easier to shop and choose products. We deployed a new Tandy Leather-branded workbench, so our customers have a place to be creative and share their love of leathercrafting with like-minded leathercrafters. We created a military appreciation program for all of the great men and women who protect our liberty and American values.

In 2017, we plan to install monitors in each of our stores to provide full access to our vast collection of leathercraft library teaching videos. We will also develop local in-store customer appreciation events, where we can give back to our customers with promotions and giveaways. In a nutshell, I want our customers to feel comfortable hanging out at our stores, to feel like their local Tandy Leather store is a home away from home.

What are we doing to increase brand awareness? We revamped our approach to trade shows, attending those where we can really promote our product and connect with new and old customers alike. In fact, in 2017, we are the proud title sponsor of the Pinners Conference, which, for all the do-it-yourselfers listening, is the Pinterest headline event. There are four conferences across the U.S., and we'd love for you to join us for a make and take -- make it and take it project. We are also increasing -- we are also adding headcount to increase our social media presence and enhancing our advertising programs to strengthen our relationships with our very important business customers.

Finally, what are we doing to strengthen store performance? This past year, we took on the laborious process of resetting our inventory levels across each of our 115 stores to better manage inventory at the stores and at our warehouse. Inventory is now where it needs to be based on where it sells. We've also changed our strategy for store openings to improve ROI with smaller stores in upgraded retail centers.

In 2016, we opened four stores, Nyack, New York; Philadelphia, Pennsylvania; Johnston, Rhode Island; and Lyndhurst, New Jersey. So far in 2017, we've reopened in Harrisburg, Pennsylvania and have plans to open at least four more stores by the end of this year. Looking out even further, our goal is to open on average three new stores a year.

And what we are most excited to roll out and believe will be the most important investment as we look for profitable growth and increased store traffic as an overlay to all of the initiatives I just mentioned, is our new district restructuring. In the past, we've operated with regional managers across a small number of geographically large regions. The size of the regions made it almost impossible for our regional managers to visit the 20 to 25 stores that they had to support with any semblance of effectiveness. Today, we are now operating 15 districts that report up to two regional managers. Each of the districts contains 6 to 10 stores in a much a smaller geographic footprint, which allows our district managers to help our stores grow traffic and sales much more effectively.

Under the old footprint, our regionals were busy putting out fires. With the smaller geographic footprint and number of stores, we expect our district managers can train the next generation of store managers and associates to better serve our customers and succeed in today's retail environment. So far, we've got 10 of the 15 district managers placed.

Having personally interviewed each of those district managers, I am very optimistic about Tandy Leather's future. Each of our district managers have a proven track record of successful top line and bottom line growth, while being a leader in product and leathercraft knowledge and in support of our store associates.

With the increase in our minimum salary base for our store managers, we believe we now offer a very competitive compensation structure that will allow us to attract and retain stronger store managers and associates. Our people is where it starts. They are the front line to our customers and to helping us in reaching our goal of teaching the world leathercraft one person at a time.

In summary, we've accomplished a lot since I took over in February 2016, but we still have a lot of work to do. I'm very excited about the foundation for growth that we are rebuilding.

Now I'll ask Tina to provide you with a quick run-through of the numbers for the fourth quarter and the year.

Thank you, Shannon. Our fourth quarter consolidated sales, totaling $24.1 million, decreased 0.6% or $142,000 from last year's fourth quarter sales. Our Retail and International Leathercraft segment reported a 0.4% and 13% sales increase, respectively, while our Wholesale segment reported a sales decline of 4%. Retail Leathercraft continues to be our largest segment, contributing 66% of our total sales. Wholesale Leathercraft contributed 30% of our total sales, with International Leathercraft contributing the remaining 4%.

The sales increase in the retail segment consisted of a 1% increase in same-store sales and new store sales growth of $412,000 from the four stores that Shannon just mentioned. The decline in the wholesale segment was the result of a 2% same-store sales loss and the impact of Harrisburg that temporarily closed in the second quarter of 2016.

The increase in the International Leathercraft segment was the result of an overall improvement in our international customer base, but this is somewhat muted by the U.K. pound sterling exchange rate, which dampened our sales increase.

Foreign currency exchange rates affect us in two ways, one, the comparison of the current results at the current exchange rates to last year's results at the exchange rates in effect at that time; and two, the impact of weaker currencies in our foreign markets against the U.S. dollar, which causes our products to be more expensive, which can result in our foreign customers purchasing less.

Consolidated gross profit margin for the quarter was 60.2%, decreasing from 61.2% in last year's fourth quarter. As Shannon mentioned, we had a better than expected response from holiday promotions, which drove higher sales, but the overall product mix negatively impacted our gross profit.

As a reminder, there are generally two things that affect margins, the mix of retail sales to wholesale sales and the ratio of leather sales to non-leather sales. All else being equal, when the sales mix is more heavily weighted toward leather in a given period compared to the same period a year ago, gross profit margin will be lower.

Consolidated operating expenses this quarter increased slightly, or $12,000, compared to a year ago. While we experienced an increase in our store managers' salaries, rent and utilities, we were able to offset those decreases in discretionary spending. Income from operations was $3.6 million for the quarter, decreasing $333,000 or 9% compared to the fourth quarter of 2015.

For the year, consolidated sales, totaling $82.9 million, decreased 1% or $1.2 million from 2015 sales. Our International Leathercraft segment reported 5% sales increase, while our Retail Leathercraft sales were flat. Our Wholesale segment experienced a 5% sales decline. The sales increase in the International segment was due to the expansion of our international customer base, offset by an unfavorable impact of foreign currency exchange rates from the U.K. pound sterling.

Our Retail Leathercraft segment's increase consisted of a slight same-store sales gain, plus new store sales growth of $1 million, which was offset by two stores that closed in the first half of 2016. The decline in the Wholesale segment was the result of the 3% same-store sales decline combined with the impact at Harrisburg, which temporarily closed last April.

Consolidated gross profit margin for the year is 62.4%, improving 0.8% from 2015's consolidated gross profit margin of 61.9%. Our team worked all year to maximize our gross profit through product and customer mix.

Consolidated operating expenses in 2016 decreased 0.4% or $183,000 compared to 2015. Personnel costs and store occupancy all increased, but were offset by reductions in store move costs, advertising and other outside services.

Income from operations is $10.3 million this year, a 2% decrease from 2015's operating income of $10.5 million.

We ended the year with total assets of $70.6 million, which is up from $64.6 million at the end of 2015. Cash is at nearly $17 million versus $11 million a year ago. We finished the year with $33.2 million in inventory, a 1% decrease over year-end 2015.

Total liabilities increased $3.3 million, primarily due to the increase in our bank debt to fund our stock buyback program. Our total debt is $7.4 million, which is primarily related to our stock buyback program, which we will begin paying down later this year based on its scheduled maturity. Our debt at December 31, 2016, also includes the last installment of a capital lease that we have in place and will be paid off by year-end. EBITDA for 2016 was $12 million, which is equal to that of 2015.

I'll turn the call back over to Shannon, who will close with our outlook for 2017.

Thanks, Tina. Looking into 2017, we are estimating the top line to grow to the $84 million to $85 million range. The current retail environment continues to be a challenging one, but we are cautiously optimistic about the initiatives we have in place and that we will be seeing some benefits for our top line this year.

Overall, from an OpEx and earnings perspective, we believe that 2017 will be a year of investment with the new district restructuring as well as the effect of the FLSA wage increase. We will be actively monitoring the success of these programs and our other initiatives to ensure an appropriate ROI, although these initiatives may take time to produce quantitative results to our bottom line.

Ultimately, we believe this investment is laying the foundation for growth and expect that our earnings will be negatively impacted in 2017, but will show a return to our bottom line beginning in 2018 and beyond. That said, for 2017 we expect our EPS to be in the range of $0.56 to $0.58.

We plan to open or reopen at least four new stores this year in the U.S. As already mentioned, one has already -- we have already reopened the store in Harrisburg, Pennsylvania in late January.

Regarding on 2017 capital expenditures, we're expecting CapEx to be approximately $1.7 million to $1.9 million to cover our new store openings, the rollout of our district manager program and the infrastructure to support that program and some maintenance CapEx for our home office.

Last thing before we go to questions, I want to thank all of our great associates for their support this year and for the progress we have made in 2016. I look forward to meeting more of you in the future as I continue to make store visits one of my personal priorities as CEO.

Lastly, our Annual Meeting of Stockholders is scheduled for June 6 at 11:00 a.m. at our corporate offices in Fort Worth. We would welcome the opportunity to meet you, so please consider yourself personally invited.

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

(Operator Instructions) Our first question comes from Mike Mork with Mork Capital Management.

I'm just curious, a lot of retailers have been hurt by the so-called Amazon effect, where people go in, they see something and they buy it online. Does that affect you at all?

Go ahead.

No. This is Mark. How are you? Not really. I mean, we're such a specialty retailer that the majority of all of our customers, they want a real touch and feel, the leather and the products and learn everything that has to do with that experience, so we haven't had any real effects with that.

We've explored marketing some of our products through these marketplaces and that's a possibility that we may do so down the road some, but as a general rule we haven't really had that effect and really won't, like most specialty retailers don't. We're very fortunate that we're in that type of industry that our customers really want that hands-on effect and they want that experience of visiting our stores and the training and answering their questions. And so we're very fortunate that way.

Okay. Well, that's reassuring. Then also, can you just give us -- this 40% increase in pay, can you tell us what it's been, what it's going to? And will you be then competitive as far as getting some good managers, et cetera?

So our manager compensation program, prior to December 1, was -- in the U.S., was set at a $36,000 base salary and a 25% -- a bonus of 25% of the operating profit of the store that they managed. So some managers that do very well are making low six figures. Those that are struggling are making $36,000.

So what we did was, if you followed the FLSA news, they rolled out a -- it was basically $47,500 was going to be the minimum salary -- base salary in order to be -- continue to be an exempt employee. What we did was we increased our salaries for our base -- our managers' base salary to $50,000. So we're slightly ahead of what the minimum was there.

And again, we -- I think we announced to our store managers that we were -- the pay change was going into effect on December 1. We announced that like November -- I want to say November 20. And then the news came out on the 22nd that they had -- the judge had issued an injunction to stay on that rule. So it hasn't gone into effect yet, but we had already told our managers that's what we were doing.

We feel like, with a $50,000 salary, that makes us -- makes our store manager positions much more marketable and much more attractive that -- bottom line, it sounds a lot better than a $36,000 base, that we did tweak our bonus program just a little bit, since we're now paying 20% after a $25,000 floor, but there's no cap on that.

So again, and that's what we tell all our managers, is you can't max out on bonus. It's strictly based on how much profit the stores can generate. So we're at a $50,000 base instead of $36,000 now.

Okay. Well, that sounds good. And just lastly, three units a year, can you up that somehow? It seems like you're so profitable. It looks like you're going to be restructured here. Could you have five, six stores a year? Or what would stop you from going faster?

Yes, we could. We set our -- the minimum at three. It all comes down to people. And we're hoping -- bottom line is, yes, we could open more stores if we've got qualified manager trainees that can manage those stores, because that's about 90% of the battle when it comes to store success and store profitability. So with the district manager program now and having oversight, closer proximity and more support, we're really hoping that we can train -- and with our new salary structure, we're hoping that we can increase the number of manager trainees that we've got in the system so that, yes, we could open more stores.

But we think three stores is easily manageable. Could we open six or eight? Yes, with the right people, absolutely. And if we see this district manager program really working like we expect that it will, then you will see us adjust that as we go along.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back to Ms. Green for closing remarks.

Thank you. Thanks again for participating in our 2016 earnings conference call today. We look forward to speaking with you again next quarter. Have a great day.

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