Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Tandy Leather Factory, Inc. (NASDAQ:TLF)

Q2 2013 Earnings Call

August 9, 2013 11:30 am ET

Executives

Shannon Greene - Treasurer & CFO

Jon Thompson - President & CEO

Analysts

Steve Shaw - Sidoti & Co.

Bruce Silver - Silver Capital Management

Russell Molan - Baer Capital

Operator

Good day, ladies and gentlemen, and welcome to Tandy Leather Factory Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Shannon Greene. Ma'am, you may begin.

Shannon Greene

Thank you. Good morning and thank your for joining us for our second quarter 2013 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory and I'm joined by Jon Thompson, our Chief Executive Officer and Mark Angus, our Senior Vice President.

Before we begin, 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 From 10-K for 2012 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 the update of those statements.

So, we performed reasonably well in the second quarter achieving a 12% sales increase and a 6% earnings increase compared the second quarter of 2012. Gross profit margin for the quarter was 62.8% while operating income decreased by 5%.

We ended the quarter with $7.6 million in cash, $27.5 million in inventory. Totals assets at June 30 increased $4.1 million from year-end 2012 to $53.2 million.

Now, for the numbers from today's press release. Second quarter consolidated sales increased 12%. Current quarter sales were $19 million compared to last year's second quarter sales of $16.9 million. Wholesale Leathercraft sales were $6.7 million this quarter, up 7% from $6.3 million in the second quarter last year. The same stores posted a 5% sales increase reporting sales of $6.3 million compared to $6.1 million in the second quarter 2012. Our national account group posted a 79% sales increase for the quarter, reporting sales of $381,000 compared to $213,000 last year.

Our Retail Leathercraft division reported sales of $11.2 million, a 14% increase over last year's second quarter sales of $9.9 million. The same stores posted a 13% sales increase and the one new store, which opened in November, last year, added quarterly sales $123,000.

Our International Leathercraft segment, which consists of three stores located outside of North America, reported sales of $1 million for the quarter compared to $758,000 in last year's second quarter, a gain of 32%. All three stores have been open for more than a year, so the same store sales gain is also 32%.

Consolidated gross profit margin for the quarter was 62.8%, declining from last year's second quarter margin of 64.7%. Wholesale Leathercraft's gross profit margin was 69.1% compared to 68% in the second quarter 2012. Retail Leathercraft's gross profit margin was 59.3% compared to 62.3% in last year's second quarter. International Leathercraft's gross profit margin for the second quarter was 60%, down from 68.7% last year.

Consolidated operating expenses were $9.6 million or 50.5% of sales in the current quarter compared to $8.5 million or 50.1% of sales last year, an increase of $1.1 million, or 13%. Wholesale Leathercraft reported operating expenses totaling 56% of its sales versus 50.5% last year. Retail Leathercraft reported operating expenses totaling 47.1% of its sales compared to 49% last year. And International Leathercraft's operating expenses for the quarter were 51.5% of its sales compared to 61.9% last year.

Income from operations was $2.4 million for the quarter, down 5% or $119,000 compared to the second quarter 2012 operating income.

On a year-to-date basis, consolidated sales increased 9%. 2013 sales were $38.2 million compared to 2012 sales of $35.1 million. Wholesale Leathercraft sales were $13.5 million this year, up $23,000 or 0.2% from last year's sales of $13.4 million. The increase is the result of a 3% same store sale gain with sales this year of $12.8 million compared to $12.4 million last year, partially offset by a 35% sales decline for national accounts, with sales this year of $666,000 versus $1 million in 2012.

Our Retail Leathercraft division reported sales of $22.8 million, a 13% gain over last year's sales of $20.1 million. Sales from the one new store were $243,000 this year. The 77 comparable stores posted sales of $22.6 million, an increase of 12% compared to last year's sales of $20.1 million. Our International Leathercraft segment reported sales of $2 million so far this year compared to $1.5 million last year, an improvement of 30%.

Consolidated gross profit margin for the year was 62.4%, a decrease from 2012's gross profit margin of 63.6%. Wholesale Leathercraft's gross profit margin was flat at 65.5% both this year and lat year. Retail Leathercraft's gross profit margin decreased from 62.1% last year to 60.7% this year. International Leathercraft's gross profit margin declined from 65.7% last year to 61.8% this year.

Consolidated operating expenses increased $1.6 million, or 9.2% to $18.9 million or 49.4% of sales in the current year compared to $17.3 million, or 49.3% of sales last year.

Wholesale Leathercraft reported operating expenses totaling 51.4% of its sales compared to 48.1% last year. Retail Leathercraft reported operating expenses totaling 48% of its sales currently versus 48.9% of sales last year. International Leathercraft reported operating expenses totaling 52.7% of its sales this year compared to 64.7% last year.

On a consolidated basis, the most significant operating expense increases were in advertising and marketing, employee compensation, property insurance, freight out and credit card fees.

Income from operations was $5 million, down $52,000 or 1% compared to 2012.

Looking at our balance sheet at June 30, 2013, compared to December 31, 2012, total assets are up by approximately $4.1 million and current assets are up approximately $3 million. Cash decreased $132,000 to $7.6 million at the end of June. Inventory increased $1.6 million. Current liabilities increased $1.5 million due to an increase in accounts payable and accrued expenses up $1.3 million and $163,000, respectively, compared to year-end 2012.

Our current ratio is 4.1. EBITDA for the first half of 2013 was $5.6 million. There are two Tandy stores with operating losses as of the end of June totaling $22,000. All of the Leather Factory stores are profitable as of June 30.

A few more things before we get to questions. We moved our flagship store into the 23,000 square foot building that we began construction of last year. The grand opening was held in early June. The new location has been well received by customers and we intend to do the bulk of our training of our new mangers at this store. We currently have seven managers in training there.

The cost of the building was $2.8 million and the store fixtures and equipment totaled $375,000. Our budget was $3 million all in, so we were within $175,000 of our goal.

Regarding expenses, we have increased our advertising spend this year, trying some different things, but believe it is having a positive impact on sales. Our primary advertising method is targeted direct mail. We produce four-color flyers and mail them to existing and potential customers. We don’t mass mail. As I'm sure you know postage has gone up as has printing costs. And we have increased the frequency of some of the mailings from every other month to every month. We are e-mailing as much as possible, which has a lower cost, but it will be a long time, if ever, before we totally eliminate the production of those hard-copy flyers.

Employee compensation is also up this year due to an increase in headcount. As we move our stores into larger locations, we are increasing the number of employees in those stores. Further, if the staff at our flagship store wasn’t predominantly MITs, we would probably say it was over-staffed. However, having a supply of managers in training will have a positive effect on our opening of new stores in the future. So, the investment now will pay off in the long run.

Finally, we incurred some legal and professional fees this quarter, one-time expenses, if you will, associated with some new trademark registrations of company logo variations and our Board's adoption of a shareholder rights plan.

Finally, there were some expenses associated this quarter related to the move of our flagship store, again, one-time expenses. Specifically, we wrote off approximately $60,000 in leasehold improvements and old fixtures at the old locations.

Regarding store openings in 2013, we are currently working on one domestic store opening that should happen early in the fourth quarter.

To summarize, we are in line with our internal projections for the first half of the year and are looking forward to a solid performance in the last half of the year. Despite the cautious economy, we believe we are performing well and continue to earn the loyalty of our customers as evidenced by the strength of our sales.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Steve Shaw of Sidoti & Co. Your line is open.

Steve Shaw - Sidoti & Co.

Hey, guys. Shannon, regarding the gross margin, what was the primary driver in the contraction. Was that lower leather sales?

Shannon Greene

Generally speaking, yes. Gross profit margins are always affected by a couple of things. The mix of the products sold and, as you probably know, leather is our lowest margin item. So, if we sell more leather in a quarter than we did the comparable quarter before, it can absolutely mean that gross profit margin is going to come down a little bit. Obviously, what we hoped is we sell a lot of leather and then all the other things to with it.

The other possibility with gross margin is the customer mix. Retail customers -- the selling prices to Retail customers, pure Retail customers is higher than some of -- at the other price levels, Wholesale, et cetera, so it's a combination of those two mixes, customers mix and product mix that can positively or negatively affect margin.

Steve Shaw - Sidoti & Co.

Okay. And then you mentioned some additions to employees to the store sizes. Do you guys have a number of headcount that you added for the quarter?

Shannon Greene

I don’t have the number in front of me, but I want to say it was like 20.

Steve Shaw - Sidoti & Co.

Okay. And how much expenses were related to the legal expenses with the trademarking?

Shannon Greene

About $60,000 - $75,000.

Steve Shaw - Sidoti & Co.

Okay. And then did you mention where the new store was going to be opened in the fourth quarter?

Shannon Greene

We have not announced that yet, no.

Steve Shaw - Sidoti & Co.

Okay, all right, thanks a lot.

Shannon Greene

Yes.

Operator

Our next question comes from the line of Bruce Silver of Silver Capital Management. Your line is open.

Bruce Silver - Silver Capital Management

Hi, can you hear me?

Shannon Greene

Hi, Bruce, yes.

Bruce Silver - Silver Capital Management

Hi, I want today ask about how much cash do you really need to keep on the balance sheet? And what are you considering doing with the cash as far as either buyback stock, giving something to shareholders as dividends would be nice.

Shannon Greene

Yes. The minimum cash that we are comfortable with is about $5 million. When we did the dividend in 2012, I think we pulled the cash down to about $2.5 million or $3 million and that gets pretty tight. So, $5 million at a minimum, so we're a little bit over that now. As far as plans, obviously, that's very much a Board decision. The two things that make the most sense are another dividend or the consideration of implementing a quarterly dividend as opposed to doing a one-time deal. Or, stock buybacks is always on the list as well. I can assure you, it's a discussion that's held at every Board meeting.

Bruce Silver - Silver Capital Management

I would have hoped for a quarterly dividend as opposed to a one-time.

Shannon Greene

Say that again.

Bruce Silver - Silver Capital Management

I would prefer a quarterly dividend as opposed to one-time.

Shannon Greene

Got you.

Bruce Silver - Silver Capital Management

Thank you.

Shannon Greene

It makes sense at some point if the cash generation continues like it has historically.

Bruce Silver - Silver Capital Management

Thank you.

Operator

Our next question comes from the line of [Russell Molan of Baer Capital]. Your line is open.

Shannon Greene

Hi, Russell.

Russell Molan - Baer Capital

Hey, how is going?

Shannon Greene

Good.

Russell Molan - Baer Capital

I know it's only been a couple of months, but I was just curious I know you gave a little color, but you know how the new store up there in Forth Worth has gone. Is anything surprised you guys, good or bad, and just any other thoughts on it will be great?

Jon Thompson

Well, I think it's gone good. Well, I think some of the best things about it has probably been the [classroom] and the amount (inaudible) that we're getting and the turn out in that area. But, you know, again, the -- how well it's been received, it's been great. We get a lot of compliments. And you know, we would like to stay a little busier, but I think everything's gone to plan and everything looks great.

Russell Molan - Baer Capital

Got it. Thanks. That's it.

Shannon Greene

Thanks, Russell.

Operator

Our next question comes from the line of Chris Parker. Your line is open.

Unidentified Analyst

Thank you. Good morning, Shannon.

Shannon Greene

How are you?

Unidentified Analyst

Very well, thanks. And yourself?

Shannon Greene

Doing fine, thank you.

Unidentified Analyst

Good. Good. So, I want to echo, I believe, it was Mr. Silver's comment about a quarterly dividend would be really nice going forward. I imagine one thing might be that the anticipated inventory build as we get into the rest of the year that you're reserving some cash for, I would imagine that might be a reason to save more cash now, but maybe 2014 we can expect quarterly dividends, I hope.

My question is regarding operating income at the division level. It seems to me -- I'm guessing that most of the one-time expenses were in the Retail division, yet it looks like the Wholesale Leathercraft division is the division that really sustained a significant decrease in operating margins. And I was just wondering what the margin issues are within Wholesale Leathercraft and what you might do to address those going forward.

Shannon Greene

Yes, so our Wholesale Leathercraft division, which was prior to the time we bought Tandy in 2000 was the only significant we had. All of the corporate divisions, advertising, accounting, the warehouse, factory, et cetera, all of those departments are part of the Wholesale Leathercraft division. So, what happens, and I'll use advertising as a great example, all of the stores contribute or all the segments contribute to our advertising efforts. But, as has been the case this first six months, we are spending more on advertising than the stores are contributing. So, what happens is, because the advertising department is part of the Wholesale Leathercraft division, as the support department, if they spend more than all of the stores are contributing, then that excess spend shows up on the Wholesale Leathercraft segment results.

So, that's a great example of why is operating margin down for them, because -- and I’m going to throw out numbers, because these are not real numbers, but to make it easy, if we're collecting $1 million from the stores to pay for advertising, and we spend $2 million, somebody's got to pick that up, where that shows up on. Because the advertising department is part of Wholesale Leathercraft, that extra $1 million worth of expenses shows up on the Wholesale Leathercraft segment.

Unidentified Analyst

Okay. Going forward, would -- do you have any plans to reallocate some corporate expenses that are really Retail Leathercraft to the Retail Leathercraft or do you not see this as an issue going forward?

Shannon Greene

Yes. We continue to -- I mean, if it stays as my example of -- if we continue to spend as much on advertising as we are right now, yes, we will do some adjustments, so that the stores are contributing, because, obviously, it's the stores that get the benefit -- the advertising dollars have a direct impact on the sales and the customer traffic in the stores. So, yes, this is kind of -- this first six months, we've done some extra things, we're trying some different things with advertising and the fallout has been on the Wholesale Leathercraft side. But if it continues to work well, and is going to be something that we're going to continue, i.e., mailing those flyers every month instead of going back to every month or what have you, then, yes, the charges or the collection from the stores will have to go up in order to appropriately pay for that. So, it will be something that -- we watch those types of things very carefully.

Unidentified Analyst

Okay. Thank you very much.

Shannon Greene

You bet.

Operator

I'm not showing any further questions at this time. I would like to turn the program back to you, Shannon, for closing remarks.

Shannon Greene

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tandy Leather Factory's CEO Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts