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Tandy Leather Factory, Inc. (NASDAQ:TLF)

Q3 2013 Earnings Call

November 7, 2013, 2:30 pm ET

Executives

Shannon Greene - Chief Financial Officer, Treasurer, Director

Analysts

Steve Shaw - Sidoti & Company

Operator

Good day, ladies and gentlemen and welcome to Tandy Leather Factory third quarter 2013 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, this call will be recorded.

I would now like to introduce your host for today's conference. Ms. Shannon Greene. You may begin.

Shannon Greene

Thank you. Good afternoon and thank you for joining us for our third quarter 2013 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory and I am 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 Form 10-K for 2012 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 the update of those statements.

We are pleased with our financial performance in the third quarter achieving a 9% sales increase and a 456% earnings increase compared to the third quarter of 2012. Gross profit margin for the quarter was about 63% and operating income increased by 273%. We will provide more details regarding the significant improvement in operating income and net earnings later in the call. We ended the quarter with $6.3 million in cash and $29.5 million in inventory. Total assets at September 30 increased $5.1 million from the year-end 2012 to $54.2 million.

Now for the numbers from today's press release. Our third quarter consolidated sales increased 9%. Current quarter sales were $18.5 million compared to last year's third quarter sales of $17 million. Wholesale Leathercraft sales were $6.5 million this quarter, up 4% from $6.2 million in the third quarter last year. The same stores posted a 5% sales increase reporting sales of $6.1 million compared to $5.8 million in the third quarter of 2012.

Our National Account group posted a 12% sales decline reporting sales of $371,000 compared to $421,000 last year. Our Retail Leathercraft division reported sales of $11.1 million, a 12% increase over last year's third quarter sales of $9.9 million. The same stores posted an 11% sales increase and the one new store which opened in November last year added quarterly sales of $124,000.

Our International Leathercraft segment reported sales of $919,000 for the quarter compared to $810,000 in last year's third quarter, a gain of 14%. All three stores have been open for more than a year, so the same store sales gain is also 14%.

Consolidated gross profit margin for the quarter was 63.2%, improving from last year's third quarter margin of 61.2%. Also Leathercraft's gross profit margin was 67.3% compared to 65.9% in the third quarter of 2012. Retail Leathercraft's gross profit margin was 60.7% compared to 58.8% in last year's third-quarter. International Leathercraft's gross profit margin for the third quarter was 64.2%, up from 55% last year.

Consolidated operating expenses were $9.3 million or 50.2% of sales in the current quarter compared to $9.8 million or 57.4% of sales last year, a decrease of $464,000 or 5%. Also Leathercraft reported operating expenses totaling 52.5% of its sales versus 70.6% last year. Retail Leathercraft reported operating expenses totaling 48.5% of its sales compared to 48.9% last year. International Leathercraft's operating expenses for the quarter were 53.6% of its sales compared to 60.5% last year.

On a consolidated basis, the significant increase in expenses occurred in employee compensation and legal fees. Further we reported a $1 million expense in the third quarter last year to settle a legal matter that was not repeated this year which accounts for the overall reduction in operating expenses this quarter.

Income from operations was $2.4 million for the quarter, up 273% or $1.8 million compared to third quarter 2012's operating income. On a year-to-date basis, consolidated sales increased 9%. 2013 sales were $56.7 million compared to 2012 sales of $52.1 million. Also Leathercraft sales were $19.9 million this year at $257,000 or 1.3% from last year's sales of $19.7 million. The increase is the result of a 4% same store sales gain with sales this year of $18.9 million compared to $18.2 million last year, partially offset by a 28% sales decline for National Account with sales this year of $1 million versus $1.4 million in 2012.

Our Retail Leathercraft division reported sales of $33.9 million, a 13% gain over last year's sales of $30.1 million. Sales from the one new store was $367,000 this year and 77 comparable stores posted sales of $33.6 million, an increase of 12% compared to last year's sales of $30.1 million. Our International Leathercraft segment reported sales of $2.9 million so far this year, compared to $2.3 million last year, an improvement of 24%.

Consolidated gross profit margin for the year was 62.7%, a very slight decrease from 2012's gross profit margin of 62.8%. Also Leathercraft's gross profit margin improved from 65.6% last year to 66.1% this year. Retail Leathercraft gross profit margin decreased slightly from 61% last year to 60.7% this year. International Leathercraft's gross profit margin improved from 61.9% last year to 62.6% this year.

Consolidated operating expenses increased $1.1 million or 4.2% to $26.2 million or 49.7% of sales in the current year compared to $27 million or 51.9% of last year's sales. Wholesale Leathercraft reported operating expenses totaling 51.8% of its sales compared to 55.3% last year. Retail Leathercraft reported operating expenses totaling 48.2% of its sales currently versus 48.9% of sales last year. International Leathercraft reported operating expenses totaling 53% of its sales this year compared to 63.2% last year.

On a consolidated basis, the most significant operating expense increases were in advertising and marketing, employee compensation, legal fees, freight out and credit card fees. Income from operations was $7.4 million, up $1.7 million or 30% compared to 2012.

Looking at our balance sheet at September 30, 2013 compared to December 31, 2012, total assets were up by $5.1 million and current assets are up $3.7 million. Cash decreased $1.4 million to $6.3 million at the end of September. Inventory increased $3.6 million. Current liabilities increased $558,000 due to an increase in accounts payable. Our current ratio is 4.7. EBITDA for the first nine months of 2013 was $8.4 million.

There are two Tandy stores with operating losses as of the end of September totaling $40,000. We are evaluating our options with these stores to determine how best to get them profitable. All of our leather factory stores are profitable as of September 30 as are our U.K. and Australia stores.

Looking forward to the last quarter of 2013, we announced our October sales this morning up 6% over October of last year. As I am sure you have heard from other retailers the counter does not work in our favor this year as no one like the number of shopping days between Thanksgiving and Christmas. Fortunately, we do not rely on that period of time to make our year. So we are on track to meet our 2013 sales and earnings guidance despite the calendar.

We announced last week that we are opening a second store in the Atlanta area. It will officially open for business on November 18. It will be a large store, 8,000 square feet in Lithia Springs which is in the West side of Atlanta. Our other Atlanta store is in Norcross which is on the North East side. We are currently working on a few more domestic store openings. If everything goes as planned, we could be ready to announce them in December.

To summarize, we believe we are performing well. Sales continued their positive trend and growing earnings faster than sales is always a good thing. We are in line with our internal projections for the first nine months of the year and we look forward to a strong finish for the year.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Steve Shaw with Sidoti & Company. Your line is open.

Steve Shaw - Sidoti & Company

Hi, Shannon. How are you?

Shannon Greene

I am good. How are you?

Steve Shaw - Sidoti & Company

Good. Can you do me a favor and repeat the gross margin percentages for the retail, last year and this year?

Shannon Greene

Year-to-date?

Steve Shaw - Sidoti & Company

No, I am sorry. For the quarters.

Shannon Greene

For the quarter. Retail gross profit margin was 60.7% in the third quarter this year compared to 58.8% in last year's third quarter.

Steve Shaw - Sidoti & Company

Okay, and the margin improvement in the wholesale and the retail, in addition to the higher volume. What was driving that? Is there a specific shift in sales mix or pricing? Anything going on there?

Shannon Greene

Pricing? No. I mean it's always product mix can have an impact. I think we talked about last quarter. If we sell more leather in a store this year versus last year or vice versa, leather is going to draw a lower gross profit margin than the metals and the other accessories. So it's a matter of what happens to the moving in a particular store or a particular segment in one quarter versus another. It's not really driven by those increases of the same product. That doesn't have a big effect. It's really a mix of the products being sold because there is such a big difference between leather versus everything else.

Steve Shaw - Sidoti & Company

Right, and there is no seasonality to the Tools or other crafts being purchased, right, as opposed to leather. There is not much seasonality sort of little choppy or unpredictable.

Shannon Greene

Correct. Yes. No seasonality whatsoever.

Steve Shaw - Sidoti & Company

Okay, and then shifting gears over to the new Atlanta store. Is that building a standalone building?

Shannon Greene

I don’t think so. I believe its an industrial kind of flex space. I have not sent the property. Our regional manager that runs that region is out on the road today. But no, I believe that there are several buildings in the complex and there are several tenants in the building that were in.

Steve Shaw - Sidoti & Company

Okay. Do you guys have an estimate of added OpEx from that one store?

Shannon Greene

It would be minimal for 2013. In fact, it will be - one store doesn't - you are not even really going to notice as they are not that expensive to open or operate. So you are going to notice any significant difference in 2013 for the one store being opened. It is not opening until the middle of November. So we are going to six weeks worth of sales out of it. You won't notice at all either way, really positive or negative.

Steve Shaw - Sidoti & Company

All right. Thanks, Shannon.

Operator

Thank you. (Operator Instructions). I am showing no further questions at this time. I would now like to turn the call back to Ms. Shannon Greene for any closing remarks.

Shannon Greene

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 concludes today's program. You may all disconnect. Everyone, have a great day.

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