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Tandy Leather Factory, Inc. (NASDAQ:TLF)

Q4 2013 Results Earnings Conference Call

March 06, 2014 12:00 PM ET

Executives

Shannon Greene - Chief Financial Officer

Jon Thompson - Chief Executive Officer

Analysts

Steve Shaw - Sidoti & Company

Operator

Good day, ladies and gentlemen and welcome to Tandy Leather Factory Fourth Quarter 2013 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 is being recorded. I would now turn the call over to your host Shannon Greene. Please go ahead.

Shannon Greene

Thank you. Thank you for joining us for our 2013 earnings conference call. We will be discussing our fourth quarter and year end 2013 results as well as our plans for 2014. I am Shannon Greene, Chief Financial Officer and I'm joined 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 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 to 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 those statements.

2013 was a good year for us. Sales and earnings increased compared to 2012 which is always our goal. We opened three new stores. 2013 added another year to our consecutive year-over-year sales gains and was our 17th consecutive year of operating profit increasing 23% since 2012.

In this morning's earnings release, we also provided our 2014 revenue and earnings guidance and will be discussing that in further detail a little later in the call.

Here is a quick run [through] of the numbers for the fourth quarter and the year. Quarterly results are as follows, consolidated sales increased 4%, sales were $21.5 million this year compared to $20.6 million in the fourth quarter 2012. Wholesale Leathercraft sales were $7.4 million this quarter, up $278,000 or 4% compared to last year's fourth quarter. Within the Wholesale Leathercraft division same-stores reported quarterly sales of $7.2 million in 2013, up 4% from last year’s fourth quarter sales of $6.9 million.

Our national account group reported quarterly sales of $222,000 compared to $231,000 in the prior year fourth quarter, a decrease of 4%. Retail Leathercraft sales were $13.1 million in the quarter compared to the prior year’s fourth quarter of $12.5 million an increase of 4%. The same stores reported sales of $12.7 million for the fourth quarter of 2013 up 3% from the same quarter in 2012. International Leathercraft sales for the quarter were $1 million up 10% from 2012 fourth quarter sales of $944,000. Same store sales were up 10%, as all 3 stores in this segment are included in comp.

Consolidated gross profit margin for the quarter was 63.9% equal to that of last year’s fourth quarter. Wholesale Leathercraft’s gross profit margin decreased from 71.8% last year to 70.5% this year. Retail Leathercraft’s gross profit margin increased from 59.6% in 2012 to 60.1% this year. International Leathercraft’s gross profit margin for the fourth quarter was 65.3% up from last year’s fourth quarter of 61.3%.

Consolidated operating expenses increased to $167,000 for the fourth quarter to $9.9 million or 45.9% of sales compared to $9.7 million or 47% of sales last year. Wholesale Leathercraft reported operating expenses totaling 43.9% of its sales versus 48.2% last year. Retail Leathercraft reported operating expenses totaling 46.4% of sales compared to 45.4% last year. International Leathercraft’s operating expenses totaled 53.4% of its sales this year compared to 60.6% last year.

Income from operations is $3.9 million for the quarter, an increase of $414,000 or 12% compared to the fourth quarter 2012.

Now for the 2013 annual results. Consolidated sales were up 8% from 2012. Sales were $78.3 million compared to $72.7 million last year. Wholesale Leathercraft sales were $27.4 million in the current year versus $26.9 million a year ago up 2%. Within the division same stores reported sales of $26.1 million an increase of 4% from 2012 sales of $25.2 million.

The national account group reported sales of $1.2 million compared to $1.7 million in 2012, a decrease of 25%. Retail Leathercraft’s 2013 sales were $47 million compared to last year’s sales of $42.6 million an increase of 10%. We opened three new stores in 2013 and closed two. The new stores contributed sales of $585,000 in 2013, the 75 comparable stores contributed sales of $45.8 million in 2013 which translates to same store sales gain of 9% over 2012 sales of $41.9 million.

International Leathercraft sales were $3.9 million this year compared to last year’s sales of $3.3 million an increase of 20%. Same store sales were up 20% as all three stores in this segment are included in these comps. Consolidated gross profit margin for the year was up 63%, 10 basis points below 2012 consolidated gross profit margin of 63.1%.

Wholesale Leathercraft’s gross profit margin for 2013 match that of 2012 at 67.3%. Retail Leathercraft’s gross profit margin was 60.5% declining 10 basis points since 2012’s gross profit margin of 60.6%. International Leathercraft’s gross profit margins were 63.3% for 2013 up from 2012’s gross profit margin of 61.7%.

Consolidated operating expenses were $38.1 million or 48.6% of sales in the current up $1.3 million compared to $36.8 million or 50.6% of sales last year.

Wholesale Leathercraft reported operating expenses totaling 49.6% of its sales versus 53.4% last year. Retail Leathercraft reported operating expenses totaling 47.7% of its sales currently, compared to 47.9% last year and international Leathercraft operating expenses were 53.1% of its sales this year, compared to 62.5% last year.

Income from operations is $11.3 million this year, a 23% increase over 2012 operating income of $9.1 million. Total assets increased by 15% in 2013 compared to the end of 2012 as we ended the current year with total assets of $56.4 million. We held $11.1 million in cash at year-end, a 44% increase from the end of 2012 and up 76% in this latest quarter.

Our account receivable decreased $60,000, inventory increased by $438,000. Current liabilities increased by $311,000. We paid down $506,000 of debt and total liabilities increased by $210,000. Our debt is $2.6 million at the end of 2013.

We intend to take advantage of the opportunity at the end of April to pay down an additional 10% of the principal balance or approximately $250,000 with no prepayment penalty in accordance with our credit agreement and this will be in addition to our regular monthly payment.

Our current ratio was 5.0, and EBITDA for 2013 was $12.6 million. There were five U.S. stores with operating losses in 2013 totaling a $128,000. Three of the five were the new ones opened in the fourth quarter, one with one of the stores closed this year. The [Spain] store is the only international store not profitable in 2013, but it is getting closer to breakeven.

Our balance sheet is in good shape. Our cash balance has grown nicely this year up 44% from the year ago. Our accounts receivable balance is down 15% at the end of 2013 compared to year end 2012, primarily because of the decrease in sales to our National Account customers. Inventory is a little low, but that’s normal for year end. I think we did a good job compelling operation expenses in 2013 as they grew at half the pace of that of sales.

Expense control will be important as the sales gains will continue to get harder to match year-over-year. Compared to 2012 significant expense increases are on employee comp, advertising and marketing, rent and utilities, legal and professional fees and the expenses associated with the store locations.

Looking into 2014, we are estimating sales to be up 5% to 6% in the $82 million to $83 million range. Earnings are estimated to increase 13% to 17% over 2013. Our sales so far this year have been decent up 3% till the end of February. Retail same store sales are up 3%. Wholesale same stores are down 1%. And international same store sales are up 9%.

Our plans are to open two to three new stores this year in the U.S. including the one, we opened several weeks ago. We will continue to relocate stores in the larger space in 2014 as leases come up for renewals and we can find appropriate space at the rental rates for comfortable risk.

We believe our customers are responding positively to the larger stores and evidenced by our sales. We relocated 12 stores in 2013 and have planned to move approximately 12 to 15 stores in 2014. Regarding our 2014 capital expenditures, we are expecting CapEx to be approximately $1.8 million to $2 million. The cost of fix through the larger stores as we moved in is approximately $100,000 each.

So we expect to spend roughly $1.2 million to $1.5 million on store fixtures. We are replacing some of our factory equipment this year at an estimated cost of $200,000 and finally our budget for the normal computer equipment replacement is [$0.25 million].

Regarding inventory. We believe our inventory could increase this year to $30 million. We are not increasing the number of SKUs in our line, however we are adding some higher quality leathers and tools at the continued request of our customers, which will result in a higher investment overall. We believe that higher quality products will contribute to additional sales.

Last thing before we got to questions, our annual meeting of stockholders is scheduled for June the 10th, at 11 AM at our corporate office 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 this morning. 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.

Question-and-Answer Session

Operator

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

Steve Shaw - Sidoti & Company

Shannon, how are you?

Shannon Greene

I’m good. How are you?

Steve Shaw - Sidoti & Company

Good. Question on the new stores, do you guys plan on continuing to open up sister stores in some of the stronger markets or you guys looking at new markets?

Jon Thompson

Probably, I guess it depends on how you look at, I mean for us the LA market always has been underserved, Bay Area moving around San Francisco is a little weak, so we surround some of these areas, but we feel like there is still a lot of room to grow. I guess if you consider sister city (inaudible).

Steve Shaw - Sidoti & Company

Okay. Alright, thanks Jon. And then when opening the new stores, do you guys generally see a shift in the mix to more tool purchasing for first time buyers?

Jon Thompson

No, not really. Generally, it’s across the board product. So, it’s excited to see it there and (inaudible).

Steve Shaw - Sidoti & Company

Okay. And then lastly, what’s the current stance or 2014 stance on the marketing plan? I know you guys were ramping up especially now marketing, what’s the plan for ‘14?

Jon Thompson

2014 is going to be similar to 2013. We’ve tweaked some of the mailings and changed some of the (inaudible) things but overall it’s going to be just the same.

Steve Shaw - Sidoti & Company

Okay. All right, thanks guys.

Operator

Our next question comes from [Alan Teflon] with -- he’s a private investor. Your line is open. Alan, your line is open.

Shannon Greene

Hi Alan.

Unidentified Analyst

Hi. I was just curious about sales in other countries. Do you have websites? I assume that sales are in local currencies.

Jon Thompson

Yes. There are multiple currencies and the way our website is set up is that you’re for instance outside the U.S., [user end up] selecting a website like for instance you select UK or the Spain site if you want to buy in euros or pounds, so you can buy from either site. Normally, what we have to set up is the blockade, you want to buying either outside the U.S. or buying in the U.S.

Unidentified Analyst

Okay. And then -- okay that kind of answers my question.

Jon Thompson

All right.

Unidentified Analyst

Thank you.

Jon Thompson

You’re welcome.

Operator

Our next question comes from Ron (inaudible) with Tandy Leather Factory. Your line is open.

Unidentified Analyst

Hi. Hello?

Shannon Greene

Yes.

Jon Thompson

Hello.

Unidentified Analyst

I had a question for you, so what -- can you guys estimate how much of your website sales come from other countries ex-North America?

Shannon Greene

Specific countries or just non-U.S.?

Unidentified Analyst

Non-U.S. or Canada?

Shannon Greene

Yes and no. We can tell obviously the way the website works is when you go to our website, you can select countries. We obviously sell out of 5 total, U.S.; Canada; Spain; Australia; and UK. Then…

Unidentified Analyst

And Japan or something, I can go on the website and buy and get it shipped, get products shipped to Japan or some other random country where you don’t have a store?

Shannon Greene

Yes you can, you absolutely can but you like for Japan, we have -- depending on where you are we’ll have -- those orders will route to whichever country and stores closest. So you are example in Japan, yes if you are in Japan you can order from us, it’s going to -- you are going to be routed because of your address, you are going be routed to the Australia website and our Australia stores going to handle your order because they are closer to you than the U.S. or Europe is.

Unidentified Analyst

Okay, thank you. Just one other question; I remember that back when you guys were ramping up Tandy in the U.S., Thompson Sr. said that a lot of the stores would open based on where do they kind of knew the markets did really well. In the new countries that you are going into, what are the factors that you look at when you decide of where to open the store?

Jon Thompson

Well for us, we have a lot of history for sales from other countries, so we were trying to go in the markets where we already had a lot of dealers and a lot of sales to start with. And so where we ended up being where we already had market, Tandy Leather sold overseas for as long as I can remember and we have when we bought them out, we had their list of sales plus our list. So for instance, the UK was a no brainer because we knew who -- we had a lot of distributors already; same way in Australia, Spain (inaudible) didn’t have a lot of pre-existing clients when we went into that market.

Unidentified Analyst

Okay, thank you.

Jon Thompson

Yes.

Operator

Our next question comes from [Fabian Vanier], a private investor. Your line is open. Your line is open, sir.

Unidentified Analyst

Yes, hi. Can you hear me?

Shannon Greene

Hi Fabian.

Unidentified Analyst

Okay, awesome, great. I’m good. So I was just to ask a few questions, first of all, I was hoping to maybe breakdown what the annual salary cost per store is for your new 6,000 to 8,000 square foot stores, what kind of the sum of the employee and store manager wages for a store of that size, so just the base salary though? I know, because I know for your store managers you have kind of a profit sharing and scheme, so just the base salary for a store of that size?

Shannon Greene

Sure. So, all of the stores in the U.S. are required to have obviously a manager, the MNC full time employees. The larger stores don’t necessarily require more staff, although they could from volume. So, but may be you are talking, may be if we went from a 3,000 square foot store to 6,000 square foot store, may be it add up a full time -- one more full time employee, so you’d have a total of four including the manager, but not necessarily.

So just because they’re double in size per foot wise doesn’t mean they are going to double in size personnel wise. The manager comp is base salary in 2014 has moved to 36,000, base salary. And then as you indicated they do earn 25% of the operating profit of the store that they manage. And that’s the same, I mean that bonus plan and that compensation range is the same regardless of what size store you’re in.

Unidentified Analyst

Right. And could you be may be provide us breakdown for just normal employees or you could kind of calculate what the salary across the store is, can you please provide that breakdown or…?

Shannon Greene

Generally no, but the store associates are generally full time, so 40 hours a week, and average $10 an hour.

Unidentified Analyst

Okay, great. Thank you very much. So then the next question is has there been any change in the locations of your new stores, because you used say that your old stores are kind of in strip malls and recognizable streets, so that now that you move into larger stores and larger areas, do you move to areas where maybe the rent per square foot is higher? And also do these new stores carry a wider range of SKUs or do they just trade more of a same rent SKUs?

Shannon Greene

As we are moving into larger locations, we are trying to upgrade the general locations. Always good shopping centers certainly work; maybe what we are looking at is not quite as old as maybe when we first opened. We want the areas to be nicer because these are nicer stores. But the risk factors are not increasing significantly; in fact most of them aren’t increasing at all.

The rent expense obviously for a larger number of square feet is the total rent increasing, but the rent rate no not really, somewhere between depending on the locations, somewhere between $10 and $15 a square foot is generally what we look for. Increasing SKUs, the total dollar -- we are not, we don’t increase the number of SKUs in a larger store, we carry right now about 2,400, 2,500 active SKUs in the line. The only thing that the larger stores do is instead carrying three of some item maybe they are carrying 12 of an item. So the SKU is increasing, but the number of SKUs is not.

Unidentified Analyst

Okay, great. And then last question if I may, so in your management training program in international stores, you have people in the pipeline does not give any training, they are right now -- you kind of prepare them for new stores opening and how is that coming and integrate the international expansion?

Jon Thompson

Right now, we don’t have anybody or anything going on right now as far as the training program for international. Right now we have nothing on the horizon internationally, but we certainly have stores that they could be trained in, in Spain or in the UK where we've got people who have been around a long time. We have a regional manager from the U.S. that runs that division who has been with us for a long time that certainly is capable of training anybody that we do get and train him over there.

Unidentified Analyst

Got you. Okay. Okay. Thanks so much. That's it from me right now. Thank you.

Shannon Greene

Thanks [Fabian].

Operator

(Operator Instructions). Our next question comes from Jason Lee, a private investor. Your line is open.

Unidentified Analyst

Hi, guys. Congratulations on the quarter.

Shannon Greene

Thanks.

Unidentified Analyst

Just two questions, first question is could you please discuss working capital and inventory? And if you guys have any plans to improve working capital management and inventory turnover?

Shannon Greene

So, inventory turns are -- they have improved over the last couple of years due to moving more of the inventory out of our warehouse and what we would consider back stock or replenishment stock and into the stores. So, it feels -- I mean I think relative to other retailers, the turnover rate is lower. I think it turns, on a consolidated basis it turns in the low 3s annually. And historically that's been because we keep -- the way our system, the way we’re set up is a buyer source product worldwide, everything comes here to our warehouse in Fort Worth. And our stores replenish or order replenishment starts once a week.

So we're shipping an order, replenishment order to all of our stores weekly out of the stock here in inventory as opposed to having the vendors that we buy from shipped directly to the stores. It's more cost effective to have it all housed here and shipped to the stores weekly. Does that make sense? Does that help?

Unidentified Analyst

It does. That’s very helpful, thanks. And my second question is what has contributed to the relatively stronger cash generation this past quarter? And do you have any thoughts on perhaps returning excess cash to shareholders whether it be through share buybacks or dividends?

Shannon Greene

So fourth quarter always -- well overall this business generates cash and it has for a long time and that’s all you can knew. Fourth quarter cash is a couple of things, while we’re not as seasonal as a traditional retailer for fourth quarter obviously fourth quarter sales are the strongest of the four quarters and a lot of that business is retail customers of course. So kind of cash has generated in fourth quarter simply because of that.

The other thing is that we do all of our -- the majority of our inventory buying for fourth quarter we do in second and third quarter. So we use cash in second and third quarter to get inventory in here and then obviously we don’t buy a lot, we don’t replenish a lot during, throughout the fourth quarter we start that towards the end and then in the first quarter.

So fourth quarter always generates a lot of cash, lots of cash sales because of the retail customer holiday, Christmas shopping season and then we’re not buying as much inventory in fourth quarter because we have stocked that beginning late second quarter and all throughout the third. Inventory obviously we wanted to have by the end of September.

As far as use of cash, there is really two options and the Board discusses with it every Board meeting. There are no acquisitions to buy; there is really no place to put the cash that we can really get any return on it. So the two options are stock buyback and a dividend. And as you probably know we’ve done two one-time dividends one in 2010 one in 2012.

We had a Board meeting in February discussed it then what to do and no decision was made, but the Board will continue to talk about it at our next meeting which comes up in the next 45 days whether dividend makes sense or whether a stock buyback makes sense or if there is some other positive uses of cash. But those are generally the two options and the Board will make that decision when they feel like it’s appropriate.

Unidentified Analyst

Great, thanks. And I actually have one more question if you don’t mind. Would you be able to provide any guidance on CapEx and free cash flow for 2014?

Shannon Greene

So the CapEx is $1.7 million to $2 million for 2014, that’s made up of store fixtures that will go in the relocated stores in 2014 which is $1.2 million to $1.5 million. $200,000 in factory equipments that needs to be replaced upgraded. And $0.25 million in just general computer equipment replacements as computer equipment like our work stations and that kind of things, so total CapEx is expected to be $1.8 million to $2 million in 2014.

Unidentified Analyst

Great. And do you have kind of like a estimate or guidance for free cash flow 2014?

Shannon Greene

No we don’t put that up.

Unidentified Analyst

Great. Thanks very much.

Operator

And I’m showing no further questions. I will now turn the call back over to management for closing remarks.

Shannon Greene

Thank you. On behalf of the entire management team, I would like to thank you for participation in our 2013 earnings conference call today. And we look forward to speaking with you again next quarter. Have a good afternoon.

Operator

Thank you. Ladies and gentlemen that does conclude today’s conference. You may all disconnect. And have a great day.

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