Tandy Leather Factory: Red Chip Conference Presentation Transcript

Feb.17.07 | About: Tandy Leather (TLF)
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Tandy Leather Factory, Inc. (NASDAQ:TLF)

Red Chip Conference

February 12, 2007 12:00 pm ET

Executives

Shannon Greene - CFO, CAO and Treasurer

Presentation

Unidentified Company Speaker

Ladies and gentlemen, we're going to go ahead and move forward now. Our next presenter is Shannon Greene with Tandy Leather Company. Shannon?

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RedChip Companies, Inc., is a well-established source of independent research and information on the small-cap market. Dedicated to "discovering tomorrow's blue chips today(tm)," its analysts seek out up-and-coming and undiscovered small-cap companies before they show up on Wall Street's radar screen. Through RedChip Review(tm), the Company's flagship publication, analysts provide a unique breadth of coverage and depth of research on relatively unknown small-cap companies. RedChip Visibility(tm) provides publicly-traded small-cap companies an opportunity to present their business to institutional and individual investors by holding investor conferences across the country. For an investor kit click here or call 1-800-REDCHIP.

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Shannon Greene

Okay. Thank you very much for the opportunity to tell you about our company. I am Shannon Greene, the Chief Financial Officer of Tandy Leather Factory. We are headquartered in Fort Worth, Texas -- probably is no surprise to most of you. Being the one in the Phoenix area today, I would point out that we have several stores in town, a leather factory store in Phoenix, and then we've got Tandy Leather retail stores in Phoenix and Tempe.

If you have a serious interest in our company, I would strongly encourage you to visit one of the stores in the area. It's a great way to get a quick feel of exactly what it is we do, why it works. I also brought copies of the PowerPoint presentation today. So if -- stop by our booth or I've got a stack here. As you leave, if it's something that you want to pick up, feel free. I've got multiple copies.

With that said, we are Tandy Leather Factory, a growing retail -- specialty retailer and wholesale distributor of leathercraft. Very quickly, what is leathercraft? It's a lot of things to a lot of different people. But I would describe it basically as anything that you could make with a piece of leather. We sell the leather and all of the supplies, tools, dyes, finishes that you would need to complete that project. So think of belts, wallets, saddles, purses, apparel, shoes, the sky is the limit, it's based on your creativity.

We do not sell any finished product. It's all what we consider raw materials. It's you walk out with a piece of leather and the supplies, and you make whatever it is that you're interested in. It sounds a lot like a craft as in artisan crafts, and it is, but it's bigger than that. And we'll talk about that a little bit later in the presentation.

We are what we believe. We are the leader in the industry. There are no other companies public or private that are doing exactly what we are doing. We have some of the most experienced personnel in the business, and most importantly, we have the number one brand name in the industry, that being Tandy Leather. I guess that I should also mention that in addition to all these soft concepts, experience, brand name, et cetera, we are generating real profits and putting hard cash in the bank.

I won't read all of these milestones for you as I think they pretty much speak for themselves. I will say that the most significant event on this slide is the acquisition of Tandy Leather in the year 2000. Hang on with me just a minute and let me give you a little bit more background as to why that is so important.

We've all heard of RadioShack. RadioShack was purchased out of bankruptcy by a man named Charles Tandy back in the '60s. At the time he was running a little leathercraft company called Tandy Leather Company. He started Tandy Leather after he got home from World War II.

He had seen leathercraft being used in many of the military hospitals for rehabilitation and also as a recreational activity on many of the military bases while he was serving in the navy. He believed that he could develop a market for leathercraft if it could be taught to the general public. So as a result, Tandy Leather was effectively born.

Fast forwarding a few decades, Charles Tandy used the cash that was being generated through these little leathercraft stores around the country to purchase the names that you know now, RadioShack, Pier 1, Bombay and ColorTile. Those were all original Tandy -- they were Tandy companies originally, and they were all acquired with the cash that was generated from Charles Tandy's original company, which was Tandy Leather Company.

Simply stated, Tandy Leather was the platform from which the Tandy family as companies was started. So in essence, we like to say that we are the original Tandy Company.

And I mention briefly our experience personnel. This slide gives you some more specifics about that team. The years listed under each name are the years of experience in the leathercrafting industry. Wray Thompson and Ron Morgan are our founders. They were Tandy Leather executives working under the directions of Charles Tandy prior to starting the leather factory.

And I will interject here as to eliminate a little confusion. Our company was originally called the Leather Factory and after we bought Tandy Leather in 2000. We combined the two names to become Tandy Leather Factory. You will hear me talk about the old Tandy that was the Company that Charles Tandy started. That was the Company that Ron Morgan and Wray Thompson worked for originally. "The Old Tandy" -- quote unquote -- was the Company before we bought it.

Back to the management team, it’s a great group. Been in the business for long time I don’t think there is another company in the industry that has put together as stronger team as we have. That’s another reason why we don’t have much competition. There is not a lot of people out there that know the industry and we think we’ve got the best ones working for us.

Who are our customers? Who does this? We basically operate two segments and I would say that those two segments are very similar. We refer to them in our public filings as wholesale leathercraft segment and retail leathercraft segment. The wholesale leathercraft segment is our leather factory stores. We have 30 across the country.

They are wholesale focused. Their main customers are other retailers, small manufacturers. What we call of as dealers after our sale centers, small mom and pop independent retailers. We also in that segment, we sell to the big boxes Michael's, A.C. Moore, JoAnn's, Hobby Lobby and a little bit to Wal-Mart.

The retail leathercraft segment is basically our Tandy leather retail store. Its customers, primarily the end user, the hobbyist and the consumers someone who does leathercraft maybe in his garage and his workshop at the kitchen table could be a professional hobbyist someone who makes, develops such craft and is fairly proficient at it, maybe sells wallets to his friends at work.

We’ve got several -- well that come in buy 100 belt lengths on Monday and make customs belts on week and take them to the flea markets and trader and villagers on the weekends as it be like professional and hobbyist type.

All of our sales are pushed. Even though we have a catalog, we do mail-order. We have a full website that has the entire product line on it. All of the sales, the customer relationships are pushed out to these stores. We do not have a centralized mail order fulfillment house. We get web orders and our headquarters at Fort Worth everyday, those orders are pushed out to the store classes to the customer.

So we want the stores to develop the relationships, the customer service, the interaction with the customers because that’s part of what drives business. It's a very traditional old fashioned type of business. The better we are at customer service and going beyond and beyond with those customers, the more successful will be.

So to have a centralized mail order center somewhere in -- wherever, Texas or whatever, doesn't make a whole lot of sense because, basically, then you're just accepting orders, you're filling those, there's no interaction, there's no personal relationship. Personal relationship at the store level is very important with customers and that's part of the reason that we have a structure like we do.

What's causing the growth? We've -- if you do any research on our -- kind of our overall financial position, you'll notice that specific in -- specifically in the last five years or so things have gone very well. We've had a good track record since we've been in business, but substantial growth in the last five years. That is due to the Tandy Leather retail store chain. We are expanding that chain.

A little history when the old Tandy before we bought them after Mr. Tandy died and a lot of the leather people that -- for the experienced, people in the business they left Tandy. Either we hired them away or they did something else. Tandy Leather retail stores -- and this is what I've been saying in the late 80's or early 90's, we're not doing really well. You've got to know the products. You've to know the business to do well.

So at one point, they had 350 stores, retail stores domestically by being -- particularly, by the mid '90s they had closed most of those. And by the end of '90s, by the time we bought them, they had closed them all. They had decided that mail order and Internet business was going to be the way to go in the future. Hindsight being 20-20, of course, we all decided that wasn't the case. But as a result, Tandy Leather struggled financially. And as -- again, as I said, by the late '90s the decision was made to close all their retail stores and operates strictly as a mail order and web order fulfillment operation.

Sales declined drastically, and as a result, bad for them, good for us, we had the opportunity to purchase them at the end of 2004, what I would say is pennies on the dollar. The name in it of itself worth well more than we paid for it, and we paid just right out $3 million for the business in total. Well, side note, we had attempted to buy them probably 10 years earlier and offered them $20 million for the business, and at the time they wouldn't sell. So you wait around long enough, and I guess be at the right place and right time, and here we are.

We bought Tandy Leather with the intention of opening retail stores again. Remember Wray Thompson and Ron Morgan, our Founders, had grown up in the business under Charles Tandy opening retail store in this '60s,' 70s.

We believe very much in the bricks and water concept. Leather is a unique product. There are no two pieces of leather that are the same. So it makes sense for those people that are really interested in buying leather to be able to come in and pick out the piece that they want, touch and feel it. That was kind of the concept. So we believe that that was definitely the way to grow, and we are doing that.

We came out with an announcement at the end of 2001 that we were going to open retailer stores again. And we said -- we wanted -- at that point we said we're going to open 100 stores, and we're now saying we're going to open between 100 to 120. Two requirements basically internally that we had said even this was in the press release. We want profitable stores, I guess we're greedy, I don't know. And we want to fund the entire operation and the cash flow, the expansion it's got to came out flow we're not interested in borrowing money to do that.

So we have currently, actually this slide's outdated we've got 64 stores. We opened 10 new ones in January. We still have 50 or so vibe locations no where a lot of those are going to be all ready. And we'll open it basically at pace of a dozen stores a year. We want to make sure that we get these stores operating profitability as quickly as possible. And with our current management structure and our conservativeness I guess we think 12 stores a year is manageable.

We have been very successful with the 64 that we have so far. We will continue to -- till we get to the 100 or 120 number of opening new stores that are – 12 stores a year. So with opening that stores 12 stores a year you're looking at an annual growth right now on the retail Leathercraft segment of 20% or better on topline. And you can see there gross margin earn 60% or better, they're sell into a lot of retail customers.

The Leather factory centers on the other side which is our wholesale Leathercraft division. We currently have 29. We don't have any plans to open any more. They are spread geographically across the United States. So that we are within generally 48 hours of shipping products to any customer business whomever and we think that's the right number. They are little bit more expensive to open, take longer to become profitable. We think we – the coverage is good on wholesale side.

You can see that the annual revenue growth they are not exciting 2% to 4% is nothing to talk about. But they are historically the 26 -- 26 years old they are historical 2% to 4% revenue grower year-in-year-out regardless of what's going on, very stable, very predictable, kind of gives us a platform for the real exciting growth which is on the Tandy Leather side. We didn't see the gross profit margin because they are selling at the wholesale levels more in the 52% to 55% range as opposed to Tandy's who is at 60%.

This is just a quick snap shot of kind of where the stores are located, had several people asking today if we were primarily in the South West. That makes sense, most people think of whether it’s, that’s going to be Western, Cowboy we’re having. And get a good feel of not necessarily the little Red dots or the Leather Factory health source store and if you kind all those, you’d 29.

The Tandy Leather retail stores are the Blue Dots. As I said on the radio show, this morning we’ve got a Tandy Leather store and Phoenix and here in Tempe. They are bolstering very well. And we’ve got a leather factory store herein Phoenix and also in Tucson. This is actually slightly updated the open Boston and Allentown, Pennsylvania in January and those hadn’t -- didn’t but those two dots on the slide before we left.

But you can see they were spread all over. We do as well in the North East, a lot because New York is arising. What the heck of people do with, whether that’s a Cowboy thing and that doesn’t much to does. Upstate New York in particular does very well. It’s a good state of course. City of Manhattan, the Wall-Street guys not so much. But we’re better much spread all over and each area has a different reason for why they like leathercraft.

The North East is big settled country for us lot of settle intake companies businesses custom satellites goes up there. South West pretty much speaks for itself. And everybody else there is denomish communities in Pennsylvania and Ohio and around that area. There are all sorts of reasons why people aren’t going leathercraft. So I will give you quick snapshot of kind of where we are and then we will hopefully, several years from now have 50 or so more stores.

So where are we in leather stores -- where are we in retail store that’s kind of our point -- that’s kind of what we are doing, where we are going, why we are -- where we’re going to get the next bang from. So the next couple of slides are a little of bit more specific information about these retail stores. As you can see from the slide they are not very expensive to open. I think back to the old RadioShack's, Tandy Leather stores are kind of the prototype for what Charles Tandy did with radio shack. They are narrow 1500, 1800 square feet, these are not big stores.

They go into older strip shopping centers. Usually, have a store manager and maybe one sales clerk on the floor. It’s a very specific niche product line carrying about 2700 fuse. We’d point out that the store manager, his base salary is not very much, $28,000 a year base, that’s what the exception of California that holds pretty much across the country and we got to do a little bit of a work with California just because the cost of living is so high.

Where they make the money is in the operating profit of their store. For every $1 they make -- we give them $0.25 of that. So they've got great incentive to run profitable stores, become profitable as quickly as possible and continue to build on that. Their pay raises every year on, how much more profit they can generate this year than last.

It's works very well. Again, this is not a new concept. This was Charles Tandy's idea of early. I don't know, how RadioShack's plan their managers now. But this is the way the RadioShack used to pay them year's ago as well. We're not doing anything different. It's the same thing and it's working very well.

Again, I'll emphasize that these are not big stores. These is kind of where our average -- what we want our average store to look at or look like, $30,000 a month of revenue. It's not a lot. But when we you're looking at 1,500 square feet of floor space that works pretty well. They were in 60% gross margin better. Operating expenses, fully loaded corporate charges and everything run in the 45% to 50% range. So your pretax status was 10 to 15.

It's taking right now, six to nine months for the stores to become profitable on a year-to-date basis. Basically, they have to deal the way the costs and model offset needed to be $20,000 a month in revenue to breakeven, not usually happens in month, two or three. And then, in the next four to five months they usually hit the $30,000 number and continue to build on that.

The previous slide talked about the store opening cost and your inventory and your capital, your point of sales systems and your stores assignments are capitalized and depreciated over the life of the lease generally. Then we have store starter supplies, which are the pegboard and hooks and the tables and the racks that go into the store. I expense all those things in the first month that the store is opened.

So generally, what happens is, the stores starts, in the whole for like in a better term. The day he opens the stores and starts generating sales, he has usually got a $15,000 to $20,000 net to work on depending on how long the managers been on onsite, he is the accumulating salary for a couple of weeks.

So he starts day one of sales with $25,000 -- say $20,000 of expenses that he has got to overcome. So that's where the six to nine-month profitability thing comes from. He begins to generate profit, usually about month three or four, but it takes us six to nine months of continue profits to eat up that starting, nothing started well. So I think it's a conservative way to do that. You will find that, the more you get to know to us. We can take the conservative road every time. I think that's the smart way to run this business.

This is my favorite slide, as a CFO, I can talk about the slide all day. Within our cash, Tandy did it before, Charles Tandy Built RadioShack and all those companies with the cash they got off the Tandy and we've not done anything different.

Still structured very much the same, some of the products that are inline are the same product that we've ever sell in the 50s, dressed up a little bit where you bring them in and out. But the significance here is, noticed that we bought. Remember we bought Tandy at the end of 2000. You can see were we are, were in '98, '99 and 2000 had a lot of debt, virtually no cash.

As of September '06, the slide is slightly updated but as of September of '06, we had $5 million cash from bank, we have no debt and we have opened at that point 62 retail stores. So not only have we not borrowed money to open retail stores, we've also been able to payoff 6, a little over $6 million.

So it's very much a cash generator. Well that part about the story, like I said, I could talk about that all day long. I like that. Here is just quick snapshot of what our sales and earnings per share have done over the last almost 10 years, kind of speaks for itself, were definitely trending in the right direction, I don't see any reason why this type of the scenarios is not going to continue.

Tandy stores are very successful, doing well and we have a very specific expansion plan that we intend to follow. So we should be able to continue to add years to these slides and continue to generate the kinds of trends that you're seeing here.

This just obviously shows you kind of when we open stores how they work, pretty much speaks for itself. The yellow are the leather factory wholesale centers, distribution centers, whatever you want to call them, and then the red are the Tandy Leather retail stores. Again we're not opening -- were not opening leather factory wholesale centers. All the growth is going to driven from the retail stores.

So why do we think we can be successful? This is well, why are we successful, I guess, I should say. I'd like to say, it's been there done that story. We are not doing any different than Charles Tandy, originally started when he got out for World War II.

He believed that if you would teach people leather craft, it would catch on. Prior to that leather craft, was, kind of, a secret craft. You learned it from your dad or your grandfather whomever or they did it in a military and they still do, military basis, it’s a huge rehab activity in the veterans' hospitals.

You will see if you do any research, we did a made fairly a large donation to a help, hospitalize veterans, which is a non-profit organization in California, I believe, they donate lots of different crafts kits. But what we did was we donated almost 100 -- a little over 100, 000 kits.

Do-it-yourself kits, making wallets or key fobs or whatever, to -- this organization then distribute them to the VA hospitals across the country. You know, the toughest thing about be in a hospital is the time that you spend doing nothing and part of what this organization does and what we very are much in support of is, leather craft is a great vehicle, you know, hand-eye coordination et cetera, et cetera.

Men like the craft. It's, you know, they've got something that occupies their time, they've got, you know, custom-made wallet that they made or that they give to their son or whomever.

So we're -- but to summarize, we are not doing anything really different than has been done all along. Tandy had -- the old Tandy its problems and, obviously, closed their retail stores, but that wasn't because the concept was bad. The reason I think was because the lost all the people that were the leather experts. You got to know leather and you got to know the industry to be successful.

Charles Tandy was Tandy Leather’s biggest supporter. Once he died in the late 70s and the leather people began to go off to do other things, you are left with business that a lot of people don’t know how to run. And I think that's what happened to them, back in the 90s.

Since we bought them, we are very focused, very specific on where we are going and we’re -- stay and pure the craft, we don't add extra things to our line, its pure leather craft. And as a result, we think we can -- we have been very successful. I think we will continue to be that way.

Just kind of a long-term for numbers real quick. We think we can grow the topline in the 8 to 10% range for a while. And if we can mange expenses well, particularly at the corporate level, we think we can get 20 to 25% earnings growth on the bottomline. We've done that, in last couple of years, we think we can continue to that as we open retail stores.

Unidentified Company Speaker

We've got a couple of more minutes or so.

Question-and-Answer

Unidentified Audience Member

As I went through your slides, I think I’m wondering about maybe if you can explain to us, you know it’s a bad environment where you know like teenagers they like to get on computer and they like to play games and things like that.

You know and technology is so advanced and put it things, as you say this is kind of historical, cultural and it goes back. I know when I used to do on internet. I'm wondering and I've got a few questions that are running through my head like what is your average customer, are they primarily men or women?

What is your average -- what was the age group that it’s hitting and also if the prices fall I don’t know what kind of leather you use, but if the price analog is up, did your leather cost go up in this April to March.

Shannon Greene

Great. Quick answer to that, leather is a commodity. Sure it's based of slaughter, how many hamburgers we're all eating. We import most of our leather out of Mexico and South America. There are no tanneries left in the United States with the EPU and regulations. But leather is a commodity. So prices fluctuate minimally up and down generally, and once you got the math accounts scared or something like that. And if prices go up for us they go up for everyone.

So we’re somewhat insulated from price increases to us that somebody else wouldn’t get. I mean if the tanneries or the prices are going up, because the availability of the hides is gone down in your supply and demand than their prices are going up for everyone. Does that pass on to the customers as much as we can, sure?

So not a whole lot of issue there. As far as the customers, we’re probably got typically demographics. 60% of men right now, 40% of women average age is probably midst or up a 40s. And one of things that I didn’t talk about but that is very important is teaching more people leather craft and you do that. You start it with the kids. Boys scouts, YMCA, girls scouts, search cams, search groups.

We are huge supporters of those groups, boy’s scouts leather cuts are still the sixth most popular merit batch that boys can earn in the scouting program. You have to expose people to the craft and order for them to catch on.

And what generally happens for men -- well, I guess for everybody, they do it as a career it appeals to boys. Leathercraft appeals to boys much more than cake decorating and flowering. Boys like it, girls do too. But boys get caught it and like to do it. Then, as they get married and have children and, you know, working there sixty hours a week, leathercraft is not one of those things to have whole lot of time for. But then as there children get older, we have I can't tell you how many people e-mail, walk-in, call or send us a letter saying, I did it in college, got married, got busy didn't have time. I stuck out my tools in my garage, send me a catalogue, I want to get back in it again.

So it's very much a -- we got to push it, we've got to make more people aware of the craft. We catch the miss-kids who were in the art departments of the schools, the shop classes. We do demonstrations and a trades shows and in hospitals and in you know, at any place that we can expose somebody to the art of leathercraft. We try to do that and we try to start early, with the idea that, you know, out of ten people, you may end up actually catching two or three that really like it. They do it for while, get busy as they get all their responsibilities etcetera. Pick it up again then as I get older. It's not even – you have not been athlete, you are not to be in great shape, you know, you can do it then as a older person.

So we're working on developing the female side of the business. More products that appeal to you to women and do you know I've got a 13 year daughter who loves to make sparkly belts and so, she's you know, she's doing at even in the middle of internet and computer games.

She's making her own belts and going to school and you know all the girls are saying, where did you get the belt. I made it. That kind of you know -- but you just got to expose people to it, other wise your idea, but you know, competing against the internet and video games and the golf course and you know – them all, you have to really work on that or an otherwise, you know the craft will basically decline.

Unidentified Audience Member

[Question Inaudible]

Unidentified Company Speaker

Shannon, can you take that?

Shannon Greene

Sure.

Unidentified Company Speaker

But it's a great presentation. I appreciate it -- probably one of your demographics, I was a boy scout and I used to make leather in boy scouts. So it's a great, great company. Thank you, Shannon.

TRANSCRIPT SPONSOR

RedChip Companies, Inc., is a well-established source of independent research and information on the small-cap market. Dedicated to "discovering tomorrow's blue chips today(tm)," its analysts seek out up-and-coming and undiscovered small-cap companies before they show up on Wall Street's radar screen. Through RedChip Review(tm), the Company's flagship publication, analysts provide a unique breadth of coverage and depth of research on relatively unknown small-cap companies. RedChip Visibility(tm) provides publicly-traded small-cap companies an opportunity to present their business to institutional and individual investors by holding investor conferences across the country. For an investor kit click here or call 1-800-REDCHIP.

Read all Red Chip Conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

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