Tandy Leather Factory's (TLF) CEO Shannon Greene on Q2 2016 Results - Earnings Call Transcript

| About: Tandy Leather (TLF)
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Tandy Leather Factory, Inc. (NASDAQ:TLF) Q2 2016 Earnings Conference Call August 10, 2016 10:30 AM ET

Executives

Shannon Greene - CEO

Analysts

Operator

Good day ladies and gentlemen and welcome to the Tandy Leather Factory Inc. Q2 2016 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, the conference is being recorded. I would now like to introduce your host for today’s conference, Shannon Greene, CEO. Ma'am, you may begin.

Shannon Greene

Thank you. Good morning everyone and welcome to our second quarter 2016 earnings conference call. I am Shannon Greene, Chief Executive Officer. Mark Angus, our President who is normally on the call is traveling this week, so he will not be joining us.

Before we get started, let me remind you that 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. Statement would include words like expect, believe, anticipate, plan, intend, target or words of similar meaning and are based on our beliefs and expectations and are subject to certain risks and uncertainties that may cause the actual results to differ materially from our forward looking statement 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 the 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.

So we had a good second quarter despite weak sales. Our gross profit margin improved over last year’s second quarter and our operating expenses dropped significantly. So while we wish sales were better, we feel we have made the most of the quarter by increasing earnings by almost 21%. We'll take that over a sales gain most days. I'm sure I sound like a broken record but I'm going to say it again. We think that for whatever reason consumers are being very cautious with their discretionary spending despite the low fuel prices and I haven't heard anyone suggest a reason for the cautiousness or when things are going to change for the better.

When we look at our specific sales data, our customer and transaction counts are down but ticket average is up slightly. The slight increase in ticket average, however, isn't enough to offset the reduction in customer and transaction count, definitely something we need to work on. In the meantime we are very focused on protecting margins and we're successful doing that in the second quarter.

Quick run through the numbers. Second quarter consolidated sales totaled $19.5 million, a decrease of 1.3% from last year’s second quarter. Our Retail Leathercraft segment reported a 0.3% sales decrease. Same-store sales increased 0.2% and new store sales added $259,000. We closed one retail store in the second quarter which had sales during the quarter of $31,000.

Our Wholesale Leathercraft segment reported a 5% sales decline. Same-store sales decreased 3%. We closed one wholesale store in the second quarter which had sales of $42,000 during the quarter.

Our International Leathercraft segment reported a sales increase of 14% which consists of a 5% same store sales loss offset by new store sales of $159,000. The foreign currencies continue to show weakness against the US dollar which causes our products to be more expensive. As a result, our foreign customers are being very careful about what they purchase. We will continue to look for ways to make our products more competitive in foreign markets in order to gain market share.

Consolidated gross profit margin for the quarter was 66.1%, improving from 64.8% in last year’s second quarter. The improvement was a result of a slight shift in product mix to more non-leather sales compared to leather sales and a higher margin earned on those leather sales.

As a reminder, generally speaking, our gross profit is affected by two things: sales mix by customer and sales mix by product. More specifically the ratio of retail versus non-retail sales and the ratio of leather versus non-leather sales results in the increase or decrease in gross profit compared to the same period last year. In the second quarter we sold less of both product categories which explains the overall decline in sales but of the leather sold the margin was slightly higher.

Consolidated operating expenses this quarter decreased 4% compared to a year ago. The significant decrease is occurred in advertising and marketing, store relocation expenses, legal and professional fees and outside services. We were successful cutting expenses in the second quarter and will continue to look for opportunities to turn expenses that don't negatively impact sales or operations.

Income from operations was $2.8 million for the quarter increasing 22% compared to the second quarter of 2015. For the year-to-date, our consolidated sales totaled $40.2 million, a decrease of almost 1% from last year’s sales for the same period.

Our Retail Leathercraft segment reported a 0.4% sales increase which consists of a same-store sales increase of 0.2% and new store sales of $339,000. We have closed two retail stores in 2016 which had sales this year of $369,000.

Our Wholesale Leathercraft segment reported a 4% sales decline which consists of a same-store sales decrease of 3% and we closed one wholesale store in 2016 which had sales this year of $188,000. Our International Leathercraft segment reported a sales increase of 5% which consists of an 11% same store sales loss, offset by new store sales of $299,000.

Consolidated gross profit margin for the year was 63.6%, improving from 62.6% last year. Consolidated operating expenses so far this year decreased 2% compared to a year ago. The significant decrease is occurred in advertising and marketing expenses and employee comp.

Income from operations was $5.2 million for the year, increasing $479,000 or 10% compared to year to date 2015. We ended the quarter with total assets of $66.6 million, up $2 million from the end of 2015. Cash was lower by $1 million at $9.8 million versus $11 million at year end 2015 primarily due to the increase in inventory. We're holding $36.3 million in inventory at June 30, $2.7 million more than at December 31. We are ahead of schedule with our purchases as we plan for the fourth quarter. So we are not expecting a significant increase in the third quarter.

Current liabilities decreased $506,000, our bank debt totaled $7.4 million at June 30, consisting solely of borrowings on a lot of credit in place of our stock buyback program. We purchased 116,000 shares in the second quarter at an average price of $6.94. For the year we have purchased 520,000 shares at an average price of $7.06. Our current ratio is 6.3 and EBITDA for the first six months of 2016 was $6 million. There were seven stores with operating losses in 2016 totaling $48,000.

Looking at the last half of 2016. We are slightly behind on revenue but believe we should catch up and we are ahead on earnings. As a reminder, our guidance is flat top line and mid single digit earnings growth. We have opened one new store so far this year and are currently working aggressively on several more. We should have more details to announce in the next few months.

Despite the current business climate we are committed to managing Tandy Leather as effectively as possible regardless of the headwinds we face. We're not afraid to try new things to support sales as long as we don't sacrifice margins. Our employees deserve the credit for their hard work, commitment to the brand and flexibility.

That concludes our prepared remarks. We appreciate your time today and your interest in the company. Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And I am showing no questions at this time. Well, actually I'm sorry, it looks like you do have a question from Robert Balkman [ph] with Central Square.

Unidentified Analyst

Hi guys. Thanks for taking the question. Just one quick one on the gross margin, it’s nice to see the improvement in the quarter. Can you just provide a little more color on what drove this sequential and year on year change? Was that mix or just what are you doing on the gross margin side?

Shannon Greene

Yeah, hi Robert. And yes, so it's a matter of -- generally always mix. As I said in the prepared remarks, there really -- simply stated, there are two things that affect margins: retail sales -- sales to retail customers versus sales to wholesale and business customers, because obviously the margins are higher on -- if you're selling to a retail customer, just strictly based on selling price. And then the other thing is leather is our lowest margin item of everything that we sell. So if we've got a product shift, selling more leather this quarter than a year ago or flip with the other way it affects margins. Last year second quarter, if you go back and look at the history we were selling a lot more leather in the first – particularly the first half of last year because of – well, couple things, that the easiest one was the West Coast port issues. We weren't getting product in from Asia and the Pacific RIM because of the bottleneck in Long Beach. And so therefore we didn't have our normal supply of non-leather items. So last year second quarter was much more heavily weighted selling leather than selling non-leather. And as a result, then it pulled margins down simply because of the gross profit on leather sales in general. This quarter the product mix has shifted back a little bit more normally. And on top of that the margins on the leather that we sold in the second quarter was better than it was a year ago. So that you put those two things together and that pretty much explains what's going on with margin second quarter this year compared to last year.

As far as customer mix, not a whole lot of different. All the customer groups seem to be struggling and so there wasn't a real big shift one way or the other in terms of retail customer sales versus non-retail customer sales. So it was really in the mix of products sold and then picking up a little bit of a bump in the gross margin on the leather itself.

End of Q&A

Operator

[Operator Instructions] I'm showing no further questions at this time.

Shannon Greene

Very good. You guys have been awfully easy on me. Thank you for participating in our earnings conference call today. We look forward to speaking with you again next quarter. Have a great 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.

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