Tandy Leather Factory, Inc. (TLF) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Tandy Leather Factory First Quarter 2015 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 be given at that time. [Operator Instructions]. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Ms. Shannon Greene, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon everyone and thank you for joining us for our first quarter 2015 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory; Jon Thompson, our Chief Executive Officer is also on today's call. 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 event 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 a manner foreseen. Please see our Form 10-K for 2014 and subsequent forms 10-Q for a discussion of some of those risks. Copies of these documents are available to the SEC's EDGAR system or 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. Overall our first quarter was okay but there were definitely some things that works against us. Gross profit margin is the focal point for the quarter which we will discuss in more detail shortly. Sales were up 5% and while operating expenses increased they increased at a slower pace than that of sale. We ended the quarter with almost $10 million in cash down only 700,000 from year end. We were able to maintain that cash position due to the decrease in inventory of $2.5 million offset by the payment of manager bonuses of slightly more than $2 million in March. Gross profit margin decreased 4 percentage points compared to last year's first quarter falling from 64% to 60%. As we have mentioned in the past there are generally two things that affect margins; the mix of retail sales to wholesale sales and the ratio of leather sales to non-leather sales. In the first quarter, the mix of leather to non-leather sales shifted towards more leather sales. We believe the primary reason for that shift was because of the reduction in inventory of our non-leather SKUs, said another way, we didn’t have the non-leather SKUs those that bring higher margins available to sale. We have talked in some of our press releases this year about the effect of the West Coast Port issues which we totally avoided in the fourth quarter of 2014. We bring in a large portion of our metals, tools, [indiscernible] buckles, rivets et cetera through those ports. The delays in product delivery has been a problem in the first quarter, resulting in those products being on our store shelves in decreased quantities if we had them at all, simply stated we couldn’t get delivery of those products consistently which means they were available in our stores for customers to buy. As a result the sales of those SKUs that normally offset the lower margins earned in leather sales just weren't there this quarter. While the port backlog is unwinding and will eventually get back to normal, we believe we will continue to experience delivery delays through the second quarter. Now for the numbers from today's press release. Our first quarter consolidated sales increased 5% over 2014's first quarter sale. Current quarter sales totaled $20.8 million compared to last year's first quarter sales of $19.8 million. Also Leathercraft posted a 1% sales decrease reporting sales of $6.7 million this quarter compared to $6.8 million in last year's first quarter. The same store posted a 6% sales gain while the National Account Group had no sales this quarter down 343,000 from last year's first quarter as a reminder we eliminated our national account sales group in April 2014. Our Retail Leathercraft division reported a 10% sales increase reporting sales of $13.1 million this quarter versus $12 million in the same quarter last year. The same-stores posted an 8% sales gain and three new stores added sales of $280,000 this quarter. International Leathercraft posted a 10% sales decrease reporting sales of $954,000 this quarter compared to $1 million for the first quarter 2014. All three stores are considered same-stores as they've all been open for more than a full year now. This segment's results are negatively affected by the currency exchange rate this year versus last year, in our local currencies; they actually achieved a 3% sales increase this quarter, compared to last year's first quarter. Consolidated gross profits margin for the quarter was 60.5%, a decrease from last year's first quarter gross profit margin of 64.1%. Wholesale Leathercraft's gross profit margin decreased from 66.4% last year to 62%, this year. Retail Leathercraft’s gross profit margin decreased from 62.7% last year to 59.9% this year and international Leathercraft’s gross profit margin decreased from 64.9%, last year to 59.5% this year. Consolidated operating expenses were $10.2 million or 49% of sales in the current quarter compared to $9.7 million or 49.1% of sales last year. Wholesale Leathercraft reported operating expenses totaling 47.9% of its sales compared to last year percentage of 46.3%. Retail Leathercraft reported operating expenses totaling 49.1% of its sales this year compared to 50.4% of its sales last year. International Leathercraft reported operating expenses totaling 56% of the sales compared to last year's percentage of 53.5%. Our consolidated operating expenses increased $445,000 in the first quarter compared to the same quarter last year. $130,000 of the increase was in employee comp, advertising expenses increased $200,000, rent and utilities expenses increased $80,000 and depreciation expenses up $40,000. Income from operations was $2.4 million for the quarter, down 19% compared to operating income of $3 million in the first quarter 2014. Looking at our balance sheet at March 31, 2015 compared to December 31, 2014 total assets decreased by $3.2 million, current assets decreased by $3.5 million, cash declined 700,000 to $9.9 million, accounts receivable increased $40,000 while inventory decreased $2.5 million. Current liabilities decreased $4 million due primarily to the decrease in debt of $3.5 million. We paid off our line of credit in February. Accounts payable increased $490,000 while accrued expenses decreased $1 million. Our bank debt currently consists of the term note on our building. The balance at March 31 was $2.1 million and we are paying the debt down in accordance with the terms of the note. We paid an extra $207,000 on the balance at the end of April without incurring a prepayment penalty. We have that opportunity each April and intend to take advantage of it in order to reduce the balance out as quickly as possible. The note expires in April 2018. Our current ratio was 6.8. EBITDA for the first quarter of 2015 was $2.8 million. Trailing 12 months of EBITDA was $12.8 million. There are five U.S. stores with operating losses as of the end of March totaling $21,000; in all cases we have made recent manager changes. All international stores are profitable. To summarize, it's been a challenging quarter and we responded as well as we could to those challenges. Sales were at 5%, operating expenses grew to slower pace than net of sales, those are both positives. Gross profit margin was a negative if you will but we believe that can fixed as we move ahead. That concludes our prepared remarks. Operator, we are now ready to take questions.

Certainly. [Operator Instructions]. Our first question comes from the line of Mike Nery from Nery Asset Management. Your question please.

Questions. So inventory, we're still going to have some issues this quarter. What do you anticipate inventory levels doing over the next couple of quarters, how many more millions do we need to add inventory, what should it look like in Q4?

Well right now of course we're still waiting for our inventory to unwind from the port shut down, so we figure by June 1st we will have everything in the list that we ordered. So yes, it's going to be tough to say because we're kind of playing catch up this time, we have never been in this situation that I can remember. And I think it all depends too on what we can find as far as special buys, last year we bought lots odd lots out of Asia and we haven't seen any of those offers as of yet, I've seen some small POs come through. So I really couldn’t predict. I think that we show, have shown that obviously having inventory on hand was definitely a big part of our sales gains in November and December. So I think it's going to be very key to try and make that up and try and get everything full again and make sure that we're ready for the fourth quarter. And we are just going to have to do our best to make sure that our buyers have got their offers lined up and that the merchandise arrives in time.

Well do you have a sense for what inventory should be at the end of the second quarter after the port shut down has kind of work through?

Mike it will probably be up a little bit if everything gets in here by the end of June up a little bit from where we are at the end of March, may be 1 million or 2 million depending on what's on the water on June 30 but I think you are really going to see the build, what build there is, will happen in between July and September, July and October.

Okay. And then in terms of CapEx for the rest of the year, what does that look like and what's a good number for the company going forward?

Mostly I don’t have the number, I think we spent 675 in the first quarter, what's driving CapEx at this point is predominantly store moves and remodels. We have three more, four more moves scheduled for so far for 2015 so figure add another, in round figures 0.5 million may be 600,000 for the rest of the year unless something catastrophic happens that we don’t know about, if we had a significant server problem or something like that with computer equipment but generally it should be 1 million or 1.2 million, we're half way through that. So you should see may be another 500,000, 600,000 for the rest of the year.

In total CapEx or just for the piece on the remodels and moves?

Total.

Okay, total. Okay. And then how many more remodels and moves are there to do and where we are at the end of the year with that process?

We are probably half way through, I think we've done 30, obviously not every retail store, not every Tandy store will need to be moved and not every store needs to be remodeled but we still probably got on the horizon for a long-term probably 30, 35 may be. But they won't happen -- I mean may be we're doing six this year, 10 is about the max I think that's the most we have ever done. This depends on when the leases are coming up and some years you have a bunch and other years you don’t have that many. So but we are not breaking leases because we are not going to pay for that. So I think we've got a total, we've done three, we've got six, we've got three or four more to do this year. So to do 30 let's say six to eight year you are talking four, five years could be pushing to six, to continue to do those if that continues to be the right strategy.

Okay. So going forward our CapEx should be more in the order of 1 million to 1.2 million?

Correct.

Okay. And so it will be less than depreciation starting sometime this year when that's new. Okay. And then my last question, obviously over the next couple of quarters you are going to build up working capital, you do it every year, this year it will be a little bigger because we're little behind on the inventory side but by the end of the year we're going to have significantly more cash than we have now. In the past we've done special dividends when we have excess cash, are there any thoughts about cash, how we distribute cash or what we do with cash going forward?

Well, as we said before that the real options as far as cash go are either continue to do those dividends, consisting quarterly dividends or realistically look at a stock buyback because there aren’t any acquisitions per se not anything that has the whole lot of money involved on any acquisitions out there. So what's on the table with the board is the discussion of do we do another buyback, I mean do we do another dividend at some point or do we look at doing the buyback and right now I would estimate they are probably weighted 50-50 at this point.

Okay, great, thanks very much.

Thank you. Our next question comes from the line of Daniel [indiscernible] Capital. Your question please.

Hi guys. I was wondering if you are still comfortable with the guidance you gave in March.

At this point yes. We are good on sales, we are behind on earnings but if we can get the inventory in here as we have planned then we should be in good shape.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back for any further remarks.

Thank you. I appreciate everyone's time today. I would also like to remind you about our 2015 Annual Meeting of Stockholders will be held on June 2nd at our offices here in Fort Worth. [We're glad] to have you all, please consider yourselves personally invited. On behalf of Jon Thompson and the entire management team, thank you for your participation in today's call. Have a good afternoon.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.