Tandy Leather Factory, Inc. (TLF) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2017 Tandy Leather Factory 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, today’s conference is being recorded. I would now like to introduce your host for today's conference, Shannon Greene, Chief Executive Officer, of Tandy Leather. You may begin.

Thank you. Good morning everyone and welcome to Tandy Leather Factory’s first quarter 2017 earnings conference call. We will be discussing our first quarter 2017 results, as well as our plans and expectations for the rest of the year. I am Shannon Greene, CEO and I am joined today by Tina Castillo, CFO; and Mark Angus, President. Before we get started, our 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. Also I need to remind everyone that there maybe forward-looking statements on the call today. Statements would include words like expect, believe, anticipate, plan, intend, target or words with similar meaning and are based on our beliefs and expectations and are subject to certain risks and uncertainties that may cause 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 our most recent Form 10-K and 10-Q as well as in 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 as you saw in our earnings release, our results for the first quarter were soft, mainly due to a slow start to the year in sales combined with our investment in personnel and our new store growth strategy. That being said, however, our results are in line with expectations. From a sales perspective like many retailers in this challenging and evolving retail environment, we are seeing a pattern where consumer spending starts weak that is expected to pick up as we move through the year. We were no different as we saw slow traffic in January and February with a slight uptick in March. In addition to the slower start, we also saw a slightly lower average ticket this quarter compared to last. We know from many years of experience that our customer base can be picky based on the selections of leather that are available. They are either focused on price with less emphasis on quantity, or it is just the other way and there is more emphasis on quality than on price. Also customers still appear to be very cautious with their spending. They are buying, but not as much or as often, which is negatively impacting our ticket averages. Finally to a lesser degree, another factor impacting our first quarter and particularly March, which helped this year was the Easter, which is typically a slow week for us. So it fell in April this year versus March last year. So we are cautiously optimistic for the upcoming month that this is a very time of the year for our products and merchandizing teams as we develop new products and are readying for the summer camp season. On the cost side, as expected our operating expenses were higher as we invested in our personnel, including a full quarter of higher manager salaries and increased headcount from our district manager program and new stores. Tina will discuss this later, but while this investment is painful in the short run, I am confident it will pay off long-term. While it is still early, we are very pleased with the performance of our new district managers and the positive impact that they are having at the local level with marketing efforts to drive sustainable growth in traffic and sales. In fact, we saw a sales increase for nine of the 10 districts that had district managers during our recent open house promotion a few weeks ago. I take that as an encouraging sign that the program is off to a good start. Looking ahead we understand that the retail landscape is changing rapidly, and our customer expectations are evolving as well. As I stated in our last earnings call in March, we know for us to grow profitably we have got to continue to improve our customer experience, increase our brand awareness and strengthen our store performance. And I discussed some of the strategic initiatives that we are undertaking. Now I will take a few minutes to update you on those. We are making great progress with our district manager program with 11 of the 15 district managers having been placed. Most of those district managers were placed by early March, and we are seeing these district managers on the front lines making new sales calls, training new personnel, developing new in store classes, and finding relevant trade shows to attend. Our goals with the district manager program are not only drive traffic and sales, but to train the next generation of store managers and associates to better serve our customers and succeed in today's retail environment. On the digital front, for those of you who maybe following us on social media, I hope you have noticed the positive improvements we are making. Not only are we increasing our digital presence with more posts and videos, but the overall feel is fresh, young and crisp. We are getting more hits, more likes and more views, which we hope leads to higher interest in our products. That in turn should drive more traffic to our website and our stores. From a brand awareness standpoint I couldn't be more pleased with how our first Pinners Conference went in Atlanta a few weeks ago. You may recall that we are the 2017 title sponsor of the Pinners Conference. I attended the Atlanta show and there were thousands of new customers in attendance. Our make it and take it projects were a huge success and all of our classes were completely filled. The enthusiasm and interest from these crafters was phenomenal, and it was very exciting to introduce them to leather crafting as an additional creative outlet for expression. I am confident that our sponsoring the Pinners Conference will generate new customer interest, and I look forward to the next three shows that take place this fall. In summary, we know our business performance was soft this quarter, but we are confident that we are investing in the areas that will drive sustainable long-term growth. However, this growth won’t always be a smooth and linear path. So we will continue to be as transparent as possible about our business and to keep you posted on our initiatives and their progress. Now I’ll ask Tina to provide you with a run through of the numbers for the first quarter.

Thank you, Shannon. Before I go into the details, I wanted to remind everyone that as was disclosed in our press release, we now operate in two segments; North America and international. You may recall that prior to January 1, 2017 we operated in three segments; wholesale, retail and international. To better reflect how management analyzes the business and allocate resources, we have combined wholesale and retail into North America effective January 1, 2017 while our international reporting segment remains the same. All prior year data discussed throughout this call has been recast to conform to the new reporting segment structure, and there is no change in reporting of our consolidated financial position or results. Our first quarter consolidated sales totaling $20.1 million decreased 2.5% or 522,000 from last year's first quarter sales. Both our North American and International segments reported a 2.6% and 1.6% sales decline respectively. North America contributed 95% of total sales, while international contributed 5%. The sales decrease in North America consisted of a 2.3% decrease in same-store sales and a 398,000 decrease in stores that have been closed, offset by 328,000 in new stores sales growth. As Shannon mentioned, our ticket counts in North America were down in January and February, but we caught up in March while our average ticket declined about 5%. The decrease in the International Leathercraft segment was solely the result of unfavorable foreign currency exchange rate movements primarily for the UK pound sterling, and to a lesser extent the euro, which both declined in value relative to the US dollar quarter versus quarter. All things being equal, we would have seen a 4% sales growth in our international segment, but again this was offset by the unfavorable exchange rate. Foreign currency exchange rate affects us in two ways. One, the comparison of the current results at the current exchange rate to last year's result as the exchange rate in effect at that time. And two, the impact of weaker currencies in our foreign markets against the US dollar, which causes our products to be more expensive which can result in our foreign customers purchasing less. Consolidated gross profit margin for the quarter was 61% decreasing slightly from 61.2% in last year's first quarter. In North America, our gross profit margin was relatively consistent with gains in gross profit margins from our mix of customers, offset by declines in gross profit margins from product mix. As a reminder, 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; all else being equal when the sales mix is more heavily weighted toward leather in a given period compared to the same period a year ago, gross profit margin will be lower. Our international segment gross profit margin decreased from 60.9% last year to 58.1% this year, again due to the unfavorable exchange rate, which compressed both sales and margins. Consolidated operating expenses this quarter decreased 2.5% or $259,000 compared to a year ago. Our four new stores, net of the impact of closed stores contributed about half of this increase, while personnel, selling and advertising cost increases contributed to the remainder. With regard to personnel costs, our costs are higher for the increase in our store manager salaries, and the roll out of our district manager program. Specifically, our store manager salaries increased as expected, but were mostly offset by lower bonus accrued. With our store managers making a higher base salary, we instituted a store profit score that must be reached before bonus is earned. As such, our store manager total compensation is mostly unchanged, but the impact from the store profit will be strongest in the first half of the year, and will start to turn in the second half, and that is when we will start to see the impact from the increase in store manager-based compensation. Income from operations was $1.7 million for the quarter, decreasing $625,000 or 26% compared to the first quarter of 2016. Our effective income tax rate for the quarter was 28%, compared to 35% last year, primarily due to timing of our deferred tax position, particularly in fixed assets as book depreciation catches up with tax depreciation. We ended the quarter with total assets of $71.3 million, up from $70.7 million at the end of 2016. Cash is at $16.5 million versus $16.9 million at year-end 2016. We are currently holding $34.4 million of inventory, which is $1.2 million higher than at year-end. Our year-end level is always the lowest due to the holiday sales. Total liabilities decrease $1 million, primarily due to payments of 2016 manager bonuses in March. Our total debt is unchanged at $7.4 million, and related to our stock buyback program. We will begin paying down our debt this year based on its scheduled [maturity]. I'll now turn the call back over to Shannon for closing remarks.

With respect to our outlook we are not updating our guidance at this time. While there are some challenging headwinds in this retail landscape, our plan is clear and our focus is on growing shareholder values through the strategic initiatives we have in place and the strong and proven brand that is generating new customers everyday. As always, I want to thank all of our dedicated Tandy Leather team members who worked so hard to move this company forward. Lastly, our annual meeting of stockholders is scheduled for June 6 at 11 AM at our corporate office in Fort Worth. We would welcome the opportunity to meet you, so please consider yourself personally invited. That concludes our prepared remarks. We appreciate your time today. And we’ll be happy to answer any questions you may have. Operator, we are now ready to take questions.

Very good. Thank you for participating in our first quarter 2017 earnings conference call today. We look forward to speaking with you again next quarter. Have a great day.