Shannon Greene - CFO and Treasure Jon Thompson - President, COO and CEO Mark Angus - SVP.

Good day, ladies and gentlemen and welcome to the Tandy Leather Factory Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Chief Financial Officer Ms. Shannon Greene. Ma'am you may begin..

Thank you. Good afternoon and thank you for joining us for our third quarter 2014 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory and I'm joined by Jon Thompson, our Chief Executive Officer and Mark Angus, our Senior Vice President.

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 the manner foreseen. Please see our Form 10-K for 2013 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. Our third quarter results were respectable although not as good as we would have liked.

We achieved a 5% sales increase and a 4% earnings increase compared to the third quarter of 2013. Gross profit margin remained strong at 62.7% for the quarter and operating income was up by 2%. We ended the quarter with $4.9 million in cash and $39 million in inventory. Total assets at September 30th were $64 million.

Now for the numbers from today's press release, our third quarter consolidated sales increased 5%. Current quarter sales were $19.4 million compared to last year's third quarter sales of $18.5 million. Wholesale Leathercraft sales were $6.3 million this quarter down 3% from $6.5 million in the third quarter last year.

The same-store posted a 3% sales increase reporting sales of $6.3 million compared to $6.1 million in the third quarter of 2013. Our National Account Group posted 100% sales decrease reporting no sales this quarter compared to $371,000 last year.

As we've mentioned numerous times, we intentionally raised selling prices or deleted many of the products that our National Account customers were buying because of unsatisfactory gross profit margins on those items. As a result, April was the last month of sales to those customers.

Our Retail Leathercraft division reported sales of $12.1 million a 9% increase over last year's third quarter sales of $11.1 million. The same-stores posted a 6% sales increase and the four new stores opened after October last year added quarterly sales of $405,000.

Our International Leathercraft segment which consisted of the three stores located outside of North America reported sales of $1 million this quarter compared to $919,000 in last year's third quarter, a gain of 15%. All three stores have been opened for more than a year so the same-store sales gain is also 15%.

Consolidated gross profit margin for the quarter was 62.7% down slightly from last year's third quarter margin of 63.2%. Wholesale Leathercraft gross profit margin was 68.1% compared to 67.3% in the third quarter 2013.

Retail Leathercraft’s gross profit margin was 59.4% compared to 60.7% in last year's third quarter and International Leathercraft’s gross profit margin for the third quarter was 68.6% up from 64.2% last year.

Consolidated operating expenses were $9.7 million or 50.1% of sales in the current quarter compared to $9.3 million or 50.2% of sales last year an increase of $422,000 or 5%. Wholesale Leathercraft’s reported operating expenses totaling 52.2% of its sales versus 52.5% last year.

Retail Leathercraft reported operating expenses totaling 48.9% of its sales compared to 48.5% last year and International Leathercraft’s operating expenses for the quarter were 51% of its sales compared to 53.6% last year.

Income from operations was $2.5 million for the third quarter up 2% or $52,000 compared to the third quarter 2013’s operating income of $2.4 million. On a year-to-date basis, consolidated sales increased 4%. 2014 sales were $58.9 million compared to 2013 sales of $56.7 million.

Wholesale Leathercraft sales were $19.6 million this year down $359,000 or 1.8% from last year's sales of $19.9 million.

The increase is the result of a 2% same-store sales gain with sales this year of $19.2 million compared to $18.9 million last year offset by a 66% sales decline for National Account with sales this year of $349,000 versus $1 million in 2013.

Our Retail Leathercraft division reported sales of $36.2 million a 7% gain over last year's sales of $33.9 million. Sales from the four new stores were $1.1 million so far this year. The 76 comparable stores posted sales of $35.1 million an increase of 5% compared to last year's sales of $33.4 million.

Our International Leathercraft segment reported sales of $3.2 million so far this year compared to $2.9 million last year an improvement of 10%. Consolidated gross profit margin for the year was 63.9% an increase from 2013’s gross profit margin of 62.7%. Wholesale Leathercraft gross profit margin was 69.4% this year increasing from 66.1% last year.

Retail Leathercraft’s gross profit margin so far this year matches that of last year at 60.7%. International Leathercraft’s gross profit margin increased from 62.6% last year to 66.8% this year.

Consolidated operating expenses increased $1.4 million or 5% to $29.6 million or 50.2% of sales in the current year compared to $28.2 million or 49.8% of sales last year. Wholesale Leathercraft reported operating expenses totaling 51.6% of its sales compared to the 51.8% last year.

Retail Leathercraft reported operating expenses totaling 49.1% of its sales currently versus 48.2% of sales last year. International Leathercraft reported operating expenses totaling 53.2% of its sales this year compared to 52.9% last year.

On a consolidated basis the most significant operating expense increases are in employee compensation, depreciation expense, advertising and marketing and store rents. Income from operations was $8.1 million or $708,000 or 10% compared to 2013.

Looking at our balance sheet at September 30th compared to December 31, 2013 total assets are up by $7.6 million, and current assets are up by $7 million. Cash decreased $6.2 million to $4.9 million at the end of September. Inventory increased $13.1 million.

Current liabilities increased $5.9 million due to the increased and short-term debt of $6 million, which is the current balance drawn on our line of credit. Our current ratio is 3.4. EBITDA for the first nine months of 2014 is $9.2 million.

There are three Tandy stores with operating losses as of the end of September totaling $71,000 and they are three of the four new stores opened since October last year. All of our leather factory stores are profitable as of September 30th except for one and that is Chattanooga, Tennessee store that was closed at the end of October.

Few more things before we go to questions. I think we would all agree that our inventory is really high right now. However, we ran out of the number of key items last year from leather specifically by mid-December, so we perfectly tried to limit that possibility of happening again this year.

We have slowed inventory purchases significantly since August, but we’ll need to ramp them up again by the end of November in order for the product to arrive in early January. Otherwise, we’ll be out of key items as we start the New Year and depending on how sales go for the rest of this year, we may be out anyway.

While that is not good, it is a nice problem to have because it means our sales this quarter were phenomenal. We’ll see and as you know there are no guarantees in this business. Finally, as we have discussed previously leather has a very long shelf life, so having large quantities on-hand means we have good availability for a longer period of time.

However, we recognize that it's a balancing act between product availability and cash which is something we work on constantly. All things being equal, we’re thinking our normal inventory levels should be in the $32 million to $33 million range.

Regarding store openings in 2014, our intention was to open two to three new stores this year and we will have done that by the end of the month. Round Rock, Texas which is North of Austin was opened in February. Beaverton, Oregon opens next week and Escondido, California opens the week after that.

To summarize, our sales have picked up in the last few months so we are on-track with our internal projections through September. Earnings are slightly behind those projections, which is the exact opposite of where we were at the end of the second quarter.

If October sales are any indication, we have a very good chance of making up some ground in the fourth quarter. Our October results won't be finalized until late next week at which time we will have a much better idea for how we will measure up against our earnings guidance.

We do expect gross profit margin to be down some in the fourth quarter compared to last year's fourth quarter, as we think we’ll sell a larger amount of leather this quarter than a year ago. How much the margin will be affected will depend on how much non-leather product is sold during the quarter.

As we’ve talked about before, the product mix has a big impact on gross profit margin. Regardless, it will be a good year as sales and earnings will be higher than last year. It feels like it's been a tough year from a sales perspective, as we have had to work hard for every sale.

Our goal for the rest of the year is to sell everything we can at acceptable margins and begin to pay down our line of credit so that we can accumulate cash again. Based on our history, we are confident that will happen overtime. That concludes our prepared remarks. Operator, we are now ready to take questions..

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Thank you. (Operator Instructions) At this time I'm showing no questions in queue..

Very good. On behalf of Jon Thompson, Mark Angus and myself, thank you for your participation in today's call. Have a good afternoon..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day..