Good day, ladies and gentlemen, and welcome to the Tandy Leather Fourth Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, today's call will be recorded. I would now like to introduce your host for today's conference, Ms. Shannon Greene, Chief Financial Officer. Ma'am, you may begin. .

Thank you. Thank you, everyone, for joining us for our 2014 earnings conference call. We will be discussing our fourth quarter and year-end 2014 results, as well as some plans for 2015. I'm Shannon Greene, Chief Financial Officer, and I'm joined today by Jon Thompson, our CEO; and Mark Angus, our Senior Vice President. .

Before we get started, 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 statement.

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 through 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 of this moment and we disclaim any duty to update those statements. .

Our goal is always that sales and earnings increase compared to the prior year, and we were able to meet that goal again in 2014. We opened 3 new stores and closed 1. 2014 added another year to our consecutive year-over-year sales gain and with our 18th consultative year of operating profits, increasing 6% to 2013. .

In this morning's earnings release, we provided our 2015 revenue and earnings guidance, and we'll be discussing that in further detail a little later in the call..

consolidated sales increased 13%, sales were $24.5 million this year compared to $21.5 million in the fourth quarter 2013. Also, Leathercraft sales were $7.7 million this quarter up $260,000 or 3% compared to last year's fourth quarter.

Within the Wholesale Leathercraft division, same-stores reported quarterly sales of $7.7 million in 2014, up 8% from last year's fourth quarter of $7.1 million..

Our National Account group had no sales in the fourth quarter compared to $222,000 in the prior year fourth quarter. As a reminder, sales through our National Account group ended in April 2014, an intentional decision on our part.

Retail Leathercraft sales were $15.6 million for the quarter compared to the prior year's fourth quarter of $13.1 million, an increase of 19%. .

The same-store reported sales of $14.9 million for the fourth quarter of 2014, up 16% from the same quarter in 2013. .

International Leathercraft sales for the quarter were $1.2 million, up 14% from 2013's fourth quarter sales of $1 million. Same-store sales were up 14%, as all 3 stores in this segment are included in the comps..

Consolidated gross profit margin for the quarter was 59.1%, declining from 63.9% in last year's fourth quarter. Wholesale Leathercraft gross profit margin decreased from 70.5% last year to 62.3% this year. .

Retail Leathercraft's gross profit margin decreased from 60.1% in 2013 to 57.2% this year. International Leathercraft's gross profit in the fourth quarter was 62.8%, down from last year's fourth quarter of 65.3%..

Consolidated operating expenses increased $695,000 for the fourth quarter to $10.6 million or 43.2% of sales, compared to $9.9 million or 45.9% of sales last year..

Wholesale Leathercraft reported operating expenses totaling 38.7% of its sales versus 43.9% last year, Retail Leathercraft reported operating expenses totaling 44.9% of sales compared to 46.4% last year. And the International Leathercraft operating expenses totaled 49.9% of its sales this year compared to 53.4% last year..

Income from operations was $3.9 million for the quarter, a decrease of $16,000 or half a percent compared to the fourth quarter of 2013..

Now for the 2014 annual results. Consolidated sales were up 7% from 2013. Sales were $83.4 million compared to $78.3 million last year. Wholesale Leathercraft sales were $27.3 million in the current year versus $27.4 million a year ago, down 0.4%..

Within the division, same-stores reported sales of $26.5 million, an increase of 4% from 2013 sales of $25.5 million..

The National Account group reported sales of $348,000 compared to $1.3 million in 2013, a decrease of 72%..

Retail Leathercraft 2014 sales were $51.8 million compared to last year sales of $47 million, an increase of 10%. We opened 3 new stores in 2014. The new stores contributed sales of $1.8 million in 2014. 76 comparable stores contributed also [ph] $50 million in 2014, which translates to a same-store sales gain of 8% from 2013 sales of $46.3 million..

International Leathercraft sales of $4.3 million this year compared to last year sales of $3.9 million, an increase of 11%. Same-store sales were up 11%, as all 3 stores in this segment are included in the comps..

Consolidated gross profit margin for the year is 62.5%, declining half a percentage point from 2013's consolidated gross profit margin of 63%..

Wholesale Leathercraft's gross profit margin for 2014 increased slightly to 67.5% [ph] compared to 2013's gross profit margin of 67.3%. Retail Leathercraft 2014 gross profit margin was 59.6%, declining from 2013's gross profit margin of 60.5%.

International Leathercraft's gross profit margin was 65.7% for 2014, up from 2013's gross profit margin of 63.3%..

Consolidated operating expenses were $40.2 million or 48.1% of sales in the current year, up $2.1 million compared to $38.1 million or 48.6% of sales last year..

Wholesale Leathercraft reported operating expenses totaling 48% of its sales compared to 49.6% last year. Retail Leathercraft reported operating expenses totaling 47.9% of its sales currently, compared to 47.7% last year. And International Leathercraft's operating expenses were 52.3% of its sales this year compared to 53.1% last year..

Income from operations is $12 million this year, a 6% increase over 2013's operating income of $11.3 million..

Total assets increased by 11% in 2014 compared to the end of 2013, as we ended the current year with total assets of $62.9 million. We held $10.6 million of cash -- in cash at year-end, a 4% decrease from the end of 2013, but up 119% in this latest quarter. .

Accounts receivable decreased by $137,000, while inventory increased by $6.6 million. Current liabilities increased by $2.2 million. We had $6 million on our line of credit at the end of the third quarter, of which, we paid down $2.5 million in December. We paid down $456,000 of our other bank debt in accordance with its terms..

Total liabilities increased by $2 million. Our debt totaled $5.6 million at December 31, $3.5 million left on the line of credit and $2.1 million on our building debt.

We paid off the entire line of credit in February 2015, and we intend to take advantage of the opportunity at the end of April to pay down an extra 10% of the principal balance on our building note, or approximately $210,000 with the prepayment penalty in accordance with our credit agreement payment.

This will be an addition to our regular monthly payments..

Our current ratio is 4.5. EBITDA for 2014 was $13.4 million. There are 6 U.S. stores with operating losses in 2014, totaling $171,000. Five were stores that had been opened 12 months or less. The other was the store that we closed in 2014. Our Spain operation is not profitable yet, but it is improving every month..

Our balance sheet is in good shape, our cash balance has recovered nicely this year even though we ended the year with 4%, $446,000 less cash than at the end of 2013. We increased our inventory by $6.6 million this year, and we paid a $2.5 million dividend in August, so having only $446,000 less cash is not bad..

Our accounts receivable balance is down 15% at the end of 2014 compared to the end of 2013, primarily because of the decrease in sales to our National Account customers..

Regarding inventory. We stated in our third quarter conference call that our normal inventory level should be in the $32 million to $33 million range, and that's exactly where we ended the year. I think we did a decent job controlling operating expenses in 2014 as they grew at a slower pace than that of sales. .

As John commented in this morning's press release, we tried some new things this year, all of which worked but some affected our operating margin more than we liked. Expense control is always important and will increase in importance as the sales gains get harder to match year-over-year.

Compared to 2013, significant expense increases are in employee comp, advertising and marketing, rent and utilities and depreciation..

Looking ahead into 2015, we're estimating sales to be in the $88 million to $89 million range, an increase of 5% -- 5% to 6%. Earnings are estimated to increase 5% to 6% as well. Our sales so far this year have been on track, up 6% through the end of February.

Retail and wholesale same-store sales are each at 9%, while international same-store sales are down 13%. However, as mentioned in our February sales press release that went out last week, the sales loss in the international stores is largely on paper because of the fluctuation in exchange rates between the local currencies and the U.S.

dollar compared to the year before. In their local currencies, the international store sales are only down 2% year-to-date..

Our plans are to open 2 to 3 new stores this year in the U.S. And has been -- and as has been the case in the past several years, we will continue to relocate stores into larger space in 2015 as leases come up for renewal and we can find appropriate space at the rental rates we're comfortable with.

We relocated or expanded 6 stores in 2014, and expect to move 8 to 10 stores in 2015..

Regarding our 2015 capital expenditures, we're expecting CapEx to be approximately $1.2 million to $1.5 million. The cost to fixture the larger stores as we move in is approximately $100,000 each. So we expect to spend roughly $1 million on store fixtures..

Our budget for the normal computer equipment replacements is $250,000 to $300,000 per year..

Last thing, before we go to questions. Our annual meeting of stockholders is scheduled for June 2 at 11:00 a.m. at our corporate offices in Fort Worth. The meeting is open to the public, and we welcome the opportunity to meet you. Please consider yourselves personally invited. .

That concludes our prepared remarks. We appreciate your time today, and we'll be happy to answer whatever questions you may have. .

Operator, we are now ready to take questions. .

[Operator Instructions] Our first question comes from Mike Neary [ph] With Neary Asset Management. [ph].

I just had a couple of quick questions. So CapEx for the year, $1.2 million to $1.5 million.

Depreciation should be about $1.5 million, is that right?.

Yes. .

Okay. And you mentioned that you're going to analyze your inventory investment.

What do you mean by that?.

You're talking about the total dollar amount, Mike?.

Yes, it just -- it says looking forward, we to expect open 2 to 3 new stores and are analyzing our inventory investment and expense control.

So do you anticipate doing anything significantly differently with inventory? Or do you think we'll end next year somewhere around where we are now?.

No, like I said, we're trying to trim it back. We ended up, of course, very heavy at year end. On the upside, with the strike on the West Coast it ended up working out very good for us. We ended up having plenty of inventory and had a nice gain. But we'd like to keep it down a little lower than that.

I think we were estimating around -- trying to keep it around $32 million or a little less. And we certainly trimmed back our purchases going into this year. But our store levels will probably remain the same. Well, our idea is still the same, to keep them heavy. We don't sell anything in the warehouse, so... .

So you think inventory should be roughly flat next year versus where it is now? Or you think you'll trim it back from where it is now?.

We'll continue to trim some items. We go into the summer, that's when we start looking at items that are slow movers, things that we need to change. And so that time is almost upon us, and that's what we're looking at. .

Okay. So when I look at it, let's say you do your $0.79, $0.80 in estimated earnings, that's $8 million in net income. Depreciation is pretty much equal to CapEx, a little bit higher, actually. It sounds like working capital should be flat to maybe even a little down.

So over the next 12 months, if you hit your targets, we'll generate another roughly $8 million of free cash flow. We have $5 million of net cash right now.

What do you anticipate doing with it?.

I don't think that we have any plans at this time. I think that our -- the amount of inventory and the opportunities that come to us like last year, we had some buying opportunities, and that's where some of our inventory came from in leather. We had a large purchase that we made overseas in odd lots.

And we'd like to keep that money available for those opportunities where we can make a good purchase or a good buy. .

Okay.

And do you have any thoughts in terms of dividends versus share purchases or things like that?.

It's always discussed at each meeting, but there's nothing on the books right now. .

Our next question comes from Fabian Renauer [ph]. He's a private investor. .

Just a few questions about international.

The first one is, if you have any time plan regarding the opening of satellites in [ph] the U.K.? And if rent is still sort of a main prohibitive factor there?.

Well, we do anticipate trying to get stores open in the U.K. and Europe. And rent, I mean, yes, it's always high. But we're a our destination location, and it depends where you look. If you look down around London, the prices get pretty high. But out in the other areas, Manchester, Birmingham, they're not as prohibitive.

So we'll probably tend to stay out in those kind of cities for now, unless something -- we just happen to find a... .

So do you have any time frame sort of for that? Or is that still not decided?.

Yes. Well, we are still looking. And we anticipate trying to get another location open over there. But we don't have a time frame. We're actively looking for leases, yes. .

Yes, but you don't have any properties, for example, that you are interested in yet. Like there's nothing that concrete yet, other than you have the desire to do it. .

No. No. .

Okay.

And then in terms of opening stores in any other countries, do you have any plan for that? Or again, it's just sort of a desire, but nothing concrete yet?.

No. Nothing concrete yet. .

Okay. And lastly, for Spain.

So what exactly are your plans to improve the unprofitability? What are sort of the initiatives that you're implementing there?.

Well, that story originally didn't have our dealers as customers. And we've switched some of that over to that store. The store in the U.K. got all of the U.S. distributers that we used to have here. Spain had to start out from scratch. And it's not really unusual for a store to start out like it's done.

They've done a lot of shows in Europe, and they'll continue to do a lot of trade shows and keep going out and beating the bushes to try and improve sales. .

So do you have any sense when do you think that might be profitable? Like are we getting close? Are we still sort of far-off? Like, what's the improvement been over the last couple of years there?.

Well, it's steadily grown. And I think with our people that we have in place there, then the shows that we have on the books to do, hopefully it'll, like I said, come around, like I said, very soon. .

Great. And then just a last question about Japan. Do you have any specific plans there? Because there's been some rumors just through the grapevine about Japan.

Any plans you would like to disclose there?.

Not at this time. .

[Operator Instructions] Our next question comes from Alan Kaplan [ph], who is a Private Investor. .

I'm interested in possible competition from online-only retailers.

Has that been a factor? Or is it a concern for the future?.

Well, no, not really. I mean, we stay on top of that and kind of monitor everything all the time. We have quite a bit of our customers that operate their own online stores and always have.

But in our business, traditionally, people like to touch and feel leather and that pour [ph] -- that key brick-and-mortar approach has always been good for us, and that continues to be that way. People just want to come in and shop for the goods like that. They just don't feel comfortable buying it over the Internet. .

I'm showing no further questions. I would now like to hand the call back to Shannon Greene for closing remarks. .

Thank you. On behalf of the entire management team, I would like to thank you for participating in our 2014 earnings conference call today. We look forward to speaking with you again next quarter. Have a good afternoon. .

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day..