Shannon Greene - Chief Financial Officer, Treasurer, Director Jon Thompson - President, Chief Executive Officer, Chief Operating Officer, Director Mark Angus - Senior Vice President, Assistant Secretary, Director.

Mike Nery - Nery Asset Management.

Good day, ladies and gentlemen and welcome to the Tandy Leather Factory, Inc. Second Quarter 2015 Earnings Conference Call. At this time, all participants are in only listen-only mode. Later, we will conduct a question-and-answer session and instruction will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host for today, Ms. Shannon Greene, Chief Financial Officer. Ma'am, you may begin..

Thank you. Good afternoon. Thank you for joining us for our second quarter 2015 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory, and I am joined by Jon Thompson, our Chief Executive Officer, and Mark Angus, our Senior Vice President.

Before we start today's call, 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 through 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 of those statements. 2015 is lining up to be a challenging one, some of which is our fault, some not.

Our second quarter was disappointing although there are some bright spots. Gross profit margin has held steady against last year's second quarter margin. Sales were strong in the last half of the quarter, but very weak in the first half, which resulted in quarterly sales growth of less than 1%.

Operating income decreased by 12%, more details will be provided toward the end of this call. We ended the quarter with $10.8 million in cash and $33 million in inventory. Total assets at June 30th increased $700,000 from year end 2014 to $63.6 million.

Now, for the numbers from today's press release, our second quarter consolidated sales increased 0.4%, current quarter sales were $19.8 million compared to last year's second quarter sales of $19.7 million. Wholesale Leathercraft sales were $6.4 million this quarter, down 1% from $6.5 million in the second quarter last year.

The same store posted a 1% sales increase reporting sales of $6.4 million compared to $6.3 million in Q2, 2014, while the National Account Group had no sales this quarter, down $6,000 from last year's second quarter. As a reminder, we eliminated our National Account sales group in April 2014.

Our Retail Leathercraft division reported sales of $12.5 million, a 3% increase over the last year's second quarter sales of $12.2 million. The same-stores posted a 1% sales increase and the two new stores opened after October last year added quarterly sale of $196,000.

Our International Leathercraft segment, which consistent three stores located outside of North America, reported sales of $847,000 for the quarter compared to $1 million in last year's second quarter, down 19%. All three stores have been opened for more than a year, so the same store sales loss is also 19%.

We have mentioned a negative impact of the currency exchange rate since several press releases. If the current rate were the same as they were a year ago, this segment would have reported a 4% sales loss for the quarter rather than a 19% sales loss for the quarter.

Consolidated gross profit margin for the quarter was 64.8%, essentially matching that of last year's second quarter margin of 64.9%. Wholesale Leathercraft's gross profit margin was 73.9%, matching that of second quarter of 2014.

Retail Leathercraft's gross profit margin was 60.2% compared to 59.9% in last year second quarter, International Leathercraft's gross profit margin for the second quarter was 63.6%, down from 66.8% last year.

Consolidated operating expenses were $10.5 million or 53% of sales in the current quarter compared to $10.1 million or 51.4% of sales last year, an increase of $357,000 or 4%. Wholesale Leathercraft reported operating expenses totaling 58.9% of its sales versus 56.8% last year.

Retail Leathercraft reported operating expenses totaling 49.6% of its sales compared to 48.2% last year and International Leathercraft's operating expenses for the quarter were 60.2% of its sales compared to 55.2% last year.

Income from operations was $2.3 million for the second quarter, down 12% or $322,000 compared to the second quarter of 2014, operating income, up $2.7 million. On a year-to-date basis, consolidated sales increased 3%, 2015 sales are $40.6 million compared to 2014 sales of $39.5 million.

Wholesale Leathercraft sales were $13.1 million this year, down $161,000 or 1% from last year's sales of $13.3 million. The decrease is the result of a 3% same-store sales gain with sales this year of $13.1 million compared to $12.7 million last year offset by a 100% sales decline for national account with no sales this year versus $349,000 in 2014.

Our Retail Leathercraft division reported sales of $25.6 million, a 6% gain over last year's sales of $24.2 million. Sales from the three new stores were $594,000; so far this year 79 comparable stores posted sales of $25 million, an increase of 4% to last year's sales of $24 million.

Our International Leathercraft segment reported sales of $1.8 million so far this year compared to $2.1 million last year, a decline of 14%. As was the case for the second quarter, the negative impact of the currency exchange rate this year compared to a year ago was significant.

With consistent exchange rate, this segment was reporting 2015 sales matching that of 2014. Consolidated gross profit margin for the year was 62.6%, a decrease from 2014's gross profit margin of 64.5%. Wholesale Leathercraft's gross profit margin was 67.8% this year, decreasing from 70.1% last year.

Retail Leathercraft's gross profit margin declined from 61.3% last year to 60% this year and International Leathercraft's gross profit margin decreased from 65.9% last year to 61.4% this year.

Consolidated operating expenses increased $802,000 or 4% to $20.7 million or 51% of sales in the current year compared to $19.9 million or 50.3% of last year's sales. Wholesale Leathercraft's reported operating expenses totaling 53.2% of its sales compared to 51.4% of sales last year.

Retail Leathercraft reported operating expenses totaling 49.4% of its sales currently versus 49.3% of sales last year. International Leathercraft reported operating expenses totaling 58% of its sales this year compared to 54.3% last year.

On a consolidated basis, the most significant operating expense increase was for an employee compensation benefit, depreciation, advertising and marketing, other outside services and store rent and utilities. Income from operations was $4.7 million, down $900,000 or 16% compared to 2014.

Looking at our balance sheet at June 30, 2015 compared to year end 2014, total assets were up by $700,000. Current assets were up by approximately $500,000. Cash increased $230,000 to $10.9 million at the end of June. Inventory decreased $65,000.

Current liability decreased $1.8 million due to the decrease in short-term debt of $3.5 million, which is the payoff of our line of credit, which occurred in February, partially offset by the increase in credit expenses which is inventory and transit. Our current ratio is 5.5 EBITDA for the first half of 2015 is $5.5 million.

There are five Tandy stores with operating losses as of the end of June totaling $55,000. All of the leather factory stores are profitable as of June 30th. Couple of more things before we go to questions, we announced our July sales this morning in the news were less than stellar. Our announcement showed several things.

First, there were a couple of larger one-time sales last year that we are not repeated this year. That happens all the time, but no one notices until they are not covered with other sales. Secondly, and looking at the product that is on its way to us now versus where we were a year ago, we are behind, particularly in leather.

As you might remember, the inventory build last year started earlier than normal. We took delivery of products in the second quarter that normally would not arrive until late in the third quarter. As a result, we felt comfortable featuring more products in our July sales wire.

This year, not only has the inventory build not started yet, but what we have coming in is not matching that of last year. All of that contributed to weaker than expected sales in July.

Looking forward to the rest of the year and our revised 2015 guidance, there is concern internally that we will not be able to match last year's results because of several issues. First, we talked all year about the negative impact of the currency exchange rate. Not only does the conversion of our foreign operations to U.S.

dollars hurt us on paper, we are beginning to experience some customer resistance for the selling process of our products in our international stores. Further, with record inventory levels last year, we set sales record. Looking at our purchase orders, we are not going to reach the inventory levels of last year.

The delivery issues with the non-weather portion of our inventories seem to be resolved so we will be in good shape there. It is the leather portion of our inventory that concerns us. Drilling down further into the specifics, we are selling more leathers this year than we did last year.

That is good but all other things being equal it puts pressure on our gross profit margin. In a perfect world, we want to sell more leather at higher margins and that happens with those opportunity buys that come up from time-to-time. Remember, what we call opportunity buys are those large quantities of various leathers at lower than normal prices.

We made a number of those last year and those purchases can have a positive impact on our gross profit margins. Unfortunately, we are not finding them this year and we cannot predict when they are going to show up.

What is happening right now is, we are selling more leather than last year, but they are normal leather purchases and that is pressuring margins downward compared to a year ago. Turning to expenses, our operating expenses would not be too far out of line if sales and gross profit margins were better.

With that said, we are turning expenses where we can. The most significant expense increases are in areas that we do not want to mess with too much, employee compensation at the stores, advertising expenses and alike.

With that said, we will be evaluating our advertising expenses looking for areas where we can cut back without affecting sales but we do not expect to reduce employee comp as it was required cutting personnel with the stores. We are also slowing the pace of store moves at least for the rest of the year.

That will reduce travel and other associated expenses. Regarding store openings in 2015, our original guidance indicated that we would open two to three stores in the U.S. in 2015.

We have not been able to find acceptable space at affordable rent rate in the market, we targeted for this year, so we will keep looking but given that it is already August, it is unlikely that we will get any stores opened in the U.S. before the end of year. All of that results at a significant downward revision to our 2015 guidance.

We do not believe that our potential have changed long-term, we just have too many things working against us against this year that are affecting our ability to exceed last year's results. We will regroup. We will make adjustments where we can and we will move ahead. That concludes our prepared remarks. Operator, we are now ready to take questions..

[Operator Instructions] Our first question comes from the line of Mike Nery of Nery Asset Management. Your line is open. Please go ahead..

Hey, guys. I got a couple of questions.

Can you give a little guidance in terms of inventory over the next couple of quarters, what you see in terms of cash needs going in the inventory then how that changes at year end?.

Inventory will build some in the third quarter. I think, we ended September last year at $39 million. We are at $33 million at the end of June. I do not see based on everything I am seeing from purchase orders from the buyers, inventory is not going to increase $6 million in third quarter..

Yes. Mike, this is Mark. I am thinking probably, we are going to end up maybe in the 36 to 38 range..

Okay. It is going to cost us $2 million in additional working capital over the next couple of quarters.

Capital expenditures for the rest of the year, Shannon, and then also for next year, do you have a sense yet for those?.

Capital expenditures, we have got a couple of store moves that are in the works, so another $300,000, $400,000, $0.5 million between now and the end of the year for CapEx. We are analyzing store moves in 2016. If we hold at a regular pace, you are looking at $1 million or so in store fixtures and build out.

That may slowdown some depending on how things go the rest of the year, so there is nothing unusual as far as 2016 CapEx. I am not aware of any significant purchases, computer equipments, that kind of thing, just the normal routine. If we continue the store move schedule, you are somewhere $1.5 million, $1.7 million maybe for 2016.

If store moves falloff, then obviously you can - the number of moves we do not do [ph] bigger take $100,000 to $150,000 out of each one of those..

Okay. Then in terms of, last year we felt like we had a little too much inventory. This year we feel like, we have a little too little.

Looking at next year and I know these things are always hard to predict in terms of the buys, but what do you anticipate being the optimal level of inventory for the Company to have on an average basis or any year basis, however you want to look at it?.

I do not know. It is hard to say, Mike. Like, when we found those good purchases before that we were able to run our inventory up, but we knew we would sell those things we had. We had made some good leather buys overseas but I think unless those things come around, we probably won't change a whole lot.

Instead what will happen as you know we will make our stores focused on the core of our sales, which is really going back to work and know the basics, so our inventory may not change a whole lot next year unless weather starts being used or you got to have everybody has kind of cut back overseas, because of the expense of the leather.

Now, leather is headed back the other way. Maybe it will pick up. People are buying their shoes also means that there is some opportunities in there, but I do not foresee our inventory changing a whole lot next year from what it is, right, what we are saying it will end up being this year..

Okay. Next year, working capital need seem to be about the same, capital expenditures roughly in line with depreciation, so whatever earnings are should be roughly what we do in terms of free cash flow.

It looks like we will build a little more cash in the next couple of quarters probably not till the very end of the year, but we have $0.90 a share now in excess cash.

In the past the company has done things like payout dividends, have you looked at either a dividend or stock buyback given the company's cash position?.

We are analyzing both. I mean, the story, Mike. If that is the logical thing to do unless leather starts falling out of the sky somewhere and we can buy a bunch. That is either one of those options are the logical things to do with excess cash if cash....

Okay. All right. Great. Well, thanks very much and I am glad you guys brought bit the bullet and brought guidance down. You know that sales comps have been really tough this year and sales growth was lower than I think you had originally anticipated, so I am glad you did that. Thanks..

Thank you..

Thank you. [Operator Instructions] I am showing no further questions in queue. I would like to hand the conference back over to Management for any closing remarks..

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 does conclude the program and you may all disconnect. Have a great rest of your day..