Shannon Greene - Interim Chief Executive Officer and Chief Financial Officer Mark Angus - Interim President and Senior Vice President.

Good day, ladies and gentlemen and welcome to the Tandy Leather Factory Incorporated Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call maybe prerecorded. I would now like to introduce your first speaker for today, Shannon Greene. You have the floor, ma’am..

Thank you. Welcome to our 2015 earnings conference call. We will be discussing our fourth quarter and year end 2015 results as well as our plans and expectations for 2016. I am Shannon Greene, Interim CEO as well as CFO and I am joined today by Mark Angus, Interim President and Senior Vice President.

The 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.

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 meanings 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 statements about those results.

These risks are detailed in our various filings with the SEC such as the most recent Form 10-K and 10-Q as well as the 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.

Our results – our 2015 results lend themselves to the perfect glass half full, glass half empty exercise. If you are a glass half empty person, you might interpret our results as follows. Sales growth was minimal, only 1%. Earnings were down 17% from a year ago, conclusion, that’s not a good year, because earning decreases are never a good thing.

If you are a glass half full person, you might interpret our results differently. The company beat its 2015 sales and earnings guidance with higher than expected sales and a smaller decline in earnings than predicted. Conclusion, it’s a good year, because sales grew and the company generated more earnings than anticipated. Here is our perspective.

2015 was a challenging year, although I wouldn’t characterize it as a bad one. While our sales growth was not at the level to which we have been accustomed, we still increased sales.

Further, we found ourselves behind the 8-ball so to speak at the end of the first quarter due to a significant decline in our gross profit margins, again, not something we are generally used to. However, we were able to make up most of that decline by year end, ending the year only 0.5 percentage point lower than 2014.

The decline in the first quarter was partly our fault. We waited too long to begin replenishing our inventory after record sales in the fourth quarter 2014 and partly due to outside circumstances, specifically the issues with the West Coast port in the first quarter and to some extent into the second quarter.

As a result, it took the rest of the year to make up for that first quarter and we almost made it. Expenses grew faster than sales, which I never liked and I believe we can fix most of that going forward. We ended the year with almost $11 million in cash, $33.6 million in inventory and we are pleased with both the levels.

So, overall, the company performed relatively well in 2015. And if you consider how things are going for U.S. retailers as a whole, maybe we performed better than just, okay. So, we have some things to work on absolutely. I hope you will never hear me say we have arrived we can go no further this is as good as we are going to get.

There will always be something we can improve upon. And as long as Mark and I are leading this company, we will focus on doing just that, doing better all the time. So, what can we do better, what are the areas that need the most the work, my list is rather long, as is Mark, but here are a few of the most important ones for both of us.

Personnel, we believe this company’s greatest asset is its employees. We are a team and without everyone working towards the same goal, the company will not grow to its full potential. Our commitment is to communicate employee value and to create a structure and culture where employees can find careers here, not just jobs.

We will dissolve our dilemma of how to hire quality managers who in turn hire exceptional staff, probably not totally, but it is definitely a step in the right direction.

Employee product knowledge, Tandy Leather came into existence, because Charles Tandy believed that he could create a successful company consisting of a chain of Leathercraft stores, by teaching people how to do leather work.

We need to do a better job of educating our employees, so that they can be able to assist the customers who look to us for help. We are currently working on a program to do just that providing to our store associates some basic knowledge of the items that we sell and how to use them.

They will be more effective sales people when they are comfortable talking to customers about our products. Store economics, we have tried a lot of things in recent years to cause our stores to increase their market share and grow their sales and profit. By and large, most things worked at least fairly well.

However, I believe we can achieve those goals without spending as much money. Some specifics, as you are aware, we have moved the number of our smaller stores into larger space. The concept makes total sense, the larger the space the more inventories available to customers, which should result in higher sales.

However, so far we have not achieved the ROI on those moves that I think we should. The sales gained were not enough to cover the increased rents etcetera. So in 2016, we are going to move away from that strategy at least temporarily. Another item that we are analyzing is local advertising.

Are we getting the proper ROI on that spend? If so, we need to keep doing it. If not, then we need to stop it. We have always said our advertising efforts are a crucial part of our success. We just want to make sure we are doing, using every advertising dollar wisely and getting the proper return. We will be reviewing all spending carefully.

The store economic changes should be financially measurable in fairly short order, by that I mean 2016. I expect it will take a little longer to measure the results coming from the investment in personnel and product knowledge, but we are convinced that these will pay off for us over time.

We have a lot of work to do, but Mark and I are very excited about the opportunity and are 100% committed to Tandy’s success. Here is a quick run through of the numbers for the fourth quarter and the year. Our fourth quarter consolidated sales totaling $24.2 million decreased 1% or $229,000 from last year’s fourth quarter sales.

Retail Leathercraft segment reported 1% sales increase, while our wholesale and international Leathercraft segments reported sales declines of 2% and 17% respectively. Retail Leathercraft contributed 65% of our total sales. Wholesale Leathercraft contributed 31% of our total sales, with international Leathercraft contributing the remaining 4%.

The sales increase in the retail segment consisted of flat same-store sales and new store sales growth of $192,000. The new stores are the two that were opened in November 2014. The decline in the wholesale segment was the result of a 2% same-store sales loss and the impact of the one store that was closed in the fourth quarter 2014.

The decline in the international segment was primarily the result of the negative impact of the foreign currency exchange rates. Those rates affect us two ways.

The comparison of the current results of the current exchange rate to last year’s results at the exchange rates in effect at that time and the impact of weaker currencies in our foreign markets against the U.S. dollar causing our products to be more expensive, which will result in our foreign customers purchasing less.

Consolidated gross profit margin for the quarter was 61.2%, improving from 59.1% in last year’s fourth quarter. Consolidated gross profit margins were better every month of the fourth quarter compared to the same period the year ago. Consolidated operating expenses this quarter increased 3.5% or $372,000 compared to a year ago.

Rent and utilities, employee benefit programs, depreciation and supplies are the expense categories that caused the majority of the increase. Income from operations was $3.9 million for the quarter, increasing $14,000 or 0.4% compared to the fourth quarter 2014.

For the year, consolidated sales totaling $84.2 million increased 1% or $730,000 from 2014 sales. Retail Leathercraft segment reported a 4% sales increase, while our wholesale and international Leathercraft segments reported sales declines of 2% and 15% respectively.

The sales increase in the retail segment consists of a 1% same-store sales gain and new store sales growth of $1.3 million. The new stores are the three that were opened in 2014.

The decline in the wholesale segment was the result of a 1% same-store sales gain offset by the impact of the one store closed in 2014 and the elimination of our national account customer group. Again, the decline in the international segment was the result of a negative impact of the foreign currency exchange rates.

Consolidated gross profit margin for the year was 61.9% declining 0.5 percentage point from 2014 consolidated gross profit margin of 62.5%. You might remember we talked about the significant reduction in our first quarter gross profit margins due to the lack of non-leather inventory in our stores.

As a result, there was a significant shift in the mix of leather versus non-leather sold that quarter. There are generally two things that affect margins, the mix, the retail sales, the wholesale sales and the ratio of leather sales to non-leather sales.

All else being equal, when a 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. Margins held steady in the second quarter decreased 1.5 percentage points and increased 2 percentage points in the fourth quarter.

Simply stated, we came very close to making up the gross profit margin decline from the first quarter. Consolidated operating expenses in 2015 increased 3.5% or $1.4 million compared to 2014. Rent and utilities, employee benefit programs, advertising and other outside services were the primary contributors to the increase.

Income from operations was $10.5 million this year, a decrease of 12% from 2014’s operating income of $12 million. We ended the year with total assets of $64.6 million, up from $62.9 million at the end of 2014. Cash was slightly higher at almost $11 million versus $10.6 million a year ago.

We finished the year with $33.6 million of inventory, a 2% increase over year end 2014. Total liabilities decreased $156,000. We reduced our bank debt from $5.6 million at the end of 2014 to $3.7 million at the end of 2015.

We paid $3.5 million on our line of credit in February, paid off our building note of $2.1 million in September and then borrowed $3.7 million on the new credit line related to our stock buyback program currently in place. Our current ratio is 5.7. EBITDA for 2015 was $12.1 million. There are three stores of operating losses in 2014 totaling $50,000.

Looking ahead into 2016, we are estimating the top line to be flat in the $84 million to $85 million range. The current environment is a challenging one and as I indicated in this morning’s press release, we can’t force customers to purchase from that – from us.

With that said, we will continue to focus efforts on providing quality products at competitive prices. We are behind on sales of February, but I believe we will catch up.

Further, we are targeting mid single-digit growth in earnings of 5% to 7%, that’s an actually – actual earnings dollars translated into EPS and you are looking at 10% to 12% EPS growth. We plan to open two to three new stores this year in the U.S. One has already opened in Nyack, New York.

Regarding our 2016 capital expenditures, we are expecting CapEx to be approximately $1 million to $1.2 million. We are rolling out a new phone system to our stores as well as upgrading our payment processing terminals. Equipment costs for both rollouts will be approximately $500,000.

Our budget for the normal computer equipment replacements is $300,000 to $400,000. I know of no unusual CapEx needs at this time. Last thing before we go to questions. Our Annual Meeting of Stockholders is scheduled for June 7 at 11 am at our corporate offices 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 will be happy to answer whatever questions you may have. Operator, we are now ready to take questions..

Operator:.

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

Ladies and gentlemen, thank you again for your participation in today’s conference call. This now concludes the program and you may all disconnect telephone lines at this time. Everyone have a great weekend..