Shannon Greene – Chief Executive Officer Mark Angus – President.

Analysts:.

Good day, ladies and gentlemen, and welcome to the Q3 2016 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, the conference is being recorded.

I would like to introduce your host for today's conference, Ms. Shannon Greene, CEO. Ma'am, please begin..

Thank you. Welcome to our Third Quarter 2016 Earnings Conference Call. I am Shannon Greene, Chief Executive Officer of Tandy Leather Factory; Mark Angus, our President; is also available during the question-and-answer session towards the end of today's call.

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 may be 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 the most recent Form 10-K and 10-Q as well as 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 third quarter was somewhat challenging, although not a surprise.

As has been the case all year, weak sales continued through the third quarter. Earnings decreased in the quarter as well, compared to our 2015 third quarter, but they were in-line with our internal expectations.

We are pleased to say, however, that we are still ahead of our earnings guidance for the year and that our gross profit margin improved over the last year's comparable quarter. As is the case with other global retailers, the cautious spending on the part of consumers continues.

With the election now behind us, we're hopeful that things may settle down. However, we all know it's too early to tell if the general feeling of uncertainty, whether real or perceived, will begin to shift to a feeling of stability or not. As a result, many retailers are struggling with tepid sales and Tandy is no exception.

When we look at our specific sales data for the third quarter, our customer count is down 3%, transaction count is down 2%, and average tickets down 7%. We believe most of that decline is attributable to the economic environment, overall. However, we are continuing to design various sales and marketing campaigns to positively affect those statistics.

Our focused efforts will continue as we are keenly aware that managing effectively through difficult period such as this is critical. Quick run through of the numbers; third quarter consolidated sales totaling $18.6 million decreased 4% from last year's third quarter sales.

Retail Leathercraft segment reported a 2% sales decrease; same-store sales decreased 1% while new store sales added $284,000. Our Wholesale Leathercraft segment reported an 8% sales decline, same-store sales decreased 6%.

Our International Leathercraft segment reported a sales decrease of 3% which consists of an 18% same-store sales loss, offset by new store sales of $134,000. As has been the case all year, the foreign currencies continue their weak showing against the U.S. dollar. As a result, our products tend to be more expensive in foreign markets.

We are hearing from our foreign customers that their business is slow and the competition from China is increasing. We will continue to look for ways to make our products more competitive to gain market share. Consolidated gross profit margin for the quarter was 62.5%, improving from 61.1% in last year's third quarter.

The improvement was the result of a slight shift in product mix to more non-leather sales compared to leather sales and a higher margin earned on the leather sales. In the third quarter, our sales of non-leather products matched last year's third quarter, and the gross profit on those sales were within half a percentage point.

We sold less leather in the third quarter compared to last year, but the gross profit margin on that leather was 4% higher. So the margin improvement was basically the result of selling leather at a higher margin than that of last year. Consolidated operating expenses this quarter increased 1% compared to a year ago.

The expense categories contributing to the increase where employee comps and benefit, store ramps, and depreciation offset somewhat by decreases in advertising and store relocation expenses. We are continuing to monitor expenses throughout the company looking for opportunities to trim expenses that don't negatively impact sales or operations.

Income from operations was $1.5 million for the quarter, decreasing 17% compared to the third quarter of 2015. For the year-to-date; consolidated sales totaled $58.8 million, a decrease of 2% from last year's sales for the same period.

Our Retail Leathercraft segment reported a 0.3% decrease which consists of same-store sales decline of 0.2% and new store sales of $622,000. We closed two retail stores in 2016 which added sales this year earlier in the year of $369,000.

Our Wholesale Leathercraft segment reported a 5% sales decline which consisted of same-store sale decrease of 4% and we closed one wholesale store in 2016 which had sales this year of $188,000. Our International Leathercraft segment reported a sales increase of 2% which consist of a 14% same-store sales loss offset by new store sales of $433,000.

Consolidated gross profit margin for the year was 63.2%, improving from 62.1% last year. Consolidated operating expenses so far this year decreased 0.6% compared to a year ago. The significant decrease occurred in advertising and marketing expenses in fully compensation and benefit, store relocation cost, and other outside services.

Income from operations was $6.7 million for the year, increasing $158,000 or 2% compared to year-to-date 2015. We ended the quarter with total assets of $69.8 million, up $5 million from the end of 2015. Cash increased by approximately $0.5 million ending the quarter at $11.4 million versus $11 million at year-end 2015.

We're holding $37.1 million in inventory at September 30, that's $3.5 million more than at December 31, and only $800,000 more than at June 30. As we mentioned at last quarter's conference call, we received a large portion of our purchases for fourth quarter prior to June 30. So the small increase in the third quarter is exactly what we expected.

Our bank debt totaled $7.4 million at September 30, no change from June 30 and consists solely of borrowings on the line of credit, that's in place for our stock buyback. We did not purchase any shares in the third quarter. For the year, we've purchased 520,000 shares at an average price of $7.06.

Our current ratio is 6.0 and EBITDA for the first nine months of 2016 was $8 million. There are seven stores with year-to-date operating losses in 2016 totaling $78,000.

Looking at the last quarter of 2016, our top line is slightly behind our original guidance, so we revised that guidance from expecting flat sales compared to 2015, to a 1% to 2% decline. Our earnings guidance is a 5% increase over 2015 and we reiterated that earnings guidance on our October sales press release.

We are excited about the two new stores we have opened so far this year with the most recent one being in Philadelphia last month, and we are working aggressively on several more that should be opened in the next month, we will announce those openings shortly. We believe Tandy is performing relatively well and the potential for improvement is strong.

As stated previously, we're moving ahead with our plans for growth and expansion, even in light of the challenging global retail environment. We have a great team of associates who are committed with Tandy's success and we commend them for their continued dedication to the brand and our collective success. That concludes our prepared remarks.

We appreciate your time today and your interest in the company. Operator, we're now ready to take questions..

Thank you. [Operator Instructions] I see no questions in queue, ma'am..

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

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