Tina Castillo – Chief Financial Officer Mark Angus – President.

George Kelly – Private Investor.

Good morning, ladies and gentlemen, and welcome to the Tandy Leather Factory First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Tina Castillo, Chief Financial Officer. Ma’am, you may begin.

Great. Thanks, Bridget. Good morning, and welcome to Tandy Leather’s First Quarter 2018 Earnings Conference Call. We will be discussing this morning our first quarter 2018 results as well as our plans and expectations for the rest of 2018. Shannon Greene, who normally starts these calls, is traveling today and is in Toronto.

So it will just be me as well as Mark Angus, our President. Before we get started, our 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.

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 statements about those results.

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

As you may have seen in our earnings release, our results for the first quarter were positive with improvements to both the top line and bottom line. We were pleased with the results as it reinforces that our key priorities to drive sustainable growth in traffic and sales are working.

In our last earnings call a few months ago, we outlined some of the key priorities as part of our overall strategic initiatives that we’ve been developing to guide us to our 2020 financial targets of reaching $90 million in net sales and a return to greater than 10% operating income margin.

I’ll take a few minutes now to update you on those and why we think they are working. To grow sales, we are focused on increasing our average ticket, which has seen some decline in 2017, as we lost business with our nonretail customers, who tend to purchase more per ticket than our retail customers.

This quarter, we’re pleased to report that our average ticket increased slightly or 0.8% from $75.77 to $76.38 across both of our customer groups.

Looking at the data, it’s not surprising, leather is generally our largest ticket item and the prices that we sold leather in 2018 versus 2017 was a little higher in part due to customer mix and assortment. In addition, we recently introduced two small machines, a burning – a burnishing machine and a sewing machine that have retail prices above $200.

These new items didn’t have much of an impact in the first quarter as they were only recently introduced. But we expect that the average ticket will continue to improve as the year progresses as new higher ticket items are entered into our product lineup.

Next, in an effort to provide increased convenience to our customers, we also started opening later on Tuesday and Thursday evenings as well as on Saturdays starting in March. Those extra hours have proven to positive to our customers with these extended days sales showing relatively strong comp.

Starting in June, we will begin opening on Sundays from 12:00 to 5:00 p.m. and are starting to market and promote these new hours to our customers. We think Sundays will be well received as our customers often drive several hours to visit a store and having an extra weekend day for them to shop will certainly be welcomed.

By opening on Sundays, we can also offer multi-day classes where more complex project can be completed over a two day period and keep our customers more engaged. As for our district managers, we continue to see good progress with our district restructuring program, which has provided for a faster execution of our strategy.

In addition to proactively supporting our store managers and associates to better serve our customers, our district managers are the primary leads in returning underperforming stores to profitability.

These district managers are being tasked to focus on these stores by working closely with store managers to grow sales and gross profit as well as evaluate any necessary steps to improve performance.

From a brand awareness standpoint, we just completed two out of the six scheduled Pinners Conference & Expo, which are two day events focused on crafting for which Tandy is the title sponsor. The first Pinners Conference was held in San Diego in mid-April and the second was in Atlanta this past weekend.

Similar to what we saw in 2017, we hosted four leather crafting classes at each conference, all of which were sold out. The enthusiasm and interest from these crackers and do-it-yourselfers was phenomenal. And it was very exciting to introduce them to leathercrafting as an additional creative outlet for expression.

I’m confident that our sponsoring the Pinners Conference will continue to generate new customer interest and I look forward to the next four shows that will take place this summer and fall. We are still on target for opening two to three stores in 2018 with one that may be ready by early third quarter.

Now I’ll walk you through the numbers for the first quarter and then we’ll have a few closing remarks before we open it to questions. Our first quarter consolidated revenue totaling $20.3 million increased 0.7% or $139,000 from last year’s first quarter sales.

Both our North America and International segments reported increases with North America reporting a 0.4% gain and International reporting a 5.8% gain. North America contributed 95% of total sales, while International contributed 5%.

The sales increase in North America consisted of a 1.2% decrease in same-store sales, offset by $318,000 in new store sales contributions.

The increase in our International segment was primarily the result of favorable foreign currency exchange rates for the euro and to a lesser extent the pound sterling, which both increased in value relative to the U.S. dollar quarter versus quarter.

Consolidated gross profit margin for the quarter was 63.3%, increasing from 61% in last year’s first quarter. In North America, our gross profit margin improved from 61.1% to 63.3% due to mix of customers with more retail than nonretail and due to product mix with more profitable items sold than in the prior year.

Our International segment gross profit margin increased from 58% last year to 63.5% this year, primarily due to some pricing increases that we implemented last fall. Consolidated operating expenses this quarter increased 5% or $525,000 compared to a year ago.

Our three new stores that opened since March 2017 contributed about 1/3 of this increase, while our – while the foreign currency exchanges contributed another 15%. The remaining increase is attributable to higher personal and travel cost for 12 district managers, many of whom weren’t placed until after March 2017.

We also incurred higher selling and occupancy costs – occupancy cost across our store footprint. Income from operations was $1.8 million for the quarter, increasing $31,000 or 1.8% compared to the first quarter of 2017. Our effective income tax rate for the quarter was 27% compared to 28% last year. The decrease is due to the U.S.

Tax Cuts and Jobs Act that was signed into law last December. While it lowered our corporate tax rate, it also eliminated domestic production deduction and added new global foreign income tax. We ended the quarter with total assets of $75 million, which is up slightly from the $74.9 million at the end of 2017.

Cash is at $19.3 million versus $18.3 million at year-end 2017, and we’re currently holding $36.7 million in inventory, which is $0.5 million lower than at year-end 2017. Our total debt increased by $0.5 million as we bought back 72,400 treasury shares at an average price of $7.47.

Our remaining share repurchase authorization remains over $1 million as of the quarter end. In summary, while first quarter was encouraging, there is still much work to be done and we are diligently focused on developing and refining our strategic initiatives to continue the trend of improvement.

In fact, the sales trend has continued to improve for April, as April sales were approximately 2.8% over comp. With respect to our outlook, we are not updating our [indiscernible].

We continue to estimate sales to be in the range of $82 million to $84 million and fully diluted EPS in the range of $0.63 to $0.68 based on 9.3 million of average shares outstanding. While our actual effective tax rate for the quarter was higher than guidance, we are still working on finalizing our 2017 tax return.

Likely, our tax rate maybe in the range of 24% to 26%, but at this time, our gross profit margins are holding higher than we had initially forecasted. As always, we want to thank all of our dedicated Tandy Leather team members who work so hard to move this company forward.

And last, our annual meeting of stockholders is scheduled for June 5 at 11:00 a.m. at our corporate offices in Fort Worth. We will welcome the opportunity to meet you. So please consider yourself personally invited. That concludes our prepared remarks. We appreciate your time today. And we’ll be happy to answer whatever questions you may have.

Bridget, we’re ready to take any questions.

[Operator Instructions] Our first question comes from the line of George Kelly, a Private Investor..

Hi, guys. Thanks for taking my questions. So a few for you.

First of all, wondering about leather pricing and hide pricing, the raw material that you’re buying? And how is the price, if you were to compare it with this time last year? How has that impacted your sale – your revenue growth? Is – have you seen – you mentioned that your average ticket is up slightly.

If you were to sort of make same-for-same leather pricing with last year, would it look different?.

Hi George, this is Mark. It’s basically just been flat. The prices are very stable and really holding. Really the change that we referred to is really just the mix of the particular products that people bought, and so we really see it just really holding really for the rest of this year as being relatively stable..

Okay, got you. And then second question on the cash balance. Wondering – you bought back a little stock in the quarter.

Are there other uses – major uses that you’re considering? Or how do you sort of rank the preferred uses for your cash?.

All right. George, right now, about half of that cash balance is overseas. And we are continuing to monitor foreign currency exchange rates in opportune times to bring it back. So a lot of that cash really isn’t here in the U.S. And as you know, with that stock buyback, we are purchasing that through our line of credit.

And so one thing we are evaluating is do we bring that cash back and pay down that line and we consider as well dividends and other ways to return to our stockholders. So that is always a topic of discussion in our board meetings and one that our board takes very, very seriously.

And so right now, again, we look at the foreign cash flow bringing us back when rates are better and evaluating our overall line of credit with, of course, the stock buyback..

Got you. Okay. And then another question on – this one on advertising. I believe that you’ve started to shift away from some of your catalog spend. What – it sounds that your sales growth trends have improved, especially here recently in April.

So does that give you confidence to continue shifting away from catalog? Or have you not started that yet? Anything there? And also, your overall sort of social media. It seems like you are adding more content on Facebook and other platforms.

What’s the ROI with that? How pleased or displeased have you been with your social media advertising?.

Well, as for the advertising part of it, we – all we’ve basically done is we kind of changed our model a little bit the first of this year, and we do that every year. We review the performance and who are mailing and we really focused a little bit more on our business type customers.

And so we’ve kind of done regular sales pieces monthly now, directly geared to that group. But overall, we basically just – the classifications of our customers, we tweaked a little at the end of last year. And so we really haven’t changed that much in our advertising direction. It’s basically, we’re just utilizing things more efficiently, I believe.

So it’s working very well. And we see a lot of positive response from everyone on what we’re doing. And as for the social media part of it, we basically – yes, we put in a lot more effort into really doing what our customers have asked for, which is more how to content on those platforms. And again, it’s kind of new somewhat to us.

But we continue to work and learn and continue to grow it. So hopefully, we will see some – we have not focused on really ROI on the social media. It’s really been just trying to bridge the gap between more regular advertising program and how we contact and stay in touch with our customers and we see it growing continuously every month.

So we’ll continue that focus, and we’re looking at different ways to get an ROI on those platforms. And hopefully, later in the year, we’ll have a little more insight into that..

Okay. Okay. And then last question from me.

What is – what do you expect for full year CapEx? And can you break that down between maintenance and the new stores that you’ve planned?.

So we do expect our full year CapEx to be a little lower than what it’s been. It has been a little bit above $1 million, $1.3 million the last couple of years. So we do think it’s going to be a little bit lower in 2018. I would say from a growth CapEx, we’ve only got two or three new stores that are opening.

And generally a new store, we don’t spend more than $100,000, $150,000 for leasehold improvements. And then the rest would be maintenance and that’s typically just computer upgrades, just the IT systems to support the stores. So that’s primarily where our maintenance Capex is for, just supporting the stores and their IT needs..

That’s it. Thank you..

[Operator Instructions] Our next question is from [indiscernible]. He’s a private investor..

Hi guys and congrats on a quarter and thanks for taking my questions. First question is on the district manager program. In August 2017, I think you guys had about 12 to 15 spots filled and the same in March of 2018.

So can you just talk about like the status on that? And are you starting to see results?.

We do think we’re seeing results. We think that we’re seeing an improvement in just some of the softer stuff, just personal, training, product development and this takes time. When we first implemented the program, we knew that it was going to take at least 18 months to really start to gain traction.

So we do believe that this program has been really beneficial and, again, that runway was with an 18 month time line.

We are constantly refining and reviewing and looking at the DM program, evaluating is 15 districts the right number, should it be something – perhaps something smaller? Are there ways that we can improve that return on investment? I know it’s been painful and 2017 CapEx spend continues to impact the comps.

But we do believe that this program is really needed just because we are aspeciality retail and leathercrafting isn’t something that the normal person knows about. And so it really takes us – it takes a lot of time and effort to develop a customer. But the whole goal for us is not some fad. We’re looking at loyal lifetime customers.

And we want to bring that person in and we want to spend the time that’s necessary to really ignite that interest and inspire them to create projects. And it starts from maybe a bracelet and then it goes into something a little more complicated like a belt.

Then it might go into something, supercool wallets and so on and so forth and again, that just takes time and it takes patience. And we have to invest in that training for our folks and our district managers are really the ones who lead that effort..

Okay. Thank you. Another question on the same-store sales decline.

Do you think that’s representative of a secular trend? Or like why is that the case in that revenue is really being driven by store expansion rather than the combination of the two?.

That’s a great question. I mean, our same-store sales, it has been declining and it’s largely in part really to that loss in that business customer. Our retail has been phenomenal. It has shown great growth over the last few years.

It’s just the business customers and as Mark talked about our advertising program and how we’re doing more targeted marketing, our district managers are also tasked with getting those business customers to come back into the store and if they can’t come back to the store, then they go out and visit them and help them to support their initiatives.

So we are working on turning that same-store sales decline around in April, we reported that we had a 2.8% improvement and we were happy to see that our same-store sales in the U.S., there was not a decline. It was relatively flat. So we really do think that the outlook for 2018 remains positive. Our guidance for revenue is in the range of 82 to 84.

And so we do expect that the same-store sales will either be flat or improved..

Okay. And then last question on the higher ticket items.

Have you historically seen that adding higher ticket items have increased the average ticket size? Like what’s the incentive for customers to necessarily purchase it if it’s available?.

I think what we mean with our higher ticket is that we are introducing new products that help drive that ticket and those new products, we hope, will also have them purchase other products.

So if you purchase a burnishing machine, you may purchase additional leather so that you can use it or if you’re buying a burnishing machine, you may need the ancillary parts. And so the whole goal is let’s provide additional products, additional ways for them to create projects that they can source just from us..

Okay. And last question on that. Have you seen any change in the – over the last couple of months? I know there are like leather products available? But obviously, in the past, you talked about how it’s not as much of a threat.

Has that changed?.

No. No, it hasn’t. Mark is shaking his head, no..

No. It really hasn’t. We try to work. We are the leader in this industry, and we work really, really hard to do exclusive products and we continually introduce new and innovative products and instruct people on how to use it. And we really don’t see that..

Alright, thank you..

And I’m not showing any further questions. I will now turn the call over to Ms. Castillo for any closing remarks..

Well, we appreciate your time today and your interest. And we appreciate you participating. We look forward to speaking with you either at our Annual Stockholders' Meeting or next quarter. Have a great day..

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day..