Good morning, everybody. Thank you for joining us for a discussion of Tandy's Q2 financial results. I'm Dan Ross, General Counsel and Corporate Secretary for Tandy, and I will be moderating the discussion today. .

Our CEO, Janet Carr, will give a brief overview of the quarter, and we will then open it up for questions and discussion. [Operator Instructions] I will not be reading questions or comments directly from the chat this time. With that, let's get started. .

Today's presentation will include statements other than historical results that constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, each as amended.

These statements reflect our expectations or estimates based on the information we have today, but are not guarantees or predictions of future performance. .

They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control and which may cause actual results to differ materially from the statements contained in this presentation. You are cautioned not to put undue reliance on these forward-looking statements.

The company assumes no obligation to update or otherwise revise these forward-looking statements, except as required by law. And with that, I'll turn it over to Janet to begin our presentation.

Janet?.

Sorry. Yes, sorry. .

We can hear you now. .

Let me start again. Thanks, everyone, for joining today. Our Q2 sales were down 0.8% over last year. Gross margin rate came in at 57%.

Operating loss was $700,000 and adjusted EBITDA adjusting for noncash items such as depreciation and stock-based compensation as well as interest taxes and onetime expenses related to the restatement was negative $100,000. .

At this time of year, we're building inventory for our July sale and beginning the bills for holiday, so cash was down to $5.6 million, similar to last year from $10.3 million at the end of Q1. Inventory ended the quarter at $40.1 million, down about $3 million from second quarter and inventory last year. .

We paid back our small COVID-related Spanish loan and have the opportunity to buy back 360,000 shares of Tandy stock in April. On a year-to-date basis, sales are down 2.6% versus last year, gross margin, 57.7% and operating income, $100,000 and adjusted EBITDA, $1.5 million. .

Our sales trend in Q2 versus last year improved over Q1 compared to last year, down less than 1% versus down 4% in Q1. But the retail environment remains challenging due to inflation, worries about recession, war, public health and on and on.

We closed one door in March of this year in our -- in San Bruno, California, which had no material impact on our retail sales or channel share. Subsequent to the end of the quarter, we also closed the Oxnard, California store in July. .

We evaluate a number of factors when determining whether to close existing stores.

For example, the 4-wall cash flow trend and longer-term projections for the store, the long-term sales trend, the ongoing cost of store operations, the date of the lease expiration, the quality of the store and location and the size and potential of the trade area, including proximity to other existing stores among other variables. .

Our overall channel share remains stable year-over-year. We're seeing similar challenges in our commercial business as demand from their customers is also soft. We expect that the retail environment will remain challenged by the many external forces at play right now.

Q2 gross profit dollars came in 6.9% below last year due to lower sales and gross margin rates. Gross margin rate of 57% reflects product and capitalized cost increases that we've been realizing over the last year or so that are just now flowing through cost of sales due to our FIFO methodology of inventory valuation. .

We've raised price on about 30% of our SKUs, but we've only seen nominal increase in average unit retail as a result of product mix. We saw operating loss of $700,000 in Q3 -- in Q2, sorry, and operating income of $100,000 in the first half, both down over the same periods in 2021.

These declines are the result of factors we've already discussed, softer sales, lower gross margins in addition to higher operating costs associated mostly with the tight labor market. .

Adjusted EBITDA for the quarter is 0 and for the first half, $1.5 million. Just a brief reminder of some of our core strengths that we believe give us the adaptability to weather the current challenging environment. First, leather crafting is a large and growing market.

We are the market share leader and the only 100-year-old brand in a very fragmented market. We have strong multichannel distribution, retail, web and commercial, and we're the only player with over 100 retail stores. We have a capable team with a proven track record of managing through business challenges.

Aside from the CFO, we've had no turnover in the executive leadership team that I recruited shortly after I arrived here. .

one, continued improvements in our core business, including optimizing the fleet, using 4-wall cash flow as our key metrics, focusing on teaching and bringing customers into stores and into the category, piloting new formats, continuing to improve the breadth and quality of our product offering and growing our commercial business, targeting small to medium businesses with a tailored business model.

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The second area of focus are key growth initiatives where we've made very good progress, Youth, art therapy, chain wholesale and international. Just a word about the key principles that we use to manage the business from a financial perspective, disciplined capital allocation.

Our growth initiatives do not require significant capital investments, and we expect to fund them out of cash flows from the business. Two, we expect to maintain a conservative balance sheet and will only consider layering on modest leverage when we are generating higher cash flows from operations.

And three, our Board is focused on maximizing long-term shareholder value. We will thoughtfully consider all mechanisms for increasing value from returning capital via dividends or buybacks to monetizing our real estate to M&A. We'll do so responsibly without impairing the business' long-term prospects, which is our highest priority. .

And from an operating perspective, we believe we can grow profitable sales to $100 million and operating income to $15 million over the next several years by focusing on continually improving our consumer proposition and leveraging our competitive advantages. We've talked about that in some detail in prior calls.

We're building an operating model with talent, systems, processes that can support the business for many years to come, but that can also remain flexible and nimble that can both scale and allow us to respond to changing market conditions quickly. I think we've proven that in the last few years. .

Before I close a note about our CFO. First, I would like to thank Mike Galvan for his excellent contributions here over the last 2-plus years with us. He ably steered us through restatement and catch-up of all of our SEC filings at the same time transitioning to a new ERP system. We could not have done this without Mike, and he will be missed.

The CFO at Tandy has had to manage through tremendous obstacles in a very high-performance environment. .

Given what we've accomplished in the face of these obstacles, it's clear that we've been lucky enough to have the right person in the job at the right time. Our SeatonHill Partners team has already proven that they can capably support us through the transition.

With the restatement and ERP transition behind us, our next CFO will have the experience and capabilities to help lead us into our next chapter. .

Now moving on to questions and discussion. If you wish to ask a question or make a comment, message Daniel Ross directly in the chat, and he will ask you to unmute your line. You can join the chat on the tool bar. When you ask you, you'll need to accept the prompt to unmute yourself.

Dan, do we have some questions?.

Yes, we do. Thanks, Janet. Our first question comes from Eric Speron. .

Janet, can you hear me?.

Yes. .

So Janet, the line in the press release, managing costs and conserving cash and clearly, you mentioned protecting the runway of the business. My question is, obviously, we want to get leaner where we can, but can we also get like meaner? Are there ways where you can increase the agility of your business and do actually do more with less.

So I mean, of course, you're going to take your eye -- continue to keep it on cost.

But do you think there's ways, whether it's variabilizing the comp structure? Or do you think there's ways where we could a corporate? Or do you think you're having more player coaches? Is there ways that you think we can get meaner at HQ? Because it seems like we're pretty lean. So anyway, that's my question. It's cost. .

Yes. I think we're pretty dang mean. I know that when you were here, and we spent some time walking through our facility. You don't see a lot of suits walking around. Everybody does everything. It's a good thought, though, and we need to continually look at this. I appreciate the thinking. We are variabilizing our comp where we can.

So very good thought, and I think we need to continue to push on it, but I think there's nothing that's really obvious right at this moment. .

Our next question will come from Eddie Reily. .

Janet, just on cost reduction measures. I was wondering about the strategic fit for the Spain store, it looks like they're experiencing a little bit more top line pressure than the U.S. and Canada.

Just want to know how that kind of fits in with the portfolio going forward?.

Yes, it's a great question. Spain is -- has been and is still quite cash flow positive. It also represents the model of how we want to tackle international with mostly a wholesale approach. Our same store sells a lot to resellers to small retail and small businesses all throughout Europe.

So it does serve a strategic purpose and they definitely pay their way. So we're using that as a jumping off point to grow our international business without huge -- without having to open stores and do a huge capital investment, and we're -- it's important in that way. .

Okay. Got you. And just wondering if you could maybe unpack the differences in revenue between Canada and the U.S.

I'm wondering if the overall sales decline is more a factor of the macro environment or trends in leather crafting overall?.

I think coming out of last year, where we had strong trends and then the slowdown that we saw in Q1, all of our arrows are pointing in a really positive direction in terms of Tandy and our customers and what we've been doing in the broader category. So we believe we have no reason to believe that if anything beyond the macro environment. .

Okay. Got you. And if you could just maybe go into why Canadian revenue was up versus U.S.? If you have any color there, you'd like to provide us. .

I don't think we have a great deal of insight into why Canada has been up except that it was down a lot more in 2020. In 2021, they took a lot longer to recover from the pandemic. So I think that they're having a little bit of an easier compare. .

Okay. Our next question comes from [ Shai Dardashti ] who has not unmuted and sent me the question by text, so I'll just read it.

Shai asks how does the company perceive the opportunity to unlock shareholder value from the company's real estate holdings?.

Yes. Great question, Shai. We have a very valuable real estate holding here in Fort Worth. And at this point, we are maintaining it. We're considering ways to potentially unlock some value from it.

But one thing that we are being very cautious about is leveraging up, and we want to maintain sort of the risk profile that we have today, and we don't feel like extracting the -- monetizing the value of our real estate. Today, right now is the right long-term strategic decision for the business.

At some point in the future, we would definitely consider that. And we are on an ongoing basis. Regularly, the Board is considering all of the assets that we have and how we can best monetize them. .

But if you're asking a specific question, should we sell our property or should we leverage it up? The answer for us right now is no, that does not feel like the right decision from a risk perspective for us. .

The next question is another one I received through the chat directly from [ Josh Womack ], who's asking whether the Board has discussed an extension of the share repurchase plan, which he said he thinks may have expired on July 31. So I can just answer that. Josh, you are correct that the plan that we had in place did expire on July 31. .

And the Board has recently approved a renewal of that plan with the same $5 million value of shares that we can repurchase and the new plan will extend until the end of August 2024. We announced that in the 10-Q that we recently filed, but certainly I don't blame you for not seeing it, but the Board has renewed the plan. .

Our next question will come from Tim Heitman.

If you can unmute yourself, Tim?.

There. Can you hear me? A couple of questions on commercial.

Maybe give us a little more perspective on the types of customers you guys consider commercial? I know that you've kind of changed using the store base in terms of shipping direct now out of the warehouse, maybe changing the focus and maybe describe the sales force and how they might operate to grow that business.

And then maybe an example of the success or opportunity in that space because that should still be a pretty growing business in the long run?.

Absolutely. So our commercial business, we define as above $5,000 and above $20,000 per year in sales. The above $5,000 are customers who are still primarily being served out of the stores that get preferential pricing and are mostly businesses.

To be served by our commercial group, which are direct account representatives who call on customers directly because we don't have to come into the store and their product is shipped directly from our warehouse to their place of business. .

And they also get preferential pricing. And the examples are various. They are bag makers, shoemakers, pass -- number of holster and knife sheet makers. We've got upholstery. We have jewelry. An example of a customer who does upholstery for a large fast food chain among others, but is kind of a commercial upholster.

And they have been working with us buying our leather and they cover barstools with this leather and they had been doing it in their factory with guys who are cutting it out by hand with a knife. .

And one of the things we were able to do is say, you know we could do that a little better for you. We did that in our factory.

So we had a dye made, a template for using our big commercial clickers to click out those pieces, and that is customer who's super appreciative because we not only save them in labor and total costs, but they are now sort of a loyalty Tandy customer buying all of their leather from us as well, which may not have been the case if we had not been providing that service as well.

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So that's the kind of thing that we want to be doing going forward as an example. .

Just maybe one other quick follow-up unrelated.

Are you guys looking to try to get another line of credit now that your financials are all current?.

Yes. Great question. And yes, we are in active discussions with a number of financial institutions, and we expect to have something in place working capital line of credit in the coming months. .

Okay. At this point, I don't have any queue of people who are asking to read their own questions. I do have 2 more in the chat. .

Dave McCann, do you want to read your question? You're able to unmute. Okay. he doesn't have a mic. I'll read this one to Janet. .

He asks, can you discuss any recent sales trends in July and August, especially as gas prices have retreated somewhat? Also, what inflationary trends are you seeing in cowhide costs? And then -- sorry, right? Sorry, no mic on my end. .

Okay. From a sales trend perspective, July and August have been similar to what we saw in Q2. We are continuing to adapt. We are trying a lot of different things.

And so when we talk again at the end of Q3, we'll be able to report back to you on our insights coming out of some of that experimentation, but we're not just sitting on our hands saying, "Jesus, the same old thing we were doing is not working now." We're trying a lot of different things.

But what we're not necessarily seeing consumers responding generally in the environment in a completely different way. .

The second part of the question, sorry, was on cost of leather. Yes, we have seen, especially over the last 12 months or so significant increases in the cost of raw material and in leather. Our tanneries are still struggling with obtaining raw material.

That's actually one of the biggest challenges that they've had as well as the cost of labor as many of these markets have continued to struggle with COVID and have simply been short of labor. .

So we, again, sourced from many, many tanneries and we've been moving and juggling and doing everything possible to continue to keep those costs as low as possible. Where the costs are really going up, as you all know, freight, that has containers coming from overseas have, I think, the word is quintupled.

They are now more than 5x the cost before COVID. .

So that is representing a challenge for us and all of that has to flow through product cost. .

Okay. A follow-up question from Eddie Reily. .

Just another one for me, sorry.

I was wondering if you guys are planning on taking any pricing action to maybe offset the cost of freight, maybe for the 70% additional [ SKUs ]?.

Yes. We did. We are taking pricing action where we can, Eddie. And it's selective. We're doing it on the product where we're seeing the most significant increases. We're also keeping our eye on competition because our customers do. So in some places where we have to maintain competitive pricing, we're doing that.

And where we can follow, we do that as well. .

So it's not necessarily a one for one. This product has gone up 10%. We'll take our price up 10%, right? We're looking at our entire portfolio of products and making those judgments where we think the customer is going to be less price sensitive.

We're doing that, where we know that they -- that they sort of benchmark off of key items, we're making sure that we're staying competitive with those. .

So it will continue to happen. It's also -- we can also get at it through product mix. Our -- by emphasizing different types of products, our machine sales, for example, have been very strong, and that has been helpful. And the other area where we can have an impact is in promotion. So we can take some regular retails up.

We can do some promotion in the end, the mix may result in a higher AUR. .

The next question is from Eric Bradley, who also doesn't have a microphone, so ask me to read it.

He asks, are there any additional updates on any plans to uplift to NASDAQ?.

Yes.

Do you want to answer that, Dan?.

Sure. Eric, we have submitted everything now for relisting on NASDAQ. We are waiting for them to approval. The application has taken longer because coming out of our restatement, NASDAQ asked us to file another quarter's 10-Q timely to show we can do it before they consider the application, and we just did that this week on Monday. .

And so at this point, hopefully, they will be in the final part of the review process. .

Eric Speron, I'm going to unmute you in just a moment for a follow-up. .

Just on gross profit, you mentioned mix and to Eddie's question about price. The way I read that section of the Q was that this gross profit, these percentages we're seeing is a big function of FIFO, but it is in fact how you're dealing with the business today. It wasn't totally clear to me.

Did it also mean to imply that the outlook for gross profit is going to be mired further? Or did it mean to imply that you guys are managing as best you can and that the gross profit percentage probably is going to hang out here in the high 50s. I just don't know if I grasped how you were... .

Yes. We -- if you think about where we were back in 2018, the model was sort of what I would call extreme high low. We had very, very high regular retail, and then we promote it frequently and deeply. And the problem with that model is that that's not what our competitors do. Our consumers perceived us as ripping them up as expensive. .

And so we shifted to this sort of modified EDLP, Everyday Low Price Strategy. So on all of the key consumables, right, the milk of the leather crafting business, the things that people really key on, we had to bring those to be competitive every day. And we don't promote for the most part, we don't promote those items. .

So key wedged leather, for example, key hardware, key liquids and dies that people use every day, and they use up. And you want to be able to just come in and buy those when you need them, not wait and then stock up on sales. So that was kind of strategically what we did. .

We gave up gross margin to do that. That was an investment to rebuild credibility market, take back market share that was sort of dwindling away with our customers. And I expect that where the gross margin is today is about where it probably is going to be.

There will continue to be mix that comes to play, but this is -- this was roughly the impact of our movement to an EDLP strategy. .

Our next question is from Tim Heitman. .

Another question on inventory. Last year, you guys made the decision to kind of buy ahead of the search to ensure that you had inventory and that turned out to be a great decision relative to a bunch of other retailers and their results. Could you give us maybe a sense of 2 parts.

One, how much "extra inventory" you might be carrying plus since there's inflation, there's a difference between average cost of unit and then in your inventory versus just kind of gross inventory? So is $40 million kind of peakish inventory levels going forward regardless of sales? Or do you think you're carrying a few extra million dollars that working capitalized, you could convert back to cash maybe in the 6 to 9 months?.

So it's a hard question to answer, Tim. There are many, many, many puts and takes, not the least of which is FIFO, which I know way too much about at this stage. What I will say is we do have inventory that we'll sell through as we have transitioned some of our key product categories to new vendors.

And we have many weeks on hand that we stocked up on, on our old vendors to make sure that we have enough for a transition. .

In addition to increasing costs, one of the challenges with vendors is actually how long it's taking them to get product to us. Some of it is delays in shipment, but a lot of it is they're just not delivering. We have purchase orders we've written a year ago that still -- we still haven't received. .

So we did have to stock up in some of these product categories where we were switching to new vendors, not knowing how long it was going to be before the new vendor was -- we were receiving their product. So I think there's a little bit in there, but that inventory level is going to increase as we broaden the product offering. .

And as we increase our overall sales as well. So I'm not -- I'm feeling, and this is not analytically derived that about where we are this year is about where we need to be. We did pull back some as our sales have come in softer in Q1 and 2 in our product purchasing, but not enough that it would be material. .

Janet, Jeff, for those of you who don't know, our Chairman got a question that I think he's going to read. .

Sure. Yes. Jeff Gramm, I'm a Director of Tandy. I got a question for clarification on the real estate question. And I just want to be clear that it's not just conservatism and it's not all about whether to leverage or not. It's also -- we're very in tune with how valuable the property is.

We know that after taxes, it's probably worth 1/3 or more of the value of the whole public market value here. .

And a part of our hesitation to do something like a sale leaseback is that we don't really see ourselves in this property long term. But we don't want to limit our flexibility by entering into something like a sale leaseback now.

We've looked at options like, well, subdividing or are trying to monetize pieces of the property that we're not actively using. And it just doesn't seem like a good long-term value proposition. We think the property is a lot more value -- valuable if we keep it intact.

And so it's -- I mean, our view here is that we want to create the maximum long-term value from this property, and we know that that's there. So this is not just like a conservatism issue that we're not immediately monetizing or like or leveraging the property.

It's also we just think in terms of the operations of the business, we're not at the right juncture to create maximum value from it. .

Thank you, Jeff.

Any other questions, Dan?.

I have just one more from the chat, which says I think you were working on upgrading the quality of the products, has that been accomplished is most of the old inventory gone?.

Yes, we were, and we continue to do that. Most of the old inventory is not gone. We are still working our way through that depending on the product category, Hardware was probably the biggest product category. So we are working our way through. We have new vendors in place. We still have another number of other product categories that we're working on.

So it's kind of a work-in-progress, but we've made tremendous steps forward, and we're getting that from our customers every day. .

Again, any plans to do further write-downs on the inventory?.

No. We should -- it's part of kind of the regular housekeeping of the business. Leather is an organic -- it is a perishable product, especially veg-tanned leather, which is very sensitive to UV damage. So we are instituting more rigorous storage guidelines around leather, but some of it just has to get thrown out -- it's an organic product. .

So some of it has to get thrown out every period. But we're -- that is minimal, and we're really keeping up on that. So there should be no write-down. .

Okay. That's all the questions I have in the queue at this point. .

All right. Well, we're here, you can reach out to us. Either Dan or I or Jeff and -- happy to have any other -- answer any other questions or have any conversation. If this format works for you all, we're looking to do this at the end of Q3 as well. And going forward, we continue to evolve it. But thank you again for participating. Bye. .

Bye, everyone..