Tandy Leather Factory Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2023

There are 4 speakers on the call.

Operator

Good morning, everyone. Thank you for joining us for a discussion of Kandi's Q2 2023 financial results. I'm Dan Ross, General Counsel and Corporate Secretary for Tandy, and I will be co moderating the discussion today. Our CEO, Janet Carr, will give just a very brief overview of the quarter, and then we will devote the conference to investors' questions and discussion. If you wish to ask a question or make a comment, please press the reactions button, which is located at the bottom of your Zoom screen, and then select raise hand.

Operator

Jen will recognize the questioners and ask you to unmute your line. You will need to ask your questions out loud yourself through your computer or phone audio. Please be sure to state your name and if applicable your company when you begin your question. I will not be reading questions or comments directly from the chat. With that, let's get started.

Operator

Today's presentation will include statements other than historical results that constitute forward looking statements within the meaning of the Securities Act of 1933 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.

Operator

And now here's Janet Carr.

Speaker 1

Hi, everyone. I'm going to ask Dan to mute you all just because I think we're getting a little bit of crosstalk here. Thanks for joining us today. As Dan said, just a very brief overview of the quarter. Our sales Down 5% from Q2 of last year, due to continued weaker consumer demand, closed stores and a weaker response to our promotions as we've been discussing for the last several quarters.

Speaker 1

Operating Right over there. Expense came in at $10,100,000 down 10% versus last year. So you see us getting traction on Our goal of getting control of operating expenses and driving profitability and accordingly our operating income came in at $790,000 versus a $737,000 loss last Q2. Inventory was $37,500,000 down about $700,000 from year end and down 2 point $6,000,000 versus Q2 of last year. And in general, despite weakening sales, we do feel good about managing our Expenses and driving profitability.

Speaker 1

And with that, we are open for questions or comments.

Speaker 2

Can you hear me all right?

Speaker 1

Yes. Hi, Joe.

Speaker 2

Hey, Janet. Can you talk a little bit about the New York City store and Sort of the capital that was invested into the store and how it compares to some of the others?

Speaker 1

Yes. The New York City Store is about 2000 to 2,500 Square Feet, which is small for our Stores, it's on the small side, but we have implemented a lot of new visual merchandising That allow us to have more product in a much more condensed space in addition to having a big maker space. That store has already got traction and with virtually no marketing with almost entirely word-of-mouth. We already have good traffic, good flow for classes, and our store director is making a lot Connections with the leather crafting community, including the big fashion community that's based in New York. I don't have an exact number on the Store build out, but it is significantly more than what we have spent in other locations, driven primarily by the higher costs of general contractors in the New York area.

Speaker 1

So it's going to be about Twice as much, but keeping in mind that our average store build out is about $50,000 so this store may come in Between $75,000 and say $150,000 So it may be more, but in the whole scheme of things, it's super low. And the return is we look for a cash on cash return of about 18 months to 24 months on our store investment. And Given where this store is trending so far, we're not concerned that we'll be able to see that.

Speaker 2

Great job on the profitability. I was wondering if you could elaborate a little more on sales environment And how the units are trending relative to, let's call it, inflation by unit of Item? And how should I think about what's going on in the stores? Sales are down 5% and inflation is up 5%, are your units down 10?

Speaker 1

I can't do that math for you in my head and I don't have it, but I will ask the team to do some of that math. We have been limiting our price increases to what is absolutely necessary given that we have a very price sensitive consumer. In aggregate, overall, we're seeing price increases of about 10% versus 2 years ago, but that's been happening gradually and across various units. And how that averages Out at an average unit retail, I can't tell you exactly off the top of my head. Point being, I'm not sure that the decline in sales well, I can tell you Well, I'll tell you, generally speaking, I don't think the decline in sales is a result of increasing price, because we have absorbed some of those prices.

Speaker 1

We switched to other Vendors, we've done everything possible to try to maintain pricing. So if you're if the Correctly, your question is, are sales down because you've raised price? The answer is, we don't think so. And were that the case, we would expect to see greater responsiveness to our promotions. If regular retails are increasing, then people would likely be more responsive to promotions and we're not seeing that either.

Speaker 1

We're Seeing people continue to buy more at regular retail, and that's been our long term strategy overall is to make sure that we're And I'm getting notes from our team saying, Yes, about 10%. But there are lots of mixed questions as well. Abigail?

Speaker 3

Hi. This is Abigail.

Speaker 1

Hi.

Speaker 3

Hi. Can you talk a little bit more about your best opportunities to reduce Costs, like what you've already done or what you can do to get the cost structure down, whether it be gross margin improvement or operating cost reduction?

Speaker 1

Yes. I think there's opportunity for both. From a cost perspective, the biggest bucket of opportunity is Store labor. The challenge is that labor costs have been increasing, and Especially retail store labor in the market is very tight and we have to pay more. In some places, we are have minimum wage pressures.

Speaker 1

And in some cases, we just have to pay more because the market has Become a lot more competitive for people in these kinds of roles. That said, we have an opportunity to reduce store hours And that is an initiative that we've been working on, to take the number of hours down. We've had in the past, A lot of full time employees and we are moving more toward having more part time employees to give us more flexibility. We've had rules about having more than one employee in the store at all times and we think there are stores that are small enough and there are Periods, certain days and times of the day when one employee can operate a store. So looking at all kinds of ways to improve the effectiveness of the hours that we do have and reduce them overall, while at the same time we know we will have to pay and give some of that back and paying employees More per hour.

Speaker 1

So that is the single biggest opportunity. From a gross margin perspective, we continue to work the sourcing side. We did see improvements in especially freight in costs. I don't know. In 2021, we were talking about cargo shipments at $15,000 a container and now they're back down to below $3,000 a container for the most part coming from Asia.

Speaker 1

So We've got a lot of opportunity to continue to whittle away here and there at the gross margin. At the same time, we are feeling Pressure, especially sourcing from places like Mexico, where the dollar is Quite weak against the Mexican peso relative to where it's been over the last year. So it's all like this giant juggling act. Right over there. I have to say we are trying to selectively take price where we can And where we feel like there are there is lower sensitivity and especially keeping our sharp eye on competitors.

Speaker 1

We are the biggest, so we want to make sure that we're always offering good everyday retails that are competitive. That said, there are some categories where we can take price and be more promotional. So all ways that we're juggling the millions of variables in this to try to drive higher gross margins as well.

Speaker 3

Got it. Thanks. And I guess just as a follow-up question, maybe you could talk a little bit more about your biggest opportunities to drive revenue growth going forward?

Speaker 1

Yes. Revenue growth, we as you know, over the last year, we closed a number of stores that were trending down and cash flow negative and didn't really have an opportunity to get to cash positive. And so the number one opportunity for sales growth is finding store locations where we can operate cash flow positive stores. There are a lot of leather crafters that are Spread sort of in a thin layer all across the U. S.

Speaker 1

And there's lots of geographies that we're not covering, including some Geographies where we closed stores during COVID, we closed like 10 or 11 stores during COVID where the leases were up, The landlords weren't willing to negotiate and we were closed for the 3 or 4 months that we had stores closed during that time. And We got out of some of those locations and said we're going to come back and find a better location and we are now actively working to find store locations. I think that we're also clear on the kinds of locations that work for us. Part of the experiment in New York is to make a store with a full assortment work in smaller square footage That allows us to get smaller spaces and lower rent and improve the ability to drive positive cash out of these stores. So that's the number one opportunity that we're actively pursuing.

Speaker 1

We've got a lot of other That are sort of underneath there, including lots of product improvements, lots of kits, Focused on classes, community engagement, especially around youth as we have new youth product lines coming out. Veterans remain a big focus for us and being able to have a veterans focused initiative and community engagement. So it's a long list of things, but new stores is the number one thing that we can be doing right now.

Speaker 3

Got it. Thanks. That's helpful. And I just have one more question, if You don't mind? You kind of touched on it, but you had excellent free cash flow generation year to date.

Speaker 3

Do you think you can continue to generate free cash flow Into this year and next year and kind of what the puts and takes of that are?

Speaker 1

Yes, that's the goal. The fact is that a little bit of The big bump in cash at the end of this quarter is timing, some product payments and product receipts. So I don't expect to see that continue at that rate every single quarter going forward. As you know, Q3 is our low point in the year before a big Q4 Black Friday and the December promotions. So But it is our goal to continue to drive positive cash and to continue to grow it And we're pleased to see that we're making progress against that.

Speaker 3

Got it. Thanks so much.

Speaker 1

Other questions, comments?

Operator

Andrew, sure.

Speaker 2

Last question is, can you talk a little about store manager labor? How is the hiring environment right now? And what kind of turnover are you seeing in the existing store managers?

Speaker 1

Yes. It's tough. I'll be totally honest with you. It's a tough environment out there. Labor in retail is tight, and we have a number of openings.

Speaker 1

I can't tell you off the top of my head what store manager Turnover is today, but it's been relatively stable, although we do have a number of both Voluntary and involuntary as we continue to improve the quality of our talent pool, especially at retail. Retail stores are a competitive advantage, but the flip side of that is that you have to Create an excellent service environment in 103 stores and that can be challenging in a tight labor environment and especially when we're looking to try to maintain discipline around cost. So it is our number one Opportunity to continue to recruit and importantly retain the good store managers and Can't say anything more than, for a lot of retailers, it's a tough hiring environment still. No other questions?

Speaker 2

I'll ask one more, just Sort of overall cash management, I'm assuming buybacks are just given the liquidity are difficult to do. So you could maybe just Briefly comment on that as well as sort of now that the cash balance is getting back up a little bit, how the cash is being managed and interest and all that?

Speaker 1

Yes. We do have a T Bill Ladder program that we are using for our undeployed cash. And with T Bells delivering, I don't know, yields of north of 5%, that's been nice. And our buyback program, as you know, is in place and operating and it's Something that the Board considers, in every discussion, how we deploy our capital and How we think about the balance of it. So the buyback programs in place, I don't Frankly, Dan can probably speak more to the ins and outs of this, but my understanding of the regulations of this is that there are limitations to how much you can buy given the volume that trades every day.

Speaker 1

And So given that we have limited trading volume, the amount that we can buy back is Probably always going to be pretty limited as well, under that program. But I mean, that's just the reality. However, the program is turned on and operating. So the Board is committed to doing that for now. Anyone else?

Speaker 1

You can always reach out to us on Investor Relations. I think my e mail is actually on our press releases. So I do hear from some of you occasionally and happy if you think of something later that we can chat about that's public. I'm happy to have those conversations as well. And Thank you all for your interest.

Speaker 1

Really appreciate you taking the time to get on and chat with us. There's nothing else, Dan?

Operator

Okay. Thank you all for joining the meeting today.

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