Earnings Call Transcript - TLF Q2 2023

Daniel Ross, General Counsel and Corporate Secretary

Good morning, everyone. Thank you for joining us for a discussion of Tandy's Second Quarter 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.

Operator, 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 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.

Janet Carr, CEO

Hi, everyone. I'm going to ask Dan to mute you all because we're experiencing some crosstalk. Thanks for joining us today. As Dan mentioned, here's a brief overview of the quarter. Our sales were $17.5 million, a 5% decrease from Q2 of last year, attributed to ongoing weaker consumer demand, store closures, and a less favorable response to our promotions as we've noted in previous quarters. Operating expenses were $10.1 million, down 10% compared to last year, showing progress in controlling operating costs and improving profitability. Consequently, our operating income was $790,000, compared to a loss of $737,000 last Q2. Inventory stood at $37.5 million, down about $700,000 from year-end and down $2.6 million or 6.5% from Q2 of last year. Our cash position was $10 million, an increase of $2 million from year-end and $5.6 million from Q2 of last year. Overall, despite declining sales, we feel positive about our expense management and profitability efforts. We are now open for questions or comments.

Joe Koster, Analyst

Can you hear me, Janet?

Janet Carr, CEO

Yes.

Joe Koster, Analyst

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?

Janet Carr, CEO

The New York City store is approximately 2,000 to 2,500 square feet, which is relatively small for us. However, we have introduced various new visual merchandising techniques that enable us to showcase more products even in a compact space, along with a large makers' area. This store has already gained traction mainly through word of mouth, with little to no marketing. We are seeing good traffic and class participation, and our store director is building strong relationships within the leather crafting and fashion communities in New York. While I don't have the exact cost for the store build-out, it is significantly higher than our previous locations due to the elevated costs of contractors in New York. We're expecting it to be roughly twice as expensive, considering our average store build-out is around $50,000; this one might range from $75,000 to $150,000 or potentially more. However, in the broader context, this is still a low investment. We aim for a cash-on-cash return within 18 to 24 months for our store investments, and based on the current trends for this store, we are confident in achieving that.

Unknown Analyst, Analyst

All right. Great job on the profitability. I was wondering if you could elaborate a little more on the 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%?

Janet Carr, CEO

I can't do that calculation off the top of my head, but I'll have the team look into it. We've been careful with our price increases, only implementing what is absolutely necessary since our consumers are quite price-sensitive. Overall, we’ve seen price increases of about 10% compared to two years ago, but this has been gradual and varies by unit. I can't provide the average retail price right now. However, I believe the decline in sales is not due to our price increases, as we've absorbed some of those costs. We’ve switched to other vendors and taken every step possible to keep our prices stable. If your main question is whether sales have decreased because we've raised prices, we don’t think that’s the case. If it were so, we would expect a stronger response to our promotions. With regular prices rising, consumers would likely respond more to promotions, and we aren’t seeing that. On the contrary, consumers continue to purchase more at regular prices, which aligns with our long-term strategy of providing good value every day. I've also received feedback from our team that confirms around a 10% increase, but there are many mixed factors at play.

Unknown Analyst, Analyst

This is Abigail. 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 reductions?

Janet Carr, CEO

Yes, I believe there are opportunities for both cost reduction and gross margin improvement. The main area for cost savings is in store labor. However, we are facing challenges as labor costs continue to rise, and the market for retail employees is very competitive, which requires us to pay higher wages. In some regions, we are dealing with minimum wage pressures, while in others, we simply need to offer more due to the competitive landscape for these roles. That being said, we have the chance to cut store hours, and we are actively working on initiatives to reduce the number of hours we operate. In the past, we had many full-time employees, but we are shifting towards a greater reliance on part-time staff to enhance our flexibility. We also had rules in place that required more than one employee in the store at all times, but we believe there are smaller stores and specific times when one employee can effectively manage operations. We are exploring numerous ways to maximize the productivity of our available hours while also recognizing that we will need to increase pay for some employees. From a gross margin standpoint, we continue to focus on improving sourcing. We have seen positive changes, particularly with freight-in costs; in 2021, we were discussing shipping rates of $15,000 per container, which have now fallen to below $3,000 per container for the most part from Asia. There remains substantial opportunity to improve gross margins incrementally. At the same time, we are feeling pressure from sourcing in places like Mexico, where the dollar's value has weakened against the Mexican peso compared to last year. It feels like a complex balancing act. We are strategically raising prices where possible and where we believe customer sensitivity is lower, all while remaining vigilant about our competitors. As the largest player in the market, we must ensure that we consistently provide competitive everyday retail prices. Nevertheless, there are certain categories where we can implement price increases and be more promotional, so we are constantly navigating the various factors involved in driving higher gross margins.

Unknown Analyst, Analyst

And I guess just as a follow-up question, maybe you can talk a little bit more about your biggest opportunity to guide revenue growth going forward.

Janet Carr, CEO

Yes. In terms of revenue growth, over the past year, we closed several stores that were performing poorly and negatively impacting cash flow, with little chance of becoming profitable. Our primary opportunity for sales growth lies in identifying new store locations where we can operate profitably. There are many leather crafters dispersed throughout the U.S., and we have many areas that we are not covering, including some places where we shut down stores during COVID. We closed about 10 or 11 stores when leases ended, landlords were unyielding in negotiations, and we were shut down for a few months. We exited those locations and decided to come back to identify better sites. We are currently focused on finding suitable store locations and have a clearer understanding of what works for us. One experiment in New York is to create a store that offers a full assortment in a smaller space, allowing us to secure smaller locations with lower rent and better cash flow. This is our primary opportunity that we are actively pursuing. We also have a multitude of other initiatives underway, including product enhancements, various kits, an emphasis on classes, community engagement—especially with youth as we introduce new youth product lines—and continued focus on veterans with related community initiatives. While it's a lengthy list of activities, opening new stores is our top priority at this moment.

Unknown Analyst, Analyst

Got it. That's helpful. And I just have 1 more question, if you don't mind. You kind of touched on it, but you had an excellent free cash flow generation year-to-date. 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?

Janet Carr, CEO

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 just 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 just before a big Q4 Black Friday and the December promotions. 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.

Unknown Analyst, Analyst

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?

Janet Carr, CEO

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. 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 #1 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.

Daniel Ross, General Counsel and Corporate Secretary

Retail stores provide a competitive advantage, but it also requires creating a great service environment in 103 locations, which can be difficult in a tight labor market while trying to control costs. Therefore, our top priority is to continue recruiting and retaining effective store managers. Many retailers are still experiencing tough hiring conditions.

Unknown Analyst, Analyst

I'll ask 1 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 to interest and all that.

Janet Carr, CEO

Yes. We have a T-bill ladder program for our undeployed cash, and T-bills are currently yielding over 5%, which is beneficial. Our buyback program is active and is something the Board evaluates in every discussion regarding capital deployment and balance. While the program is in place, there are regulatory limitations on how much we can repurchase based on daily trading volumes. Consequently, the extent of our buybacks may remain limited. Nonetheless, the program is operational, and the Board is committed to continuing it for now. You can always reach out to us on Investor Relations. I think my email 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. Really appreciate you taking the time to get on and chat with us.

Daniel Ross, General Counsel and Corporate Secretary

There's nothing else. Dan?

Janet Carr, CEO

Thanks, Bye.