TANDY LEATHER FACTORY INC Q2 FY2022 earnings call

• Q2 sales down 0.8% y-o-y, gross margin 57%, operating loss $700k, adjusted EBITDA negative $100k. Year-to-date sales down 2.6%, gross margin 57.7%, operating income $100k, adjusted EBITDA $1.5M.
• Building inventory for July sale and holiday, cash down to $5.6M, inventory $40.1M. Closed San Bruno and Oxnard stores. Paid back COVID-related Spanish loan, bought back 360k shares in April.
• Core strengths: market share leader in fragmented leather crafting market, strong multichannel distribution, over 100 retail stores, capable executive team with no turnover in leadership since recruitment.
• Long-term plan to $100M sales and $15M operating income. Focus on core business improvements (optimizing fleet, 4-wall cash flow, piloting new formats, growing commercial business) and key growth initiatives (Youth, art therapy, chain wholesale, international).

Tandy's Q2 sales were down 0.8% over the previous year. Gross margin rate was 57%. Operating loss was $700,000 and adjusted EBITDA was negative $100,000. Year-to-date, sales are down 2.6% versus last year, gross margin is 57.7%, operating income is $100,000, and adjusted EBITDA is $1.5 million. 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 the second quarter and last year's second quarter.

• Long-term plan to reach $100M sales and $15M operating income. Focus on core business improvements and key growth initiatives.
• Renewed share repurchase plan with $5M value of shares extending until end of August 2024.

• Retail environment challenges: inflation, recession, war, public health concerns.
• Supply chain issues: raw material costs, freight costs (containers more than 5x pre-COVID cost).
• Inventory management: perishable nature of leather, need for rigorous storage guidelines leading to minimal write-downs but ongoing management.

Q: Can we get meaner in cost reduction, variabilize comp structure, etc.?

A: We're pretty mean, variabilizing comp where we can, but nothing obvious right now.

Q: Strategic fit for Spain store?

A: Spain is cash flow positive, serves as a model for international growth with wholesale approach.

Q: Differences in Canada vs US revenue?

A: Canada had a bigger recovery from pandemic, so up vs US, but all tied to macro environment.

Q: Unlocking shareholder value from real estate?

A: Considering ways but cautious about leveraging, currently maintaining real estate as it's seen as more valuable intact long-term.

Q: Share repurchase plan?

A: Plan expired July 31, renewed with $5M value extending to Aug 2024.

Q: Commercial business details?

A: Commercial business defined as >$5k and >$20k sales/year, served by direct account reps, examples include bag makers, shoemakers, etc.

Q: Sales trends in July/August, cowhide costs?

A: July/August sales similar to Q2, cowhide costs up due to raw material and labor issues, freight costs quintupled since COVID.

Q: Pricing action to offset freight costs?

A: Selective pricing action, considering product mix, promotion to offset costs.

Q: Inventory and old inventory?

A: Working on upgrading products, working through old inventory, especially hardware, with new vendors in place, minimal write-downs expected.