TANDY LEATHER FACTORY INC Q2 FY2023 earnings call

• Sales down 5% due to weaker consumer demand, closed stores, and weaker promotion response. - Operating expense down 10%, showing progress in controlling costs and driving profitability. - New York City store is 2,000 - 2,500 sq ft, implemented new visual merchandising, has good traffic and connections. - Biggest cost control opportunity is store labor; looking to reduce store hours and move to more part-time employees. - On gross margin, working on sourcing, selectively taking price where less sensitive, and watching competitors. - Revenue growth opportunity: finding cash flow positive store locations, with New York City store as small space experiment; also product improvements, classes, community engagement.

Sales were $17.5 million, down 5% from Q2 last year. Operating expense was $10.1 million, down 10% vs last year. Operating income was $790,000 vs a $737,000 loss last Q2. Inventory was $37.5 million, down about $700,000 from year-end and down $2.6 million or 6.5% vs Q2 last year. Cash was $10 million, up $2 million vs year-end and $5.6 million vs Q2 last year.

• Goal to continue driving positive cash and grow it. - Q3 is low point before Q4 Black Friday and December promotions, but aim to maintain positive cash flow.

• Consumer demand weakness. - Store operating cost pressures. - Tight labor market affecting hiring and retaining store managers. - Sourcing cost impacts from factors like exchange rates.

Q: 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?

A: The New York City store is 2,000 - 2,500 sq ft, implemented new visual merchandising, has good traffic, store director making connections. Investment significantly more than other locations due to higher NYC contractor costs, aiming for 18 - 24 month cash-on-cash return.

Q: Can you elaborate a little more on the sales environment and how the units are trending relative to inflation by unit of item?

A: Limiting price increases due to price-sensitive consumers, sales decline not due to price increase as they absorbed some prices, people buying more at regular retail.

Q: Can you talk a little bit more about your best opportunities to reduce costs?

A: Biggest cost bucket is store labor; looking to reduce store hours, move to more part-time employees. Also working on sourcing to improve gross margin.

Q: Can you talk a little bit more about your biggest opportunity to guide revenue growth going forward?

A: Finding cash flow positive store locations, like New York City store as small space experiment; also product improvements, classes, community engagement.

Q: Do you think you can continue to generate free cash flow into this year and next year?

A: Goal is to continue driving positive cash, but Q3 is low point, but aim to maintain positive cash flow.

Q: Can you talk a little about store manager labor, how is the hiring environment right now?

A: Tough hiring environment, tight labor market, have openings, turnover relatively stable but working to recruit and retain good store managers.

Q: Overall cash management, comment on buybacks and cash management?

A: Have T-bill ladder program for undeployed cash, buyback program in place but limited by trading volume, Board committed to it.