The Leather Factory Inc. (TLF)
Interview with: Shannon L. Greene, Chief Financial Officer and Treasurer
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Name recognition for the Tandy Leather division of The Leather Factory has their retail business on the rise



Consumer Cyclical
Apparel/Accessories
(AMEX: TLF)

The Leather Factory Inc.

847 East Loop 820 South
Ft. Worth, TX 76110
Phone: 817-496-4414



Shannon L. Greene
Chief Financial Officer
and Treasurer

Interview conducted by:
Lynn Fosse
Editor

CEOCFOinterviews.com
January 2003

Bio of CFO,
Shannon L. Greene has served as Chief Financial Officer and Treasurer of the Company since May 2000.  She was appointed to serve on the Board of Directors in January 2001.  Prior to May 2000, Ms. Greene served as the Company’s Controller and Assistant Controller since September 1997.  From January 1996 until she joined TLF, she served as CFO/Controller for a venture capital group specializing in the computer industry in Dallas, Texas.  From 1987 to 1995, she worked in public accounting. Ms. Greene received the Bachelor of Accountancy from New Mexico State University in 1987 and was licensed as a Certified Public Accountant (CPA) in 1991. Her professional affiliations include the American Institute of Certified Public Accountants, the Texas Society of Certified Public Accountants and its Fort Worth chapter, and the National Investor Relations Institute.

Company Profile:
The Leather Factory, Inc. ("TLF"), founded in 1980, is a premier manufacturer and an international marketer and distributor of a broad line of leather and related products to customers worldwide. Its product lines consist of leather, leatherworking tools, buckles and adornments for belts, leather dyes and finishes, saddle and tack hardware, and do-it-yourself craft kits, suede lace, western-hat trim, and fringe. Its distribution network consists of 27 U.S.-based Leather Factory stores, targeting the wholesale customer, 14 U.S.-based Tandy Leather stores, focusing on the retail market, and 3 Canadian combination (Leather Factory/Tandy Leather) stores. It also sells products via mail/telephone/Website orders. In addition, TLF produces cigar cases, wallets, and other accessories through its Royal Crown Custom Leathers unit. Its hat trims, which are sold to hat manufacturers directly, are produced through Roberts, Cushman & Company, Inc. (Cushman), a subsidiary of The Leather Factory.

The Leather Factory frequently introduces new products either through its own manufacturing capability or by purchasing from vendors. The Company holds a substantial number of copyrights for its designs, which have been incorporated throughout its product line. TLF sells 3,600 items to retailers, wholesalers, and manufacturers. The Company extends an invitation for retailers to become a Leather Factory Authorized Sales Center. They feel that most types of retail stores can become successful Leather Factory Authorized Sales centers, including craft stores, western stores, shoe repair stores, hardware stores and general merchandise stores.

CEOCFOinterviews: Ms. Greene, please give us a brief history of Leather Factory.

Ms. Greene: “The Leather Factory was started by Wray Thompson and Ron Morgan, the CEO and President of our company, respectively. They were former Tandy Leather Company top executives. They left Tandy Leather and formed The Leather Factory in 1980 through a consulting arrangement with BROWN SHOE GROUP, which was headquartered in St. Louis. The Leather Factory would compete on a product level with Tandy as it carried the same type of merchandise.  However, The Leather Factory’s focus was going to be on the wholesale customer while Tandy took care of the retail customer. Mr. Thompson and Mr. Morgan bought the Leather Factory from BROWN SHOE GROUP in 1985 and at that time, there were six locations, still in existence today. We have since grown to twenty-seven Leather Factory stores in the U.S.

In December of 2000, we acquired Tandy Leather Company from its parent corporation, Tandycrafts, Inc.  With that acquisition, we gained a significant asset in that Tandy Leather is the most recognized name in the industry.  When we bought Tandy, it was operating as a mail order/Internet order business, even though it had operated as many as 350 retail stores previously.  We spent the next 12 months reorganizing and cleaning up the operation, then announced that we were going to re-introduce the retail stores.  We now have fourteen Tandy Leather retail stores that have been opened in 2002. In Canada, we have 3 combination (Leather Factory/Tandy Leather) stores, which offer full product lines of both Leather Factory and Tandy Leather.

We sell leather and leathercraft supplies, leather working tools, conchos, buckles, belt supplies and saddle and tack hardware. We also offer a line of do-it-yourself leather craft kits. It is a wide variety of products but it is all leather related.  We don’t sell any finished goods to speak of - we sell the leather and supplies, tools, and accessories that one would need to make his own products.”

CEOCFOinterviews: What is involved in getting the leather; is it purchased as a commodity and is there much variation in price?

Ms. Greene: “Leather is considered a commodity. We buy most of our leather from vendors in Central and South America. Years ago there were numerous tanneries in the US but due to environmental regulations, most have moved out of the country. Asia has quite a few tanneries producing quite a bit of leather. Most of the leather we buy comes from domestic cattle.  The hides are shipped to Mexico, Argentina, Brazil, etc., tanned there and re-introduced back into the US.  In addition, there is a large supply of Italian leather, which is what the high-end automobile upholstery and leather shoes and handbags are made of. It is the upper-end of the leather commodity market.

With regards to prices, they don’t fluctuate a lot unless there are unusual circumstances. For example, a year or so ago, when Europe was dealing with the Mad Cow disease scare and they were expecting to slaughter so many head of cattle over there, leather prices doubled in a short amount of time.  Everyone raised their prices because they were thinking that the supply was going to be diminished. It lasted about ninety days and then prices fell back down below what the levels were before that whole issue began. My opinion is that as long as we all love hamburgers and the beef-processing, particularly in the U.S., is what it is, the supply and demand is not a problem and the prices are going to be reasonable. The nice advantage for us is when prices go up for us, they go up for everyone.”

CEOCFOinterviews: With regards to sales, how are you divided now between wholesale and retail and will that trend continue?

Mr. Greene: “Historically, as The Leather Factory, we were about 90% wholesale and 10% retail. Several years before we acquired Tandy, we were seeing a nice shift in our retail/wholesale mix to where Leather Factory was doing about 80% wholesale and 20% retail. Tandy does about 90% retail business. As Tandy becomes a larger contributor to our overall sales, then our retail business will continue to increase and become a larger percentage of our total sales. For example, in 2001, we did about $37 million in total sales and Tandy contributed about $7 million of that. The Leather Factory's retail sales were approximately five million dollars.  Combine that with Tandy's $7 million and roughly one third of our business was to the retail customer in 2001.  We believe Tandy has the potential to contribute half of our total revenue as the retail stores mature and as a result, our overall retail to wholesale ratio should continue to grow as well.”

CEOCFOinterviews: How do you decide on where and how to open and expand your stores?

Ms. Greene: “We have an advantage, because not only are our CEO and President former Tandy Leather top executives, but a number of the middle management team came from Tandy as well. This puts us in a position to have large amounts of information of how Tandy was doing from a store perspective:  where they were located and how they performed. We have all of the old market demographics, all of the store performance numbers and what the top markets are in the US.  As a result, we eliminate a lot of questions regarding where to locate.

As we picked the fourteen locations to open in 2002, one of the deciding factors was where those stores had been successful in the past under old ownership. Also, another major consideration and key to the stores’ success is having a knowledgeable and successful manager running the store. Some of the stores we opened in 2002 were selected because we had a former Tandy manager, who had worked under the old regime, interested in going back to work in a Tandy Leather store and lived in a particular area and wanted to stay there.”

CEOCFOinterviews: What are people buying in the stores?

Ms. Greene: “Tandy sells many leather craft kits. If you want to make a pair of moccasins, you can buy the kit with the leather pieces already cut with the thread, needles and instructions included to put it together. There are wallet kits and purse kits. Alot of those make good Christmas gifts and many of the kits are simple enough that children can do them. You can do some amazing things with a piece of leather. I have seen some gorgeous hand-sewn wallets; clutch purses, and billfolds. Many of Tandy’s customers are going to be individual hobbyists that are making crafts for gifts or perhaps to sell at a small flea market.”

CEOCFOinterviews: How did 9-11 and a sluggish economy affect the craft industry?

Ms. Greene: “I believe two things have happened.  After 9-11, people quit traveling and started staying home more and spending time with their families. The other thing that happened is that the economy has been down, which causes people to spend less time eating out, less time at the golf courses, and less time shopping in the malls. The craft industry feeds that very well in that it is generally less expensive to make something than it is to go out and buy it. When consumers' retail dollars are not as readily available as they were several years ago, the craft industry benefits in that people tend to find projects to work on at home to pass the time.  Handmade gifts are more popular when the economy is soft. In addition, we sell to enough different markets and customer groups that the economy isn’t quite as much of a factor for us as it would be a true well-known retailer. We have benefited, just as Michael’s, AC Moore and WalMart have benefited from the craft trends. Plus, those retailers are our customers, so perhaps we have benefited from their success as well.”

CEOCFOinterviews: Have you built relationships with Scouts and Campgrounds?

Mr. Greene: “We have a very good relationship with the Boy Scouts; most men who were in the Boy Scouts remember something about leathercraft. The leathercraft merit badge is still the sixth most popular merit badge that Boy Scouts can earn. We work very closely with the Boy Scouts, do some private label products for them, and help write some of their instruction manuals that pertain to leathercraft.

We sell to many kids camps, YMCA and kids organizations as leathercraft is popular and attractive to both boys and girls and it’s relatively inexpensive. Many of our store managers also work closely with the schools in their areas. Most woodshop and industrial arts teachers welcome the opportunity to have a new art form, vocation and project added to their curriculum.”

CEOCFOinterviews: What are the customer markets for your do-it-yourself items?

Ms. Greene: “We sell to five or six customer markets. The big national craft retailers are one group and they buy a lot of those do-it-yourself kits. The craft market and craft customers as well as the saddle and tack industry are some groups. If you were a saddle maker, you could come to a Leather Factory store and buy not only the leather, but also all of the tools, finishes and the hardware that you need to make a saddle. We have a huge customer following for that including the rivets, the saddletree and padding. We also have an institutional group, which are schools and hospitals. The other customer in that category is the prison business because leather craft is an approved craft for many prisons. We have some state and federal prisons as customers as well as a large individual inmate customer group.  Small manufacturers also buy from us. We sell buckle sets and the belt links, and the rotary punch to punch the holes. There are also many people that do this as an art craft.”

CEOCFOinterviews: How do you maintain the inventory, and are there many new products and a constant change in what you offer?

Ms. Greene: “Yes and no. There are some timeless items that we sell all the time, but we also spend a lot of time rejuvenating our product line. We produce a catalog each year for both Tandy Leather and Leather Factory and although much of the content is of the same products, they are laid out differently and the catalogs look a little different. In conjunction with the catalogs that come out, we look at our usage numbers and the popularity of items. We will discontinue four to six hundred items every year and introduce the same number of new items. Leather is leather; but we offer dozens of types, styles and thickness, depending on the need. Some items are more popular than others or come in and out of fashion.  When I was a kid, one of the things everyone wanted was a belt with your initials or name on it. It was very popular back in the 70s.  I understand now that it isn’t "safe" to have your child's name or initials on his or her clothing. So that particular belt kit is not in our line at the moment."

CEOCFOinterviews: Are there copyrights or patents involved in either the design or manufacturing of the products?

Ms. Greene: “Yes, we have about five hundred trademarks and copyrights and we have a couple of patents. However, we don’t try to protect everything. We have several people on staff that are constantly coming up with new and creative ideas.  We may or may not try to protect these ideas, depending on how long we think it is going to be in the line and how important it is going to be.”

CEOCFOinterviews: What sets Leather Factory apart from the competition?

Ms. Greene: “When it comes to competition, we are the largest supplier of the particular product lines we offer in the industry. That is particularly the case now that we own Tandy Leather.  I suppose we have competition but no one that we are aware of competing with the exact same product line. There are smaller companies that are doing about one to five million dollars in sales per year, so they are quite a bit smaller than we are. Usually, these are individually owned retail leathercraft stores and many of them are customers of ours. We have the advantage of being large enough that we can buy more efficiently than many other companies. In addition, I'm not aware of any public companies doing the same thing we are.”

CEOCFOinterviews: Do many people come to your website, and is that a big sales tool for you?

Mr. Greene: “We have the Tandy Leather website and the Leather Factory website. The Tandy website generates more business on line than the Leather Factory website, because Tandy’s name is better known. Tandy has been around since 1919, much longer than Leather Factory, and their name is known worldwide in the leathercraft circles as the premier supplier. Part of the reason their website is as successful in the online ordering is because Tandy’s customers usually don’t buy as much leather. There are no two pieces of leather that are the same because they come from animals and we know there are no two animals exactly alike anywhere. Tandy’s customers order well off the Internet, because there is not much difference between leather kits. Leather Factory doesn’t do as well with their online business because they sell a lot more leather sides; you have the saddle makers and belt manufacturers that are looking for a particular piece of leather and that is difficult to do over the Internet. It’s kind of like trying to buy a puppy over the Internet - you can look at pictures of a litter but you really can’t tell exactly what each dog looks like and you definitely can't tell anything about their personalities.  Leather is the same way. When someone wants a piece of "brown" leather, exactly what shade of "brown" is he asking for?  It's a judgment call.

Prior to the time we bought Tandy, its previous management made the decision in the late 1990s to close their retail stores and operate strictly as a mail order and Internet company. They had directed some of their customers to their website to order that way, as opposed to having a retail store anywhere close to the customer. We do special e-mail offers to our customers that order over the Internet through Tandy and that has generated good business for us.  However, the consensus is that many of our customers are thrilled to be able to walk into a Tandy store and buy products over the counter as opposed to buying it over the Internet.”

CEOCFOinterviews: How has the expansion of the Tandy stores affected the financial condition of the Leather Factory?

Ms. Greene: “The expansion has gone very well.  We originally planned to open five or six Tandy retail stores in 2002, based on a couple of criteria. First, we want the stores to become profitable as quickly as possible, because stores that are not profitable tend to drain the profits of the stores that are doing well. Of the fourteen stores that we have opened, each store has started generating a profit within the sixty days of its opening, which is much better than we expected.  We figured it would take six months to a year for a new store to become profitable. We actually had one store that was opened this fall that was profitable the first month it was opened. The investment required to get these stores opened, although fairly minimal, has come back to us quickly. Usually the second month they are opened, they are already generating super sales and strong profits. However, we don’t want to open too quickly and generate a lot of debt while we are opening our stores.

We are financing our Tandy store openings through internal cash flow as much as possible as opposed to borrowing money to open them. They are contributing nicely to our sales and exceeding our expectations. Based on historical information that we have from the old Tandy years, we would be happy with the stores averaging sales of thirty thousand dollars a month. Right now, with the fourteen stores that we have open, we are averaging about forty-two to forty-five thousand dollars a month. As far as gross profit margins, we are well ahead of what we expected there too.  We were expecting 60% and most of the stores are pushing 65%.”

CEOCFOinterviews: In closing, what would you like to say to potential shareholders and current investors?