Tandy Leather Factory, Inc. — Form 10-K summary
Period clarification: The filing is a comprehensive annual report for the fiscal year ended December 31, 2019, filed June 21, 2021. It includes restated quarterly data for 2018, including the fourth quarter; it is not a standalone 2018 Q4 filing.
Business context and reporting period
Tandy sells leather and leathercraft supplies through company-owned stores and websites and manufactures some kits and leather products. At December 31, 2019, it operated 115 stores: 103 in the U.S., 11 in Canada and one in Spain. Since January 1, 2019, the company reports as one operating segment.
The 10-K restates 2018 and 2017 annual financial statements and certain 2018 and first-quarter 2019 interim results. The auditor issued an unqualified opinion on the financial statements, while noting the restatement and adoption of lease accounting. The auditor did not audit the effectiveness of internal controls.
Financial results and liquidity
| Metric | 2019 | 2018 restated | Change / context |
|---|---|---|---|
| Net sales | $74.9 million | $83.2 million | Down 10.0% |
| Gross profit / margin | $42.0 million / 56.0% | $50.9 million / 61.2% | Margin down 5.2 percentage points |
| Operating income (loss) | $(2.6) million | $6.0 million | Moved to an operating loss |
| Net income (loss) | $(1.9) million; $(0.21) per share | $4.4 million; $0.48 per share | Moved to a net loss |
| Cash from operations | $10.5 million | $7.8 million | 2019 included $9.3 million from inventory reduction |
| Cash and short-term investments | $25.1 million at year-end | $24.1 million cash at year-end | 2019 included $9.2 million in short-term U.S. Treasuries |
| Borrowings | No debt at year-end | $9.0 million at year-end | 2019 repaid $9.0 million of debt |
2019 cash declined by $8.2 million to $15.9 million, in part because the company invested in short-term Treasuries and repaid debt. At December 31, 2019, current assets were $52.5 million and current liabilities were $12.2 million. Operating lease liabilities totaled $14.5 million; these are lease obligations, not borrowings. The company reported $10.9 million of cash at March 31, 2021 and said it expected cash and operating cash flow to fund operations and obligations through 2021, subject to pandemic uncertainty.
Restated 2018 Q4: Net sales were $24.6 million, gross profit was $14.1 million and net income was $1.1 million. The filing provides these quarterly figures but does not give a direct Q4 year-over-year analysis in the supplied text.
Material changes and management commentary
- 2019 sales fell $8.3 million. Management attributed about $1.7 million of the decline to store closures, exiting certain third-party online marketplaces, making the Leathercraft Library free and ending wholesale pricing clubs. The remaining decline was primarily associated with fewer promotions under a new pricing strategy, inventory out-of-stocks and the transition of commercial customers to a new sales model. Same-store sales declined 8.9%.
- Gross margin contracted due to lower pricing on key items, changes in product and customer mix, and a $0.6 million increase in inventory write-down reserves. Average unit retail declined 5.5%.
- Management reduced adjusted operating expenses by $2.7 million, excluding restatement and CFO-transition costs, through savings including store closures, lower payroll and marketing costs. The filing identifies adjusted expenses as a non-GAAP measure.
- The company recorded a $1.0 million goodwill impairment in 2019, eliminating its remaining goodwill. Store impairment expense was less than $0.01 million in 2019, compared with $0.3 million in 2018.
- COVID-19 response in 2020 included temporarily closing all stores, furloughing 406 employees, reducing salaries and discretionary spending, seeking vendor payment extensions and negotiating rent relief. Eight stores were permanently closed in the second quarter of 2020; by the third quarter all remaining 106 stores had reopened. U.S. web fulfillment shifted to the Fort Worth distribution center.
Restatement, risks and contingencies
- Prior statements were found unreliable due to errors involving inventory costing and reserves, warehouse cost capitalization and classification, sales returns, gift cards, taxes, foreign currency, lease accounting and other items. Restatement increased 2018 net income by $2.4 million and reduced 2017 net income by $2.0 million. The company said inventory errors might affect earlier periods, but it did not plan to amend other earlier reports.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2019 because of material weaknesses. Remediation included new accounting personnel, a new ERP system and process documentation; the point-of-sale system integration and other remediation work remained ongoing.
- The company was delinquent in SEC filings, and Nasdaq suspended trading in August 2020 and formally delisted the stock in February 2021. Shares traded on OTC Link as TLFA. Re-listing was an intention, not an assurance.
- The company self-reported accounting matters to the SEC and was cooperating with an investigation. It described an agreement in principle for a $0.2 million penalty, subject to final documentation and SEC approval. A related shareholder class action was withdrawn in April 2020; additional proceedings remained possible.
- COVID-19, discretionary consumer demand, sourcing and shipping disruption, leather and other input costs, tariffs, foreign currency, store leases and execution of the transformation strategy were identified risks. The filing estimated approximately $1.1 million of 2020 impairment charges, primarily for certain stores’ property, equipment and lease assets.
Important facts for investors to verify
- Review the restated 2018 quarterly figures and the detailed restatement footnote; previously issued statements should not be relied upon.
- Check subsequent filings for updated financial results, cash levels, liquidity, lease commitments and the status of any remaining debt or credit facilities.
- Confirm whether internal-control weaknesses were remediated and whether the new ERP and point-of-sale systems operated effectively.
- Verify the final disposition and payment of the proposed SEC penalty, and whether any further legal or regulatory matters arose.
- Assess post-2019 sales, margins, inventory availability and store/e-commerce performance, as the filing’s stated outlook was qualified by substantial pandemic uncertainty.
- Confirm current trading venue and any progress toward relisting; Nasdaq approval was not assured.