Tandy Leather Factory, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Tandy sells leather and leathercraft products through company-operated stores and its website; at year-end it operated 115 North American stores and four international stores.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $82.32 million | $82.92 million |
| Gross profit / margin | $52.11 million / 63.3% | $51.71 million / 62.4% |
| Operating expenses | $44.87 million | $41.41 million |
| Operating income / margin | $7.24 million / 8.8% | $10.30 million / 12.4% |
| Net income / diluted EPS | $4.45 million / $0.48 | $6.40 million / $0.69 |
| Cash from operations | $3.02 million | $7.54 million |
| Cash and certificates of deposit | $18.34 million | $16.86 million |
| Debt, including current portion | $7.37 million | $7.44 million |
Current ratio was 8.3, up from 6.5. Inventory rose $4.1 million to $37.3 million, while inventory turnover declined to 2.3 times from 2.5 times. Capital expenditures were approximately $1.69 million. No shares were repurchased in 2017 and no dividends were declared.
Fourth-quarter sales were $24.50 million versus $24.10 million in 2016; net income was $1.67 million versus $2.06 million. The filing attributes $340,782 of additional FY 2017 tax expense to the Tax Cuts and Jobs Act, recorded in the fourth quarter.
Changes and operating drivers
- Annual sales declined 0.7%. North America sales fell 0.6%; same-store sales declined 2.3%, as a 9% drop in non-retail customer sales outweighed a 6% increase in retail sales. New stores contributed about $1.3 million.
- Gross margin improved, mainly reflecting customer and product mix. However, operating expenses increased $3.4 million, including costs for new or reopened stores, the district manager program, higher store-manager salaries, and marketing. These expenses drove lower operating income despite the improved gross margin.
- International sales declined 3.3% to $3.75 million; the segment recorded a $257,000 operating loss, compared with $76,000 of operating income in 2016.
- Operating cash flow fell substantially, with the $4.1 million inventory build and lower earnings among the reported factors.
Outlook, risks and other notable items
- Management’s stated 2020 targets are $87–$90 million in sales and operating margins above 10%. Its strategy includes growing average transaction size, improving underperforming stores, investing in technology, training, product innovation and digital channels, and evaluating the district manager program.
- Management planned two to four North American store openings in 2018 and no international openings that year. It said operating cash flow should fund 2018 operations and growth, with expansion deferrable if cash flow weakens.
- The company has a $6 million inventory-secured credit facility, undrawn at year-end, and a separate share-repurchase facility with $7.6 million unused at year-end. The outstanding $7.37 million borrowing is secured by company real estate; variable-rate debt exposes the company to LIBOR changes. The company reported compliance with debt covenants.
- Key risks include discretionary-spending weakness, leather and other input-cost or supply changes, margin pressure, execution of store growth and sales initiatives, foreign-currency movements, and information-technology or data-security disruptions.
- Tax Act estimates were based on management’s interpretation and could change as calculations are finalized and further guidance is issued. The company expects adoption of the new lease standard in 2019 to materially increase balance-sheet assets and liabilities, with likely insignificant earnings impact.
- The company reported no pending ordinary-course legal matters expected to materially affect its financial position or results. The auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether non-retail demand stabilizes and same-store sales improve, particularly the decline in non-retail average transaction size.
- Whether inventory growth converts to sales and turnover recovers, and whether the related cash-flow pressure persists.
- Whether expense growth moderates and the district-manager and store-expansion investments improve operating margins toward management’s 2020 target.
- Final Tax Act calculations and the continuing effects of the tax-law changes on earnings and cash taxes.
- Debt terms, covenant headroom, variable-rate exposure, and the company’s plans for the repurchase authorization and facilities.