Tandy Leather Factory, Inc. — FY2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; the fourth-quarter figures are unaudited. Tandy sells leather and leathercraft products through wholesale, retail and international stores, and manufactures some products. At year-end it operated 29 wholesale stores, 79 retail stores and three international combination stores. Approximately 16% of annual sales were exports.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $78.3 million | $72.7 million | +7.7% |
| Gross profit / margin | $49.3 million / 63.0% | $45.9 million / 63.1% | Margin down 0.1 percentage point |
| Operating income | $11.3 million | $9.1 million | +23.2% |
| Net income | $7.3 million | $5.6 million | +29.8% |
| Diluted EPS | $0.71 | $0.55 | +$0.16 |
| Cash from operations | $7.5 million | $1.9 million | +$5.6 million |
Operating expenses were $38.1 million, up 3.5% year over year; they declined to 48.6% of sales from 50.6%. Annual net margin was approximately 9.3%, versus 7.7% in 2012. Interest expense was $207,000, compared with $241,000; income tax expense was $4.0 million, and the effective tax rate was 35%.
Fourth quarter: Sales were $21.55 million versus $20.64 million in Q4 2012 (+4.4%); gross profit was $13.78 million versus $13.20 million (+4.4%); net income was $2.49 million versus $2.20 million (+13.0%). Diluted EPS was $0.24 versus $0.22.
Segments: Retail Leathercraft sales rose 10.3% to $47.0 million and operating income was $6.0 million. Wholesale sales rose 2.0% to $27.4 million; store sales increased 3.8%, while national-account sales fell 24.9% as the company discontinued certain low-margin products. International sales rose 20.0% to $3.9 million, and segment operating income improved to $400,000 from a $23,000 loss.
Financial position, liquidity and cash flows
At December 31, 2013, cash was $11.1 million, inventory $26.3 million, current assets $40.5 million and current liabilities $8.2 million. The current ratio was 4.96 and quick ratio 1.45. Total assets were $56.4 million and shareholders’ equity $44.6 million. Long-term debt, including current maturities, was $2.60 million, down from $3.11 million; the company reported no revolver borrowings and $4.0 million of available capacity. The term loan bears fixed interest of 7.1% and matures in 2018; the working-capital revolver bears LIBOR plus 2.0% and was extended to June 30, 2014. The company reported covenant compliance.
Operating cash flow was $7.54 million; investing activities used $3.77 million, principally for capital expenditures, and financing activities used $392,000. Capital expenditures were $3.77 million, including completion of the flagship-store building and store relocations and openings. Inventory increased about $438,000, while inventory turnover eased to 3.00 from 3.18. Management attributed the stronger operating cash flow versus 2012 partly to the prior-year inventory build. No dividend was paid in 2013; a $2.5 million special dividend was paid in 2012.
Changes, outlook and risks
- Growth was led by Retail Leathercraft and same-store sales; retail represented 60% of consolidated sales. Management intended to continue gradual domestic expansion, targeting two to three North American openings in 2014 and approximately 100 retail stores over time, subject to economic conditions and available qualified managers.
- Management expected 2014 capital expenditures to be below 2013 levels after completing the flagship building. It believed operating cash flow would fund operations and planned expansion, while noting expansion could be deferred if cash flow weakened. No specific earnings or revenue guidance was provided.
- Management expects national-account sales to continue declining following its product-line decisions. International expansion has no specific timetable and depends on building customer bases at existing locations.
- Key risks include economic weakness and discretionary-spending declines; higher or less available leather and other inputs, which could pressure margins; foreign-currency movements; and execution, hiring and profitability risks from store expansion. The company does not hedge inventory costs or market-sensitive risks.
- A former-store-manager wage-and-hour class action was settled and dismissed with prejudice in June 2013. The company recorded a $993,000 charge in 2012 and a benefit of approximately $312,000 in Q2 2013 for the expected escrow balance; approximately $249,000 was returned in Q1 2014. Payroll taxes of approximately $63,000 were recorded in Q4 2013. Management said other routine litigation was not expected to materially affect results or financial position.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements; it did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether sales growth and profitability persist, particularly in retail, and whether reduced national-account sales affect wholesale performance.
- Whether gross margins can withstand leather-cost and product-mix changes; review inventory levels, turnover and any slow-moving-stock write-downs.
- The June 30, 2014 revolver maturity and any subsequent renewal or change in borrowing availability, alongside term-debt amortization and covenants.
- Actual 2014 store openings, relocation costs and capital spending compared with management’s plans, including international-store performance.
- The final accounting and cash impact of the wage-settlement escrow return and related payroll taxes.