Tandy Leather Factory, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results. Tandy Leather is a retailer and wholesale distributor of leather and leathercraft products, operating wholesale, retail, and international segments. At year-end it had 29 wholesale stores, 78 North American retail stores, and three international combination stores.
Financial performance
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $72.72 million | $66.10 million | +10.0% |
| Gross profit | $45.91 million | $40.34 million | +13.8% |
| Operating income | $9.14 million | $7.71 million | +18.7% |
| Net income | $5.60 million | $4.75 million | +17.7% |
| Diluted EPS | $0.55 | $0.47 | +$0.08 |
| Operating cash flow | $1.91 million | $6.57 million | Down $4.66 million |
Gross margin improved to 63.1% from 61.0%; operating margin rose to 12.6% from 11.7%, while net margin increased to 7.7% from 7.2%. Operating expenses rose 12.7% to $36.76 million, including a $993,386 litigation-settlement charge.
Fourth quarter: Sales were $20.64 million versus $18.90 million in Q4 2011; gross profit was $13.20 million versus $11.73 million; net income was $2.20 million versus $1.70 million. The filing does not provide a clear explanation of Q4-specific drivers.
Segments: Retail Leathercraft sales grew 13.8% to $42.62 million, largely on higher same-store sales, and operating income increased to $5.44 million. Wholesale sales rose 1.2% to $26.85 million; store sales grew about 7%, offset by a 44% decline in national-account sales after the company discontinued certain low-margin products. International sales increased to $3.25 million, but the segment recorded a $23,000 operating loss, attributed to the new Australia and Spain stores.
Cash, liquidity, debt, and capital allocation
Year-end cash was $7.71 million, down from $11.19 million including certificates of deposit in 2011. Inventory increased to $25.86 million from $19.94 million, a major use of operating cash; management said year-end inventory met its internal targets and supported broader selection and international growth. Accounts receivable declined to $823,000 from $1.33 million.
Current assets were $35.67 million and current liabilities $7.86 million; the current ratio was 4.54 and quick ratio 1.09. Long-term debt totaled $3.105 million, including $202,500 due within one year; the term loan carries a 7.1% rate and matures in 2018. A separate $4.0 million revolving facility, priced at LIBOR plus 2.0% and maturing June 30, 2013, had no balance outstanding at year-end. The company reported compliance with debt covenants.
Capital expenditures were $2.69 million, including $1.8 million for construction of a flagship-store building. Operating cash flow less capital expenditures was approximately negative $0.77 million. The company paid a $2.5 million special dividend in April 2012 and reported no share repurchases in 2012. Contractual obligations included $8.90 million of future operating lease payments and $3.11 million of term debt principal.
Changes, outlook, and risks
- Retail continued to gain weight in the business, accounting for 58.6% of 2012 sales versus 56.6% in 2011. Management plans to expand the retail chain toward 100–120 stores, but described a conservative pace; it planned one North American opening in 2013, subject to economic conditions and feasibility.
- Management expected 2013 operating cash flow to fund operations and planned expansion, and expected capital expenditures to be lower than in 2012 as the flagship-store construction was due for completion in early 2013. It said expansion could be deferred if cash flow weakened.
- Key risks include economic weakness and discretionary-spending pressure; rising or less available leather and other inputs that could squeeze margins; foreign-currency fluctuations; and execution, staffing, site-selection, and profitability risks from domestic and international store expansion. The company does not hedge inventory costs or use instruments to hedge market risks.
- A proposed settlement of a former-store-managers’ wage lawsuit required a $993,386 escrow, recorded as a 2012 expense. At the filing date, final court approval remained pending after the court requested further communications to potential class members; management expected final approval but could not assure the outcome.
- Other notable items: inventory turnover slowed to 3.18 from 3.29; the special dividend and inventory growth contributed to lower cash. The company reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Whether the wage-settlement receives final court approval and whether any funds are returned from escrow.
- Whether the elevated inventory converts into sales without markdowns or further pressure on cash flow and turnover.
- Whether retail same-store growth and new-store economics support the expansion target, and whether the international stores approach profitability.
- Renewal or replacement of the revolving credit facility that matured June 30, 2013, and continued covenant compliance.
- The impact of leather-cost increases, currency movements, and national-account sales declines on future margins and revenue.