Tandy Leather Factory, Inc. — FY2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011. Tandy Leather retails and distributes leather and leathercraft products through wholesale, retail and international operations, with light manufacturing in Texas. At year-end it operated 29 wholesale stores, 77 retail stores and two international combination stores. Approximately 15% of consolidated sales were exports.
Financial performance and position
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $66.1 million | $59.9 million | +10.4% |
| Gross profit / margin | $40.3 million / 61.0% | $36.3 million / 60.5% | Margin +0.5 percentage points |
| Operating income | $7.7 million | $6.6 million | +16.1% |
| Net income | $4.75 million | $4.16 million | +14.2% |
| Diluted EPS | $0.47 | $0.41 | Up $0.06 |
| Cash from operations | $6.57 million | $2.72 million | Up from prior-year level |
| Capital expenditures | $1.10 million | $1.55 million | Down $0.45 million |
| Cash and certificates of deposit | $11.19 million | $5.92 million | Up $5.27 million |
| Total debt | $3.31 million | $3.51 million | Down $0.20 million |
Current assets were $33.69 million against current liabilities of $7.11 million; the reported current and quick ratios were 4.74 and 1.76. Inventory was $19.94 million, slightly below $20.24 million a year earlier. Stockholders’ equity increased to $34.43 million from $29.76 million. Debt is a fixed-rate 7.1% term loan secured by real estate, maturing in 2018; the company reported compliance with its covenants.
Fourth-quarter 2011 sales were $18.90 million versus $17.31 million in Q4 2010; net income was $1.70 million versus $1.56 million. Quarterly financial data are unaudited.
Material changes and management commentary
- Retail Leathercraft was the main growth driver: sales rose 15.9% to $37.44 million, and segment operating income increased 28.8% to $4.66 million. Management attributed sales growth primarily to higher same-store sales.
- Wholesale sales increased 2.4% to $26.54 million; operating income was $2.80 million, up 4.2%. International sales grew 25.6% to $2.13 million, while segment operating income declined to $248,000 from $331,000.
- Consolidated operating expenses rose $3.02 million, but declined slightly as a share of sales to 49.4% from 49.5%. Employee compensation and benefits, professional fees and licenses were notable expense increases. The higher gross margin was attributed primarily to sales mix, including retail growth.
- Operating cash flow improved substantially from 2010, when cash generation had been reduced by inventory investment. In 2011, cash generation benefited from income, lower inventory and higher accounts payable; accounts receivable collection days lengthened to 42 from 40.
Outlook, risks and contingencies
- Management expected operating cash flow to fund 2012 operations and planned expansion. It anticipated capital expenditures broadly comparable to 2011, with store openings and relocations among the uses. Plans called for one to two new North American stores and one to two international stores in 2012; one store in Spain had opened in January. The retail chain’s longer-term target is 100–120 stores, with timing dependent on economic feasibility and qualified store-management availability.
- Key risks include economic weakness and discretionary-spending pressure, higher leather and other merchandise costs, margin pressure if costs cannot be passed through, and execution, currency and regulatory risks from international expansion. The company does not hedge inventory costs or use financial instruments to hedge currency exposure.
- A proposed settlement was submitted in January 2012 in a former-employees’ wage-and-hour lawsuit. Court approval and class certification were pending; the filing says the potential liability and any damages could not then be estimated. If the proposal is not approved, litigation may proceed.
- The board authorized a special $0.25-per-share cash dividend in February 2012, payable April 2, 2012 to holders of record March 1. No dividend was paid in 2011; the prior $0.75-per-share special dividend was paid in 2010.
- The company reported no off-balance-sheet arrangements and no other pending litigation expected to materially affect financial position or results. Its financial statements received an unqualified audit opinion; the auditor did not attest to internal-control effectiveness, while management reported controls effective.
Most important facts for investors to verify
- Whether sales and margin growth—particularly retail same-store growth—continues, and whether store expansion produces acceptable returns.
- Whether leather and other input-cost increases can be offset through pricing, sourcing or expense management.
- The court’s disposition of the proposed wage-and-hour settlement and any resulting financial obligation.
- Cash generation, inventory levels and collection trends as expansion proceeds; confirm the planned 2012 capital spending and openings against subsequent disclosures.
- Payment of the declared 2012 special dividend and the company’s capital allocation after that payment.