Tandy Leather Factory, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020, compared with 2019. Although the request identifies “2019 Q4,” this filing reports the full 2020 fiscal year and comparative 2019 results. The 10-K was filed September 2, 2021.
Business context
Tandy is a specialty retailer and manufacturer of leathercraft products, selling through stores, websites and commercial customers. It operated 106 stores at year-end 2020, down from 115 at year-end 2019 after nine permanent closures. In 2020 it centralized U.S. e-commerce fulfillment at its Fort Worth distribution center. The company’s common stock was delisted from Nasdaq in February 2021 and traded OTC under TLFA.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $64.1 million | $74.9 million |
| Gross profit | $36.1 million | $42.0 million |
| Gross margin | 56.3% | 56.0% |
| Operating loss | $6.3 million | $2.6 million |
| Net loss | $4.9 million | $1.9 million |
| Operating cash flow | $(12.5) million | $10.5 million |
| Cash at year-end | $10.3 million | $15.9 million |
- Sales fell 14.5%. Comparable retail-store sales declined 28.3%, while web and commercial sales increased 76.9%. Fourth-quarter sales rose 6.5% year over year.
- Gross margin was nearly unchanged; management cited higher product and shipping costs offset by pricing, inventory bought at pre-pandemic prices and promotional optimization.
- Operating expenses were $41.3 million, including $1.1 million of impairment expense. Adjusted operating expenses, excluding specified restatement and CFO-transition costs, were $37.4 million, a non-GAAP measure.
- Inventory rose to $36.8 million from $24.0 million, using $12.7 million of operating cash. Capital expenditures were $1.3 million. Cash declined by $5.6 million over the year.
- Current assets were $51.0 million and current liabilities $12.9 million. Long-term debt was $446,000, comprising a Spanish government-backed loan at 1.5%; the company had no working-capital credit line outstanding. Operating lease liabilities totaled approximately $12.8 million.
- Cash was $5.9 million at June 30, 2021, versus $10.3 million at year-end 2020. The company repurchased 500,000 shares for $1.7 million in February 2021.
Material changes, outlook and risks
- COVID-19 closures and demand disruption drove significant sales and cash-flow pressure. All stores had reopened by the third quarter of 2020, but later temporary closures and curbside-only operations continued. Management said both stores and e-commerce had been performing above the prior-year levels in the limited period after reopening, while emphasizing uncertainty.
- Management believed existing cash and operating cash flow would be sufficient for operations and obligations through 2021, but warned that further pandemic restrictions could materially worsen cash flow. It was negotiating a future working-capital bank line; no binding financing commitment was disclosed.
- Management expected a 25–27% effective tax rate for 2021. No specific sales or earnings guidance was provided.
- Supply-chain risks included longer lead times, shipping constraints, capacity limits and vendor cost increases across much of the product line. The company had built inventory of key items at 2020 prices.
- The company restated financial statements for 2017, 2018 and the first quarter of 2019 after accounting errors, including inventory-related errors. Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2020 due to material weaknesses; remediation was ongoing. The auditor expressed an unqualified opinion on the 2020 and 2019 financial statements but did not audit internal-control effectiveness.
- In July 2021, the company settled an SEC investigation and paid a $200,000 civil penalty; former senior officers agreed to pay a separate $25,000 penalty. A related shareholder class action was withdrawn in April 2020.
Investor facts to verify
- Confirm the company’s subsequent operating cash flow, cash balance and access to working-capital financing, especially given the inventory build and June 2021 cash decline.
- Track whether internal-control weaknesses are remediated and whether the company files required reports on time; filing delinquency caused the Nasdaq delisting and could affect OTC trading access and liquidity.
- Assess whether sales gains in web and commercial channels can offset store weakness, closures and reduced store count.
- Monitor inventory valuation and sell-through, vendor price increases, freight costs and any resulting margin or markdown pressure.
- Review the status of the Nasdaq relisting application, which management said it intended to pursue after becoming current with required filings; approval was not assured.