Tandy Leather Factory, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. The report was signed September 2, 2021 and states the company was not current with required SEC filings. Financial amounts below are in millions unless noted.
Business context
Tandy is a specialty retailer and supplier of leather and leathercraft products, selling through company-operated stores, e-commerce, and commercial customers. At June 30, 2020, it operated 106 stores: 95 in the U.S., 10 in Canada, and one in Spain. During Q2, it centralized U.S. web-order fulfillment at its Fort Worth distribution center.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $9.146 | $17.197 | $26.291 | $38.138 |
| Gross profit | $5.243 | $9.370 | $15.109 | $21.615 |
| Gross margin | 57.3% | 54.5% | 57.5% | 56.7% |
| Operating income (loss) | ($2.346) | ($1.247) | ($4.645) | $0.966 |
| Net income (loss) | ($1.775) | ($0.875) | ($3.513) | $0.645 |
| Basic and diluted EPS | ($0.20) | ($0.10) | ($0.39) | $0.07 |
- Sales fell 46.8% in Q2 and 31.1% in the first half year over year. Gross margin improved, but lower sales left gross profit insufficient to cover operating costs.
- First-half operating expenses were $18.676 million, down 9.6%; the period also included $1.078 million of impairment expense. Management reported $17.242 million in adjusted first-half operating expenses after excluding $1.434 million of restatement- and CFO-transition-related costs; this is a non-GAAP measure.
- Cash and cash equivalents were $9.414 million and short-term U.S. Treasury investments were $4.614 million at June 30, 2020. Current assets were $49.382 million versus current liabilities of $10.720 million.
- Operating cash flow was negative $11.131 million for the first half, compared with positive $5.698 million a year earlier. Inventory build-up was a significant use of working capital. Cash declined $6.491 million to $9.414 million.
- Long-term debt was $0.410 million, from a Spanish government-backed COVID-19 loan at 1.5%, with interest-only payments for two years followed by principal and interest payments. The company’s former BOKF credit facilities were terminated in April 2020; there were no borrowings under them at termination. Operating lease liabilities totaled $14.330 million, including current and non-current portions.
Material changes and management commentary
- COVID-19-related closures drove much of the sales decline: all stores were temporarily closed to the public by April 2, 2020, while the company shifted to online-only service. The Fort Worth flagship reopened May 22 with restrictions. Management said all stores had reopened during Q3 2020, though later closures and curbside-only operations remained possible.
- Management cited lower payroll, occupancy, insurance, bonus, and marketing costs as expense reductions. Gross-margin improvement was attributed to product and customer mix, purchasing optimization, and lower freight costs. First-half sales were also affected by store closures, permanent store closures, pricing changes, and out-of-stock conditions on key items.
- The company furloughed 406 employees, about two-thirds of its workforce, reduced corporate salaries, negotiated rent relief and deferrals, and sought longer vendor payment terms. It received $0.05 million of Canadian rent abatements and borrowed $0.410 million under Spain’s COVID-19 loan program. It said it was ineligible for PPP and unable to obtain CARES Act loans while its SEC filings were delinquent.
- Nine stores were permanently closed during 2020, in addition to earlier closures; management cited lease expirations or negotiated terminations and the availability of nearby stores or online sales. No new stores opened in 2019 or 2020.
- No specific financial guidance was provided. Management said future sales remained uncertain and further pandemic-related closures or economic and employment-market effects could materially harm sales. It also described e-commerce and store sales as performing above prior-year levels in the later period discussed in the filing.
Risks, contingencies, and unusual items
- Management concluded disclosure controls and internal control over financial reporting were ineffective as of June 30, 2020 because of material weaknesses. Prior accounting errors had required restatements, including inventory costing, freight and overhead capitalization, sales returns, lease accounting, taxes, and other matters. Remediation efforts included accounting-system and ERP changes, staffing, process documentation, and control redesign; the weaknesses were not fully remediated as of the reporting date.
- Nasdaq suspended trading in the company’s shares in August 2020 because required SEC filings were overdue; the shares later traded OTC as TLFA, and Nasdaq formally delisted them in February 2021. The company said it intended to reapply after becoming current with its filings.
- A shareholder class action related to the restatement was withdrawn in April 2020. The filing reports no other pending ordinary-course litigation expected to materially affect financial position or results. It also discloses a July 2021 SEC settlement: the company paid a $200,000 civil penalty, and its former CEO and CFO agreed to pay $25,000 each.
- The COVID-19 impact triggered long-lived asset impairment reviews; the company recorded $1.078 million of impairment in the first half, primarily for store property and lease assets.
Important facts for investors to verify
- Whether subsequent filings resolved the reporting delinquency and whether the company has made progress toward remediating its material control weaknesses.
- Current cash, short-term investments, operating cash flow, inventory levels, and access to working-capital financing, given the first-half cash outflow and termination of bank facilities.
- Subsequent sales, gross margins, store performance, e-commerce trends, and any further closures or impairment charges after June 30, 2020.
- The status of OTC trading and any Nasdaq relisting application, as well as the terms and remaining availability of the share-repurchase authorization.
- Potential effects of the SEC settlement and any further litigation, tax matters, or other contingencies not quantified clearly in this filing.