Tandy Leather Factory, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with 2021. This is an annual report, not a standalone fourth-quarter report. Tandy is a specialty retailer and manufacturer of leathercraft products, operating 103 stores in the U.S., Canada and Spain, plus websites and a commercial sales division.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $80.3 million | $82.7 million |
| Gross profit / margin | $46.5 million / 57.9% | $47.0 million / 56.9% |
| Operating expenses | $45.1 million | $44.7 million |
| Operating income | $1.4 million | $2.3 million |
| Net income | $1.2 million | $1.4 million |
| Operating cash flow | $1.2 million | $3.7 million |
| Capital expenditures | $0.6 million | $1.0 million |
Basic and diluted EPS were $0.15, versus $0.16 in 2021. Cash and cash equivalents were $8.0 million at year-end, down from $10.2 million. Current assets were $47.3 million and current liabilities $8.9 million. Inventory was $38.2 million, nearly unchanged from $38.1 million. The company had no long-term debt at year-end after repaying its Spanish government-backed loan; operating lease liabilities totaled $10.4 million. The filing reports $51.5 million in stockholders’ equity.
Changes versus 2021
- Sales declined 2.8%, which management attributed to weaker consumer demand amid inflation and uncertainty related to global political, economic and public-health conditions.
- Gross margin rose 1.0 percentage point, to 57.9%, reflecting stronger full-price selling, product and customer mix, and price increases. Gross profit nevertheless fell 1.1% as sales decreased.
- Operating income fell $0.9 million. Operating expenses increased $0.4 million, including a $0.4 million write-off tied to an unsuccessful web-platform project; adjusted operating expenses, a non-GAAP measure, rose $1.4 million.
- Operating cash flow decreased $2.6 million. Cash used for share repurchases was $1.8 million, compared with $2.7 million in 2021; the company also repaid the Spanish loan.
- The company closed four stores and opened one in 2022, ending the year with 103 locations versus 106 a year earlier.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management prioritizes operating-expense and gross-margin management, generating operating cash and income, and selectively investing in profitable growth. It said year-end cash and operating cash flow were expected to fund operations and contractual commitments through 2023, while cautioning that economic conditions could weaken cash flow.
- Management cited inflation, higher labor and occupancy costs, volatile fuel and freight costs, supply-chain disruption and potentially weaker discretionary demand as risks. Other material risks include competition, inventory valuation and obsolescence, store leases, dependence on the Fort Worth distribution and manufacturing center, cybersecurity and foreign-currency exposure.
- Internal control over financial reporting and disclosure controls were deemed ineffective at December 31, 2022 because of continuing material weaknesses across the control environment, risk oversight, control activities, information and communication, and monitoring. Remediation is ongoing; the remaining store conversions to the new point-of-sale system were planned for 2023. The auditor audited the financial statements but was not engaged to audit internal controls.
- A $0.9 million out-of-period adjustment corrected unreconciled in-transit inventory and accounts payable in the first three quarters of 2022. It had no effect on 2022 income or retained earnings. Inventory valuation was identified as a critical audit matter; year-end inventory was approximately $38.2 million.
- The company recorded a $0.4 million cost write-off related to an unsuccessful web-platform project and said recovery from the vendor was uncertain. The SEC accounting investigation was settled in 2021, including a $0.2 million company penalty; ordinary-course litigation was not expected to have a material effect.
- On January 3, 2023, the company disclosed a JPMorgan credit facility of up to $5 million, secured by certain assets including cash, inventory and equipment. No amount had been drawn by the filing date. The Board authorized a new $5 million share-repurchase program through August 2024; the full authorization remained available at year-end. No dividends were authorized in 2022.
Important facts for investors to verify
- Progress and independent validation of remediation of the material weaknesses, including whether new systems and controls operate effectively.
- Inventory quality, reserve assumptions and the effect of the $0.9 million correction; inventory valuation depends on overhead allocation and estimates of net realizable value.
- Whether sales, operating cash flow and margins stabilize, and whether the company’s liquidity outlook remains adequate under weaker demand or higher costs.
- Terms, covenant compliance and usage of the $5 million credit facility, and any encumbrance implications from its collateral provisions.
- Share-count reconciliation: the balance sheet reports 8,293,149 shares outstanding at December 31, 2022, while the statement of stockholders’ equity reports 8,293,150.