Tandy Leather Factory, Inc. — Q1 2016 Form 10-Q
Business and period. The company sells leather and leathercraft supplies through wholesale and retail stores in North America and international combination stores. This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are with December 31, 2015.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $20.67 million | $20.79 million; down 0.6% |
| Gross profit | $12.65 million; 61.2% of sales | $12.58 million; 60.5% of sales |
| Operating income | $2.36 million; 11.4% of sales | $2.39 million; 11.5% of sales |
| Net income | $1.52 million; diluted EPS $0.16 | $1.44 million; diluted EPS $0.14 |
| Operating cash flow | $1.07 million | $3.51 million |
| Cash and current ratio | $11.44 million; 6.5 | Cash was $10.96 million at year-end; current ratio was 5.7 |
Capital expenditures were $607,000, resulting in approximately $489,000 of operating cash flow after capital expenditures. Cash increased $482,000 during the quarter. Lower operating cash flow year over year primarily reflected the $1.47 million reduction in accrued expenses and other liabilities, largely from payment of 2015 manager bonuses; Q1 2015 operating cash flow had also benefited from a $2.47 million inventory reduction.
At March 31, total assets were $65.26 million and stockholders’ equity was $50.30 million. Bank debt was $6.58 million, up from $3.71 million at year-end; current maturities were $823,000. Capital lease obligations totaled $145,000. The company had $11.44 million of cash and reported no balance on its separate $6 million revolving facility. Bank borrowings bear interest at LIBOR plus 1.85% (2.278% at quarter-end). The loan agreements require a funded debt-to-EBITDA ratio no greater than 1.5 and fixed-charge coverage of at least 1.2.
Changes and segment results
- Wholesale Leathercraft sales fell 3.4% to $6.50 million, while operating income rose 18.3% to $1.13 million. Management attributed the improvement to higher gross margin, citing a shift toward higher-margin products.
- Retail Leathercraft sales increased 1.0% to $13.24 million; same-store sales rose 0.3%. Operating income declined 13.4% to $1.21 million, as gross margin fell to 58.1% from 59.9%, partly due to a greater wholesale-customer sales mix.
- International Leathercraft sales declined 2.2% to $933,000 and operating income fell to $22,000 from $34,000. The segment had four stores, including a Manchester store opened in October 2015.
- Consolidated gross profit improved modestly despite lower sales, but operating income declined about 1% as operating expenses increased. Net income rose 5.3%, aided in part by lower interest expense ($23,000 versus $44,000).
Liquidity, outlook, risks, and notable items
The company repurchased 404,423 shares for $2.87 million during the quarter, at an average $7.10 per share. The repurchases were funded primarily by a draw on the BOKF facility intended for share purchases; approximately $3.4 million remained available under that facility at quarter-end. Treasury shares increased, and equity declined from $50.97 million to $50.30 million despite quarterly earnings.
Management expects to fund operating and liquidity needs and store growth with cash balances and internally generated funds. No numerical earnings or sales guidance is provided. The company said it did not intend to open new international stores in 2016, though it expected to continue international expansion in the future.
Disclosed risks include economic conditions, margin pressure, product cost or availability, store expansion and staffing challenges, foreign-currency fluctuations, intellectual-property protection, and brand reputation. Management expects foreign-exchange exposure to increase with international expansion. Foreign-currency translation added $638,000 to comprehensive income in Q1 2016, compared with a $644,000 loss in Q1 2015. Management reported no interim goodwill impairment indicators; it also stated that ordinary-course litigation was not expected to materially affect financial position or results. Disclosure controls were judged effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether sales and same-store sales trends improve, particularly in retail, and whether retail gross-margin pressure persists.
- Compliance with the BOKF debt covenants, remaining availability under the share-purchase facility, and the effect of borrowings on interest expense and liquidity.
- Whether operating cash flow recovers after the bonus-related accrued-liability outflow, and how inventory turnover develops; annualized Q1 turnover was 2.5 times versus 2.6 times in Q1 2015.
- Execution and profitability of international operations, including currency effects and the company’s stated expansion plans.
- The effect of the ongoing repurchase program, which was authorized for up to 1.2 million shares and had 266,852 shares remaining under the program at March 31, 2016.