Tandy Leather Factory, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company operates North American wholesale and retail leathercraft businesses and three international stores.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $19.77 million | $19.70 million | $40.56 million | $39.54 million |
| Gross profit | $12.81 million | $12.78 million | $25.40 million | $25.50 million |
| Operating income | $2.33 million | $2.66 million | $4.72 million | $5.62 million |
| Net income | $1.51 million | $1.77 million | $2.95 million | $3.62 million |
| Diluted EPS | $0.15 | $0.17 | $0.29 | $0.35 |
- Q2 sales rose 0.4%, while net income fell 14.6%. Gross margin was approximately 64.8% versus 64.9%; operating margin was 11.8% versus 13.5%.
- First-half sales grew 2.6%, but net income declined 18.4%. Gross margin was approximately 62.6% versus 64.5%; operating margin was 11.6% versus 14.2%.
- First-half operating cash flow was $5.13 million, compared with a $4.65 million use of cash in 2014. Investing cash outflow was $1.09 million, mainly for store fixtures and computer equipment; financing cash outflow was $3.81 million, entirely debt repayment. Cash increased $0.23 million to $10.87 million.
- At June 30, total debt was $1.83 million, down from $5.64 million at year-end; no revolving-credit borrowing was outstanding. Current assets were $46.84 million and current liabilities $8.54 million; management reported a 5.5 current ratio. Stockholders’ equity was $51.99 million.
Material changes and management commentary
- Q2 retail sales rose 2.7%, including contributions from new stores; same-store sales increased 1.1%. Wholesale sales fell 1.0%, and international sales fell 19% in reported dollars. International sales declined 4% in local currencies, with management citing exchange rates, merchandise delays and local price increases.
- For the first half, retail sales rose 6.1%, while wholesale and international sales declined 1.2% and 14.4%, respectively. Retail’s first-half operating income fell as gross margin declined from 61.3% to 60.0%, primarily due to product and customer mix. Overall operating income was pressured by higher operating expenses and lower gross profit margins.
- The company ended national-account sales in April 2014 after discontinuing products that did not provide acceptable gross margins.
Liquidity, outlook and risks
- The $6 million JPMorgan revolving facility had no balance at June 30 and was secured by the company’s Fort Worth real estate. After quarter-end, on July 6, the maturity was extended from June 30 to September 30, 2015. The separate real-estate term loan bears 7.1% interest and matures in April 2018.
- Management expects to fund operations, liquidity needs and store growth through cash on hand, internally generated funds and occasional revolver borrowings. No quantified earnings or revenue guidance is provided. The company expects to continue opening international stores but gave no specific timeline.
- Disclosed risks include economic conditions, margin pressure, product costs and availability, store expansion and staffing challenges, foreign-exchange movements, and brand protection. Management expects foreign-currency exposure to increase as international operations expand.
- A previously disclosed wage-and-hour class action was settled and dismissed in 2013; settlement payments were completed, and approximately $249,000 of the escrow balance was returned in 2014. The company reported no other pending legal matters expected to materially affect its financial position or results.
Investor facts to verify
- Monitor whether sales growth can translate into improved operating income and margins, particularly given higher expenses and unfavorable product mix.
- Confirm the revolving facility’s status and any subsequent extension or refinancing beyond September 30, 2015.
- Track international performance, foreign-exchange effects, and retail store productivity as expansion proceeds.
- Review the company’s inventory levels and turnover, as well as the sustainability of operating cash generation.