Tandy Leather Factory, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. The company sells leather and leathercraft products through wholesale, retail, and international operations.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $20.79 million | $19.84 million | +4.8% |
| Gross profit | $12.58 million | $12.72 million | -1.0% |
| Gross margin | 60.5% | 64.1% | -3.6 percentage points |
| Operating income | $2.39 million | $2.97 million | -19.5% |
| Net income | $1.44 million | $1.85 million | -22.1% |
| Diluted EPS | $0.14 | $0.18 | Down $0.04 |
| Operating cash flow | $3.51 million | $(1.45) million | Improved |
Operating margin was 11.5%, versus 15.0% in Q1 2014; net margin was 6.9%, versus 9.3%. The filing attributes the operating-income decline primarily to lower gross margin, as sales mix shifted toward leather, the company’s lowest-margin product category.
Segments and material changes
- Retail Leathercraft: Sales rose 9.6% to $13.11 million. Same-store sales increased 7.7%; the segment had 82 stores versus 80 a year earlier. Operating income fell 4.7% to $1.40 million as gross margin declined to 59.9% from 62.7%, partly offset by higher sales.
- Wholesale Leathercraft: Sales declined 1.4% to $6.73 million, while same-store sales rose 5.9%. Operating income fell 31% to $952,000; gross margin decreased to 62.0% from 66.4%. The segment no longer had national-account sales following the group’s elimination in April 2014, partly reflecting the discontinuation of products with inadequate margins.
- International Leathercraft: Sales declined 9.8% to $954,000, but increased 3% in local currencies, according to management. Currency movements reduced reported results; operating income fell to $34,000 from $121,000.
Cash, debt, and liquidity
- Cash was $9.93 million at March 31, down from $10.64 million at year-end 2014. Operating activities provided $3.51 million; investing used $675,000, mainly for store fixtures; financing used $3.54 million, including repayment of $3.5 million drawn on the revolving facility at year-end.
- Total debt was $2.09 million, compared with $5.64 million at December 31, 2014. The $6 million revolving facility had no balance at quarter-end and was scheduled to mature June 30, 2015. The remaining term note carries a 7.1% rate and matures April 30, 2018.
- Current assets were $42.89 million and current liabilities $6.33 million; management reported a current ratio of 6.8, up from 4.5 at year-end. Inventory decreased $2.47 million to $30.41 million; annualized inventory turnover was 2.6 times, down from 2.8 times in Q1 2014.
- Total assets were $59.64 million, down from $62.87 million at year-end; stockholders’ equity was $49.96 million, up from $49.12 million.
Outlook, risks, and other items
- No quantitative earnings or sales guidance was provided. Management expects to fund operations, liquidity needs, and store growth with existing cash and internally generated funds. It said it did not intend to open new international stores in 2015.
- Risks cited include economic conditions, margin pressure, product cost or availability, international expansion, store openings and staffing, intellectual-property protection, foreign-exchange movements, and potential brand damage. Management expects foreign-currency exposure to increase with international expansion.
- Foreign-currency translation reduced comprehensive income by $644,456 in Q1 2015, compared with a $129,408 reduction in Q1 2014. The company also reported no goodwill impairment indicators in Q1.
- The company adopted updated discontinued-operations guidance without material impact. It was evaluating the impact and adoption method for the new revenue-recognition standard, effective for it in periods beginning after December 15, 2016.
- A previously settled wage-and-hour class action is described; the settlement was paid from an escrow account, with the remaining balance returned in Q1 2014. Management reported no other pending legal matters expected to materially affect financial position or results.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether sales growth can be sustained while recovering gross margin, particularly given the product mix and continuing margin declines in wholesale and retail.
- The status and renewal terms of the $6 million revolving credit facility, whose stated maturity was June 30, 2015.
- Whether inventory turnover and foreign-exchange effects improve, and how currency exposure affects international performance and equity.
- The future effects of store investment, operating-expense growth, and adoption of the new revenue-recognition standard.