Tandy Leather Factory, Inc. — Q1 2014 Form 10-Q
Business context and reporting period: The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Tandy operates wholesale and retail leathercraft businesses in North America and three international stores. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Prior comparable period / year-end |
|---|---|---|
| Net sales | $19.84 million | $19.24 million; up 3.1% |
| Gross profit / margin | $12.72 million / 64.1% | $11.93 million / 62.0% |
| Operating income / margin | $2.97 million / 15.0% | $2.62 million / 13.6% |
| Net income | $1.85 million; diluted EPS $0.18 | $1.59 million; diluted EPS $0.16; net income up 16.9% |
| Operating cash flow | $(1.45) million | $0.50 million provided |
| Capital expenditures | $0.64 million | $0.98 million |
| Cash | $8.95 million | $11.08 million at December 31, 2013 |
| Inventory | $30.53 million | $26.30 million at December 31, 2013 |
| Total debt | $2.55 million; $0.20 million current | $2.60 million at December 31, 2013 |
| Current ratio | 4.9 | 5.0 at December 31, 2013 |
Cash used in operations primarily reflected a $4.23 million inventory build, partly offset by net income and an $0.84 million increase in trade payables. Cash used in investing was $0.63 million, mainly for store fixtures, factory equipment, and computer equipment. Financing cash use was $0.05 million of debt repayments. Total assets were $58.63 million and stockholders’ equity was $46.35 million at quarter-end.
Material changes and management commentary
- Wholesale sales rose 1.4%; operating income increased 35% to $1.37 million. Management attributed stronger gross margin (66.4% versus 61.9%) to a higher mix of retail-customer and non-leather product sales. National-account sales benefited from one-time close-out sales.
- Retail sales rose 3.4%, including 1.9% same-store growth and sales from new stores. Retail operating income fell 2.8% to $1.47 million as higher compensation, occupancy, depreciation, and travel costs more than offset gross-profit growth. The company had 80 North American retail stores at March 31, versus 78 a year earlier.
- International sales rose 11.6% to $1.06 million; operating income was $0.12 million. The segment operated three stores. Management said it did not intend to open new international stores in 2014.
- Inventory turnover was 2.8 times annualized, compared with 3.0 times in Q1 2013 and 3.0 times for full-year 2013. Average collection time improved to 36 days from 40 days.
- The company expects to fund operating and liquidity needs and store growth through cash on hand and internally generated funds. The filing provides no earnings or sales guidance and cautions that quarterly results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Management identified exposure to economic weakness and consumer-spending changes, cost and pricing pressure that could reduce margins, and execution and profitability risks from international operations. It expects foreign-currency exposure to increase as international operations grow.
- A $4 million revolving credit facility had no borrowings at March 31, 2014. It bore interest at LIBOR plus 2% (2.15% at quarter-end) and was due to mature June 30, 2014 following an extension; the filing does not describe a further extension.
- A previously settled wage-and-hour class action required a $993,386 escrow. Payments, including employer FICA, totaled $744,273; the remaining approximately $249,000 was returned to the company in Q1 2014. The case was dismissed with prejudice in June 2013. The company reported no other pending ordinary-course matters expected to materially affect its financial position or results.
- No goodwill impairment indicators were identified in Q1. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the substantial inventory build converts into sales without further weakening inventory turnover or cash generation.
- Whether improved gross margins—especially in wholesale—are sustainable, and whether retail expense growth moderates.
- The status of the $4 million revolving facility after its June 30, 2014 maturity date.
- Execution of management’s plan to fund operations and store growth from cash and internal funds, given the quarter’s operating cash outflow.
- International segment profitability and the effect of foreign-currency movements as the business grows abroad.