Tandy Leather Factory, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. The company sells leathercraft supplies through North American wholesale and retail stores and three international stores.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $19.42 million | $18.52 million | $58.96 million | $56.74 million |
| Gross profit | $12.17 million | $11.70 million | $37.67 million | $35.55 million |
| Operating income | $2.46 million | $2.41 million | $8.08 million | $7.37 million |
| Net income | $1.63 million | $1.56 million | $5.25 million | $4.78 million |
| Diluted EPS | $0.16 | $0.15 | $0.51 | $0.47 |
- Q3 sales rose about 5%, net income 4.3%, and operating income 2%. For the nine months, sales rose about 4%, net income 9.9%, and operating income 10%.
- Calculated consolidated gross margin was approximately 62.7% in Q3 versus 63.2% a year earlier, and 63.9% for the nine months versus 62.7%. Calculated operating margin was approximately 12.7% versus 13.0% in Q3 and 13.7% versus 13.0% for the nine months.
- Nine-month operating cash flow was negative $7.62 million, compared with positive $1.34 million in 2013, primarily reflecting a $13.06 million inventory increase. Investing cash use was $1.69 million; financing provided $3.10 million. Cash ended at $4.87 million, down from $11.08 million at year-end 2013.
- Inventory was $39.37 million, up $13.06 million since year-end. Annualized inventory turnover was 2.4 times versus 2.7 times for the comparable 2013 period.
- At September 30, total debt was $8.19 million: $6.00 million outstanding on the revolving facility and $2.19 million on the real-estate term note. Cash was $4.87 million. Current liabilities were $14.08 million and current assets $47.54 million; the reported current ratio was 3.4, down from 5.0 at year-end.
- Stockholders’ equity was $46.79 million, compared with $44.62 million at December 31, 2013. The company paid a one-time $0.25-per-share dividend, totaling approximately $2.55 million.
Material changes and operating drivers
- Retail Leathercraft sales increased 8.5% in Q3 and 6.8% for the nine months; comparable-store sales rose 6.2% and 4.9%, respectively. Retail operating income fell about 6% in Q3 and 2% for the nine months, as expenses grew faster than sales; Q3 gross margin also declined from 60.7% to 59.4%.
- Wholesale Leathercraft sales declined 2.8% in Q3 and 1.8% for the nine months, in part because the company ended certain national-account sales after discontinuing products with unacceptable gross margins. Wholesale same-store sales increased 3.1% in Q3 and 1.8% for the nine months; nine-month operating income improved 22%.
- International Leathercraft sales increased 14.6% in Q3 and 10% for the nine months. Improved gross margins contributed to higher segment operating income; advertising and compensation costs also increased.
- The $6 million revolver was drawn during the period. Its limit had been increased from $4 million and maturity extended to June 30, 2015. It bears interest at LIBOR plus 2% (2.24% at quarter-end) and is secured by the company’s Fort Worth real estate. The separate term note bears 7.1% interest and matures in 2018.
Outlook, risks and unusual items
- Management expects inventory to return to a more normal $32–33 million range entering 2015. It said operating and liquidity needs, including store growth, are expected to be funded by cash balances, internally generated funds, and the revolving facility. No specific earnings or revenue guidance is provided.
- Management cited economic and consumer-spending conditions, pressure on product margins and input costs, and execution and currency risks from international expansion. It expected foreign-exchange exposure to increase as international operations grow. No new international stores were planned for 2014.
- Foreign-currency translation reduced nine-month comprehensive income by $631,301; accumulated other comprehensive income turned to a loss of $543,052. This is distinct from net income.
- The company closed its Chattanooga wholesale store on October 31, 2014, after quarter-end, and anticipated less than $10,000 in fourth-quarter closing expenses.
- A previously disclosed wage-and-hour class settlement was completed; $744,273 was paid from escrow and approximately $249,000 was returned to the company in Q1 2014. Management said other ordinary-course litigation was not expected to materially affect financial position or results.
- Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether inventory growth converts into sales and cash, and whether inventory can return to management’s targeted $32–33 million range.
- Revolver repayment and refinancing plans ahead of its June 30, 2015 maturity, alongside the impact of lower cash and higher short-term debt on liquidity.
- Retail segment expense growth and margins, and the sustainability of wholesale and international segment improvements.
- Foreign-exchange effects and the company’s stated risks as international operations expand.
- The post-quarter Chattanooga closure costs and any material developments in legal or other contingencies.