Tandy Leather Factory, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. The company operates wholesale, retail, and international leathercraft businesses.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $16.90 million | $15.93 million | $35.08 million | $31.81 million |
| Gross profit | $10.94 million | $9.85 million | $22.31 million | $19.37 million |
| Operating income | $2.46 million | $1.77 million | $5.02 million | $3.68 million |
| Net income | $1.54 million | $1.08 million | $3.11 million | $2.23 million |
| Diluted EPS | $0.15 | $0.11 | $0.30 | $0.22 |
- Q2 sales rose 6.1%, operating income 39.3%, and net income 43.0% year over year. First-half sales rose 10.3%, operating income 36.3%, and net income 39.8%.
- Gross margin was 64.7% in Q2 versus 61.8% a year earlier; operating margin was 14.6% versus 11.1%. First-half gross margin was 63.6% versus 60.9%, and operating margin was 14.3% versus 11.6%.
- Q2 segment sales: Retail $9.86 million (+10.4%), Wholesale $6.28 million (-2.9%), International $0.76 million (+43.4%). Retail same-store sales grew 9.5%; Wholesale same-store sales grew 4.0%, but National Account sales fell 66.4%. International growth reflected two newer stores while its comparable store’s sales declined 8.2%.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was negative $4.25 million, versus positive $0.53 million in 2011. Inventory increased $9.81 million and was the principal cash use; trade payables and accrued liabilities each increased about $1.4 million.
- Investing cash flow was negative $0.06 million; financing cash flow was negative $2.64 million, including a $2.54 million special dividend and $0.10 million of debt repayment. Cash fell from $10.77 million at year-end to $3.82 million at June 30.
- At June 30, current assets were $36.73 million and current liabilities $9.63 million; the company reported a current ratio of 3.8, down from 4.7 at year-end. Inventory was $29.75 million, up from $19.94 million, and management said it was about 16% above internal target. Annualized first-half inventory turnover was 2.82 times, versus 3.14 times in first-half 2011.
- Long-term debt was $3.21 million, including current maturities; the term note bears 7.1% interest and matures in 2018. Total stockholders’ equity was $34.92 million. A $4 million revolving facility was executed after quarter-end; $0.5 million was outstanding as of August 10, 2012.
Outlook, commentary, and risks
- No numeric earnings or sales guidance was provided. Management expects to fund operations and growth with cash, internally generated funds, and the revolving facility; it cautions that interim results are not necessarily indicative of full-year results.
- Management cited improved Retail sales and margins and lower Wholesale operating expenses. It is prioritizing store sales over National Accounts, where further declines are possible after the company discontinued some lower-margin products.
- Plans include a 23,000-square-foot Fort Worth store building, expected to cost $2.6 million and be completed in Q1 2013. Funding is expected from cash, internal funds, and the revolver. The company also expects to pursue international store expansion, with no specific additional locations or opening dates disclosed.
- Risks include economic weakness and pressure on product margins, inventory management, and international expansion, including foreign-exchange and operating risks. Management reported no interim goodwill impairment indicators.
- A proposed settlement in a former-employees’ wage-and-hour lawsuit remained subject to court approval and class certification. The company said it could not predict liability or estimate a damages range; if approval fails, litigation may proceed.
- Management stated disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated inventory converts to sales without markdowns, and whether inventory turnover improves.
- Whether operating cash flow recovers after the substantial first-half inventory build and the special dividend.
- Utilization, cost, and availability of the revolver, particularly alongside the planned $2.6 million building project.
- Execution and profitability of new international stores and progress on comparable-store sales.
- Court approval, final terms, and potential cost of the wage-and-hour settlement.