Tandy Leather Factory, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. The company operates as a single segment, selling leather and leathercraft products through 104 stores, websites, and commercial accounts.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $19.1 million | $19.3 million | $58.0 million | $59.2 million |
| Gross profit | $11.6 million | $11.1 million | $34.0 million | $34.6 million |
| Gross margin | 60.8% | 57.5% | 58.7% | 58.3% |
| Operating income | $976,000 | $11,000 | $1.1 million | $1.7 million |
| Net income (loss) | $723,000 | $(16,000) | $779,000 | $1.3 million |
| Diluted EPS | $0.09 | $0.00 | $0.09 | $0.15 |
For the quarter, sales fell 1.2% year over year while gross margin improved 3.3 percentage points. Management attributed the margin improvement to product and customer mix and stronger full-price selling. Nine-month sales declined 2.2%; operating income fell 37.1%, as operating expenses were broadly flat despite lower sales and higher adjusted expenses.
Cash flow, balance sheet, and capital allocation
- Cash and cash equivalents were $3.05 million at September 30, down from $10.16 million at year-end 2021. Nine-month operating cash flow was negative $3.96 million, compared with negative $2.03 million in 2021.
- Inventory increased to $42.31 million from $38.08 million at year-end. Management cited a $4.5 million inventory investment as the principal operating cash use.
- Investing cash outflow was $825,000, primarily for system implementations. Financing cash outflow was $2.20 million, including $1.8 million to repurchase shares and repayment of the Spanish loan.
- The $388,000 Banco Santander loan was fully repaid in June; no long-term debt remained at quarter-end. Lease liabilities remained: $2.9 million current and $7.5 million non-current for operating leases, plus $22,000 for finance leases.
- Current assets were $48.31 million and current liabilities $11.18 million. Total assets were $70.23 million and stockholders’ equity $50.66 million.
- The company repurchased 359,500 shares in April for $1.8 million in a private transaction. A new $5 million repurchase authorization runs through August 2024; the full amount remained available at quarter-end.
Outlook, risks, and notable matters
- No specific financial guidance or forecast is provided. Management said inflation, volatile fuel prices, labor-market tightness, supply-chain disruption, higher occupancy and other costs, and weaker discretionary demand were weighing on sales and could adversely affect future performance. Management also cited uncertainty related to the war in Ukraine and COVID-19 effects.
- The company closed two California stores in 2022 and opened none during the first nine months. It had 104 stores at quarter-end, versus 106 a year earlier.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2022 because of material weaknesses involving the control environment, risk oversight, control activities, information and communication, and monitoring. Remediation includes staffing, ERP and point-of-sale system work, process documentation, and control testing; 12 stores remained to be converted to the new POS system.
- The company disclosed it had not performed a formal cybersecurity risk assessment or documented related internal controls. Ordinary-course litigation was not expected to have a material effect. The SEC investigation into historical accounting practices was settled in 2021, including a $200,000 company penalty.
- Foreign-currency translation reduced comprehensive income by $441,000 in Q3 and $629,000 for the nine-month period.
Key facts for investors to verify
- Whether sales and demand stabilize, and whether the improved quarterly gross margin can be sustained.
- Whether inventory levels convert to sales and operating cash flow, given the significant cash decline and negative operating cash flow.
- Progress in hiring qualified finance staff and remediating material weaknesses, including completion of POS conversion and effectiveness testing.
- Cash needs and capital allocation under the new repurchase authorization, alongside ongoing lease obligations.
- Potential effects of inflation, labor and supply costs, foreign exchange, and customer demand on future results.