Tandy Leather Factory, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unless otherwise noted, amounts are in U.S. dollars. Year-over-year comparisons are affected by COVID-related store closures during much of Q2 2020.
Business context
Tandy sells leather and leathercraft products through company-owned stores and e-commerce, and also provides manufacturing and production services. At June 30, 2021, it operated 106 stores: 95 in the U.S., 10 in Canada and one in Spain. Shares traded on OTC Markets as TLFA after Nasdaq delisting in February 2021.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $18.566m | $9.146m | $39.960m | $26.291m |
| Gross profit | $11.281m | $5.243m | $23.467m | $15.109m |
| Gross margin | 60.8% | 57.3% | 58.7% | 57.5% |
| Operating income (loss) | $0.724m | $(2.346)m | $1.689m | $(4.645)m |
| Net income (loss) | $0.540m | $(1.775)m | $1.285m | $(3.513)m |
| Diluted EPS | $0.06 | $(0.20) | $0.15 | $(0.39) |
- Sales increased 103.0% in Q2 and 52.0% in the first half, principally because almost all stores were open in 2021 versus widespread closures in the comparable 2020 periods.
- Management attributed improved gross margin to product/customer mix and more automated inventory-cost allocation, partly offset by higher warehouse handling and freight costs.
- Operating expenses rose 39.3% in Q2 and 16.6% in the first half, mainly from recalling store employees and higher sales-related costs. Adjusted operating expense figures cited by management exclude certain restatement and CFO-transition costs and are non-GAAP.
- Six-month operating cash flow was a use of $2.761m, improved from a use of $11.131m in 2020. Inventory growth used $6.247m of cash; the company also cited lease-liability payments and a federal tax refund as cash-flow factors.
- Cash declined to $5.704m from $10.329m at year-end 2020. Current assets were $52.345m and current liabilities $13.667m. Inventory was $43.675m, up from $36.779m.
- Total assets were $75.914m and stockholders’ equity $52.212m. Reported debt was approximately $0.433m, excluding lease liabilities; operating lease liabilities totaled $11.816m and finance lease liabilities $0.036m. The bank had terminated the company’s $6m and $15m credit facilities in April 2020; no replacement facility is reported.
- Financing cash outflow included a $1.675m repurchase of 500,000 shares. A separate $5m repurchase authorization remained available, subject to its stated conditions.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or cash-flow guidance. Management said stores and e-commerce had seen strong sales, but forecast uncertainty remained.
- COVID-19 and the Delta variant caused intermittent curbside-only operations or temporary store closures; management expected further infections and disruptions. It warned that additional closures or economic and employment effects could materially harm future sales.
- In July 2021, the company settled an SEC investigation into historical accounting practices. The company paid a $200,000 civil penalty; its former CEO and CFO agreed to pay $25,000 each. The filing notes non-monetary settlement terms but does not detail them here.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2021 because of material weaknesses, including deficiencies in oversight, staffing, control activities, information processing and monitoring. Remediation was ongoing, including ERP and point-of-sale implementation and accounting-process improvements.
- The company reported it was not current with required Exchange Act filings in its cover-page checkboxes. It said Nasdaq had delisted the stock and that it intended to reapply after making required filings. The filing was signed December 3, 2021, after the reporting period.
- Management estimated the CARES Act NOL carryback provision would produce a cash tax benefit in excess of $1m; the cash-flow discussion separately identifies a $1m federal tax refund received in the first half.
Important facts for investors to verify
- Whether sales and margins remain strong after accounting for the unusually weak, closure-affected 2020 comparison.
- Inventory levels, sell-through and operating cash flow, given inventory growth and negative first-half operating cash flow.
- Progress in correcting material control weaknesses, completing systems integration and bringing SEC filings current.
- Cash needs and financing alternatives following termination of the bank credit facilities, including lease obligations.
- Effects of ongoing pandemic disruptions and the SEC settlement’s terms and any related obligations.