Tandy Leather Factory, Inc. — Q1 2017 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2017. Tandy sells leathercraft products through company-owned stores and its website. Effective January 1, 2017, it combined its former Wholesale and Retail segments into North America; prior-period segment data was restated, with no effect on consolidated results.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $20.15 million | $20.67 million | Down 2.5% |
| Gross profit / margin | $12.29 million / 61.0% | $12.65 million / 61.2% | Margin down 0.2 percentage points |
| Operating income / margin | $1.74 million / 8.6% | $2.36 million / 11.4% | Down 26% |
| Net income | $1.23 million | $1.52 million | Down 19% |
| Diluted EPS | $0.13 | $0.16 | Down $0.03 |
| Operating cash flow | $0.16 million | $1.07 million | Down $0.92 million |
| Cash and cash equivalents | $16.41 million | $16.86 million at Dec. 31, 2016 | Down $0.46 million |
Capital expenditures were approximately $0.60 million, primarily for store fixtures, moves and remodels, and equipment. Operating cash flow less capital expenditures was approximately negative $0.45 million.
At March 31, 2017, total assets were $71.27 million and stockholders’ equity was $55.33 million. Current assets of $53.76 million compared with current liabilities of $7.79 million; management reported a 6.9 current ratio. Inventory was $34.38 million, up $1.20 million from year-end. Debt outstanding was $7.37 million, with $1.08 million classified as current maturities; capital lease obligations included $72,686 due in 2017. The company reported approximately $7.6 million unused on its $15 million stock-purchase credit line.
Material changes and management commentary
- Sales declined primarily because of lower volumes in January and February; March showed slight improvement. North America sales fell 2.6%, including a 2.3% decline in same-store sales. International sales fell 1.6%.
- Operating income decreased as lower sales and gross profit combined with higher operating expenses. North America’s gross margin edged down to 61.1%, while International’s margin fell to 58.1%, which management attributed primarily to UK currency effects making products more expensive.
- North America operating expenses rose 2.0%, with personnel, occupancy and selling costs associated with new stores and management investments among the cited increases. International operating expenses rose approximately $61,000, including higher personnel and advertising costs.
- Operating cash flow was lower than the prior-year quarter, reflecting working-capital movements, including increased inventory and payments of 2016 bonuses. Cash flow from financing was zero; the prior-year quarter included borrowing and share repurchases.
Outlook, risks and contingencies
- Management said it expects sales to improve as the year progresses and plans to continue domestic expansion. It described a long-term goal of approximately 150 North America stores, compared with 111 at year-end 2016; as of May 3, 2017, the segment operated 113 stores. The company had reopened its Harrisburg store and opened a new Allen, Texas store during 2017, and expected several more North America openings. It did not intend to open International stores in 2017.
- The company expects to fund operations, liquidity needs and store growth from existing cash and internally generated funds. It provided no specific revenue or earnings guidance.
- Risks cited include economic conditions, margin pressure, product cost or availability, execution of expansion and hiring, foreign exchange, IT or data-security disruptions, distribution-center interruptions, and brand damage. Management expected foreign-currency exposure to increase with international expansion.
- Debt agreements require a funded-debt-to-EBITDA ratio no greater than 1.5 to 1 and a fixed-charge coverage ratio of at least 1.2 to 1, calculated quarterly on a trailing-four-quarter basis. The filing does not provide the quarter’s covenant calculations.
- Management reported no pending ordinary-course litigation expected to materially affect financial position or results, and no goodwill impairment indicators in Q1. Disclosure controls were assessed as effective at a reasonable-assurance level.
- The company was evaluating new accounting standards for revenue recognition and leases. It expected no material financial impact from revenue recognition adoption, but anticipated recognizing additional assets and liabilities when adopting the lease standard.
Important facts for investors to verify
- Whether sales and same-store sales improved after the weak January and February results, and whether planned store openings deliver profitable growth.
- Whether margins recover, particularly given International’s currency-related gross-margin pressure and higher operating expenses.
- Operating cash generation and inventory levels, including the effects of seasonal stocking and bonus payments.
- Debt covenant compliance, variable-rate interest exposure, and the use or repayment of the stock-purchase credit line.
- The effects of foreign exchange and the upcoming accounting-standard adoptions on reported results and disclosures.