Tandy Leather Factory, Inc. — Q1 2019 Form 10-Q
Business and period: Specialty retailer and manufacturer of leathercraft products, selling through company-owned stores and its website. This filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. The company began reporting as one segment in 2019 after changing its management structure and deciding to substantially close its international stores.
Financial performance
- Revenue: $20.8 million, up 2.4%. Same-store sales increased 2.8%; management attributed growth partly to a new sewing machine, which generated $0.5 million in sales.
- Profit and margins: Gross profit was $12.45 million, down 3.1%, and gross margin fell to 59.9% from 63.3%. Operating income declined 33.9% to $1.17 million. Net income was $869,000 versus $1.27 million; diluted EPS was $0.10 versus $0.14.
- Costs and taxes: Operating expenses increased 1.9% to $11.28 million. The effective tax rate was 26%, compared with 27%.
- Cash flow: Operating cash flow was $3.04 million, versus $1.13 million. Inventory reductions contributed $3.3 million to Q1 2019 operating cash flow. Investing cash flow was negative $5.01 million, primarily from purchasing $5.0 million of U.S. Treasuries. Financing cash flow was negative $9.68 million, principally reflecting repayment of debt and share repurchases.
- Liquidity and debt: Cash was $12.68 million at March 31, down from $24.07 million at year-end; short-term U.S. Treasuries were $5.0 million. The company repaid its $9.0 million outstanding borrowing in February and reported no debt at quarter-end. A separate $6 million working-capital credit line was undrawn.
- Other balance-sheet items: Inventory fell to $30.56 million from $33.87 million at year-end. Stockholders’ equity was $59.69 million. Adoption of the lease standard resulted in $6.39 million of operating lease assets and $6.77 million of lease liabilities at quarter-end.
Changes, outlook, and risks
- Margin pressure reflected product mix, higher shipping and freight costs, and heavier clearance discounts; the new sewing machine had below-average gross margin.
- Operating expenses included $229,000 of one-time costs related to three store closures and higher share-based compensation, partly offset by savings. Management said expenses could trend higher during the remainder of 2019 as it invests in its growth plan.
- The company closed three underperforming stores in Q1 and planned to close its Manchester store in early June, leaving one international location in Spain. It anticipated evaluating further closures in 2019 and 2020 as leases expire.
- Strategic priorities include restructuring retail management, building a commercial/wholesale sales organization, improving product, promotion and pricing, and managing stores primarily for cash flow. No specific financial guidance was provided.
- Management cited execution of the strategic plan, margin pressure, product costs and availability, lease negotiations, competition, staffing, foreign exchange, IT and data-security disruptions, and distribution-center interruptions as risks. It reported compliance with debt covenants and no pending litigation expected to materially affect financial position or results.
- The company adopted the new lease accounting standard on January 1, 2019. It also repurchased 127,945 shares during the quarter for approximately $715,000; 779,461 shares remained available under the repurchase program.
Investor facts to verify
- Whether revenue growth can continue as store closures proceed and the commercial sales initiative develops.
- Whether gross margin stabilizes after clearance promotions, freight costs, and product-mix effects.
- How planned store closures, lease obligations, and ongoing strategic investments affect costs and cash generation.
- Whether inventory reductions are sustainable without impairing product availability or sales.
- The terms and continuing availability of the undrawn $6 million credit line and the status of the share repurchase program, which was scheduled to end in August 2019.