Tandy Leather Factory, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The filing was signed June 21, 2021, as part of the company’s effort to become current with SEC filings. Financial statements are unaudited; comparable 2018 figures are restated.
Business context
Tandy sells leather and leathercraft products through company-owned stores and e-commerce, and manufactures selected products. It operated 116 stores at June 30, 2019: 104 in the U.S., 11 in Canada and one in Spain. The company reported as a single segment in 2019.
Financial performance
- Second-quarter revenue: $17.2 million, down 10.4% from restated $19.2 million. Gross profit was $9.4 million, down 23.4%; gross margin fell to 54.5% from 63.8%. Operating expenses were $10.6 million, approximately flat, resulting in an operating loss of $1.25 million versus operating income of $1.58 million. Net loss was $876,000, or $0.10 per diluted share, compared with net income of $1.16 million, or $0.13 per share.
- First-half revenue: $38.1 million, down 3.9% from restated $39.7 million. Gross profit was $21.6 million, down 13.3%, and gross margin was 56.7% versus 62.8%. Operating income declined 73.4% to $966,000. Net income was $644,000, or $0.07 per diluted share, compared with $2.67 million, or $0.29 per share.
- Cash flow: First-half operating cash flow was $5.70 million, versus $1.72 million in restated 2018. The 2019 result included a $7.18 million cash source from lower inventory. Investing used $9.05 million, mainly reflecting $10.68 million of Treasury purchases net of $1.68 million of investment sales. Financing used $9.69 million, including $8.97 million of debt repayment and $724,000 of share repurchases.
- Liquidity and debt: At June 30, 2019, cash and cash equivalents were $11.27 million and short-term investments were $9.05 million; total current assets were $50.26 million and current liabilities $8.43 million. Inventory was $26.19 million, down from restated $33.30 million at year-end 2018. Bank debt was zero after repayment in February 2019. Operating lease liabilities totaled $16.20 million, of which $3.99 million was current.
- Other metrics: Stockholders’ equity was $58.62 million. First-half effective tax rate was 26.6%, compared with 29.2% in restated 2018.
Material changes and management commentary
- Management attributed sales declines to store closures, changes in promotional timing and pricing, out-of-stocks, and weaker commercial-customer sales during the transition to a new Commercial Program.
- Management cited product and customer mix, lower pricing on key items, higher freight costs, promotions and clearance discounts as factors reducing gross margin.
- In 2019, the company simplified pricing and launched a commercial-customer program with dedicated sales representatives, volume pricing and direct shipping from its Fort Worth warehouse. Management also described investments in its website, product quality, staffing, systems and processes.
- The company adopted the lease accounting standard in January 2019, recording $17.6 million of lease assets and $18.1 million of lease liabilities at adoption. It recorded a $362,000 after-tax cumulative accounting adjustment to equity related to adoption.
Restatement, risks and outlook
- Restatement and controls: The company said previously issued financial statements for 2016–2018 and the first quarter of 2019 should no longer be relied upon. Identified errors included inventory valuation and costing, warehousing-cost classification, inventory reserves, sales-return and gift-card accounting, lease calculations, tax items, foreign-currency accounting and accrued liabilities. Management concluded disclosure controls and internal control over financial reporting were ineffective as of June 30, 2019 because of material weaknesses. Remediation included a new ERP system, accounting-process changes and staffing improvements; remediation was not complete as of this reporting date.
- Credit facilities: The company disclosed that its bank cancelled its promissory notes in April 2020 after it could not provide required financial statements and compliance certificates amid filing delays. It reported no outstanding borrowings at cancellation and no lines of credit outstanding as of the filing.
- Regulatory and listing matters: The company reported an SEC investigation into historical accounting practices and discussions toward a possible negotiated resolution, including a proposed $200,000 penalty subject to final documentation and SEC approval. Its shares were suspended from Nasdaq in August 2020 and formally delisted in February 2021; the company said it intended to seek relisting after becoming current with filings. A stockholder class action relating to the restatement was withdrawn in April 2020; the company noted further litigation remained possible.
- Subsequent COVID-19 context: The filing says the pandemic led to temporary closure of all stores in April 2020, significant sales declines in the second and third quarters of 2020, workforce furloughs and cost-reduction measures. Eight stores were permanently closed in 2020. These are subsequent-period events, not results for the 2019 quarter. No specific financial guidance for 2019 is provided.
Investor facts to verify
- Review the restatement footnote and determine the effect and scope of corrections across affected periods; the filing identifies multiple accounting-process failures.
- Assess whether the reported margin decline and sales weakness were temporary or structural, including the impact of pricing, freight, inventory availability and the Commercial Program transition.
- Evaluate the sustainability of operating cash flow, given that the first-half 2019 cash inflow benefited materially from inventory reduction.
- Confirm current liquidity, access to financing and lease obligations using subsequent filings; the bank cancelled its facilities after this reporting period.
- Check the final status and financial consequences of the SEC matter, remediation of material weaknesses, and any subsequent effects of the Nasdaq delisting.