Tandy Leather Factory, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statement amounts are in U.S. dollars; figures below are rounded to millions unless stated otherwise.
Business context
Tandy is a specialty retailer and manufacturer of leather and leathercraft products, selling through company-operated stores, websites, and commercial accounts. It reported one operating segment. The filing says the company operated 105 stores at the filing date; its Q1 comparison states 106 stores at March 31, 2022 and March 31, 2021.
Financial performance and liquidity
- Revenue: $20.50 million, down 4.2% from $21.39 million. U.S. sales were $18.13 million, Canada $1.99 million, and Spain $0.38 million.
- Gross profit and margin: $11.93 million, down 2.1%; gross margin rose to 58.2% from 57.0%. Management attributed the margin improvement partly to product/customer mix and updated inventory cost-capitalization processes, partly offset by higher freight and warehouse-handling costs.
- Operating expenses and earnings: Operating expenses were $11.10 million versus $11.22 million. Operating income fell 14.1% to $0.83 million. Net income was $0.65 million versus $0.75 million; basic and diluted EPS were $0.08 in both periods.
- Cash flow: Operating cash flow was $0.28 million, compared with $2.21 million. Capital expenditures were $0.16 million, primarily for system implementations; cash increased $0.18 million to $10.34 million. Lower accounts payable and accrued liabilities and lease-liability payments weighed on operating cash flow.
- Liquidity and debt: Current assets were $50.30 million and current liabilities $10.86 million. Cash was $10.34 million and inventory $37.75 million. Reported long-term debt, including current maturities, was $0.41 million; the company also reported operating lease liabilities of $11.06 million.
Changes, outlook, and risks
- Management said sales were affected by a changed promotional cadence, lower consumer demand, inflation and other global events, and comparison with prior-year COVID-era stimulus-fueled sales. It warned that elevated labor, freight, product and other costs, and weaker demand, could pressure future results. No quantified earnings or revenue guidance was provided.
- Adjusted operating expenses, a non-GAAP measure excluding restatement-related costs, rose 4.9% to $11.03 million. The filing reported $0.08 million of non-routine items in Q1 2022 versus $0.71 million in Q1 2021.
- Management concluded disclosure controls and internal control over financial reporting were ineffective as of March 31, 2022 because of material weaknesses spanning the control environment, risk oversight, control activities, information and communication, and monitoring. Remediation is ongoing, including hiring, ERP and point-of-sale implementation, and process and control improvements.
- The company’s stock trades on the OTC Pink Market after Nasdaq delisting; it has reapplied for Nasdaq listing but cannot predict if or when approval will occur. The filing also notes a prior SEC accounting investigation, settled in 2021 with a $200,000 company penalty and other non-monetary terms.
- After quarter-end, the company completed a private repurchase of 359,500 shares for $1.8 million on April 22, 2022. The separate $5 million repurchase program had its full authorization remaining at March 31, 2022 and was scheduled to run through July 31, 2022.
Important facts for investors to verify
- Whether sales trends and cost inflation continue to affect demand, gross margin, and operating cash generation.
- Progress in remediating the disclosed material weaknesses and completing the remaining store point-of-sale conversions.
- The liquidity impact of the April 2022 $1.8 million share repurchase and any further repurchases.
- Whether Nasdaq relisting is approved; timing and outcome remain uncertain.