Tandy Leather Factory, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company operates wholesale, retail, and international leathercraft businesses. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $18.63 million | $19.36 million | $58.82 million | $59.92 million |
| Gross profit | $11.64 million | $11.83 million | $37.19 million | $37.23 million |
| Income from operations | $1.54 million | $1.86 million | $6.74 million | $6.58 million |
| Net income | $1.00 million | $1.11 million | $4.34 million | $4.06 million |
| Diluted EPS | $0.11 | $0.11 | $0.46 | $0.40 |
| Operating cash flow | Not separately provided | Not separately provided | $1.88 million | $3.58 million |
Gross margin was approximately 62.5% for Q3 (61.1% prior year) and 63.2% for the nine months (62.1% prior year). Operating margin was approximately 8.3% for Q3 (9.6% prior year) and 11.5% for the nine months (11.0% prior year). Net margin was approximately 5.4% for Q3 (5.7% prior year) and 7.4% for the nine months (6.8% prior year).
Liquidity, debt, and cash flow
- At September 30, cash was $11.45 million, inventory $37.12 million, current assets $52.55 million, and current liabilities $8.74 million. The company reported a current ratio of 6.0, up from 5.7 at year-end 2015.
- Total debt was $7.37 million, compared with $3.71 million at December 31, 2015; capital lease obligations were $145,373. The BOKF facilities bear interest at LIBOR plus 1.85%. The filing reports covenants requiring funded debt to EBITDA of no more than 1.5 to 1 and fixed-charge coverage of at least 1.2 to 1.
- Operating cash flow was $1.88 million; investing activities used $1.37 million, mainly for property and equipment. Financing activities used $22,000, including $3.68 million of share repurchases and approximately $3.66 million of borrowing proceeds. Cash increased $486,000 to $11.45 million.
- Inventory increased $3.54 million from year-end and annualized inventory turns declined to 2.2 from 2.4 in the comparable 2015 period.
Changes versus prior period
- Q3 sales fell 3.8%, operating income fell 17%, and net income fell 10% year over year. Nine-month sales declined 1.8%, while operating income rose approximately 2% and net income rose 6.9%.
- Q3 sales declined in all segments: wholesale 8%, retail 2%, and international 3%. International Leathercraft posted a Q3 operating loss of $49,012, versus operating income of $55,068 a year earlier. Retail operating income was nearly flat; wholesale operating income decreased 31%.
- For the nine-month period, wholesale sales fell 5.4% and retail sales fell 0.3%; international sales rose 2.5%, principally reflecting the additional U.K. store opened in October 2015. Wholesale operating income increased 21%, while retail and international operating income decreased.
- Q3 interest expense was $43,493 versus $228,235 in 2015; the prior-year quarter included a $200,000 prepayment penalty for early repayment of a JPMorgan Chase note. The company repurchased approximately 520,500 shares during the first nine months, funded primarily by BOKF borrowing.
Outlook, risks, and other matters
- No quantitative earnings or sales guidance is provided. Management expects to fund operating needs and store growth with cash and internally generated funds, plans several additional North American stores in the near term, and does not intend to open international stores in 2016 or 2017.
- Management cites risks including economic conditions, margin pressure, product costs or availability, store openings and staffing, protection of intellectual property, foreign exchange fluctuations, and brand damage. It expects foreign-currency exposure to increase with international expansion.
- Management reported no indicators of goodwill impairment in the first nine months of 2016. It stated that no pending ordinary-course legal matters were expected to materially affect financial position or operating results.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weaker Q3 sales and wholesale performance persist, and whether the international segment returns to profitability.
- How inventory growth and slower turnover affect future cash generation, markdowns, and working capital.
- Debt covenant compliance, borrowing costs, and the use and terms of the expanded stock-repurchase facility; the filing reports approximately $7.6 million of unused availability on the share-purchase line at September 30.
- Store-opening performance and expense trends, particularly the costs associated with international expansion and planned North American openings.
- Potential effects of foreign exchange movements and adoption of pending accounting standards, including revenue recognition and lease accounting; management had not completed its lease-standard review.