Tandy Leather Factory, Inc. — Q3 2015 Form 10-Q
Business and period: The company sells leather and leathercraft supplies through wholesale and retail stores in North America and international stores. This filing covers the quarter and nine months ended September 30, 2015; results are unaudited. The three segments are Wholesale Leathercraft, Retail Leathercraft, and International Leathercraft.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $19.36m | $19.42m | $59.92m | $58.96m |
| Gross profit | $11.83m | $12.17m | $37.23m | $37.67m |
| Income from operations | $1.86m | $2.46m | $6.58m | $8.08m |
| Net income | $1.11m | $1.63m | $4.06m | $5.25m |
| Diluted EPS | $0.11 | $0.16 | $0.40 | $0.51 |
| Gross margin | 61.1% | 62.7% | 62.1% | 63.9% |
For Q3, sales were down 0.3%, operating income declined 24%, and net income fell 31.8% year over year. For the first nine months, sales grew 1.6%, while operating income decreased 19% and net income decreased 22.6%. Margins shown are calculated from reported amounts.
Cash flow, liquidity, and debt
- Operating cash flow was $4.46m for the first nine months, versus cash used of $7.02m in 2014. Investing activities used $1.34m; financing activities used $5.63m.
- Cash was $7.24m at September 30, down from $10.64m at year-end 2014. Current assets were $46.01m and current liabilities $8.89m; management reported a current ratio of 5.2, compared with 4.5 at year-end.
- Inventory rose $2.18m from year-end to $35.06m. Annualized inventory turnover was 2.4 times for the first nine months, unchanged from the comparable 2014 period.
- Total debt was $3.71m at quarter-end, versus $5.64m at December 31, 2014. The company repaid its JPMorgan term note in September, incurring a $200,000 prepayment penalty included in Q3 interest expense.
- New BOKF/Bank of Texas facilities include a $6m inventory-secured revolver and a separate facility of up to $10m for share repurchases, secured by the company’s Fort Worth property. About $3.7m was drawn under the repurchase facility in September; both facilities carry interest at LIBOR plus 1.85%. The revolver has debt-to-EBITDA and fixed-charge-coverage covenants.
Material changes and management commentary
- Retail Leathercraft drove growth: nine-month sales rose 4.8%, including sales from new stores. Wholesale sales declined 1.8%, and International sales declined 14% in reported dollars.
- Retail’s nine-month operating income fell about $309,000; management cited lower gross margin from customer and product mix. Wholesale operating income fell about $877,000 amid lower gross profit and higher operating expenses. International sales were affected by exchange rates; management said local-currency sales were flat for the first nine months.
- Foreign currency translation reduced comprehensive income by $961,471 for the first nine months. The company also identified foreign exchange as a risk, with exposure expected to increase as international operations expand.
- The company repurchased 528,725 shares in September at an average $7.01 per share under a program authorizing up to 1.2m shares; 671,275 shares remained authorized for purchase at quarter-end.
- Management expects to fund operations, liquidity needs, and store growth from cash, internally generated funds, and occasional borrowings. It gave no quantified earnings or sales guidance and stated no specific timeline for further international store openings.
Risks, contingencies, and unusual items
- Factors that could affect results include economic conditions, margin pressure, product costs or availability, store expansion and staffing, brand and intellectual-property protection, and foreign-currency movements.
- The Q3 interest expense included the $200,000 early repayment penalty. The filing reports no other pending litigation expected to materially affect financial position or operating results; a previously disclosed wage-and-hour settlement was concluded.
- Management said no goodwill impairment indicators were identified during the first nine months of 2015. It cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether weaker operating income and margins persist, and whether retail growth can offset pressure in wholesale and international operations.
- Availability under the new credit facilities, compliance with their covenants, interest costs, and the effect of debt-funded share repurchases on liquidity.
- Inventory levels, turnover, and working-capital movements, including the increase in accounts payable and accrued expenses.
- The extent to which currency movements continue to affect international sales, earnings, and comprehensive income.
- The filing’s discussion of operating cash flow describes inventory as a source in one passage, while the cash-flow statement reports a $2.18m inventory increase as a use of cash; verify the underlying working-capital explanation.