Tandy Leather Factory, Inc. — Form 10-Q Summary
Business context and reporting period
For the quarter and six months ended June 30, 2014. Tandy operates wholesale, retail and international leathercraft businesses. At quarter-end it had 29 wholesale stores, 80 North American retail stores and three international stores.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $19.70 million | $18.97 million | $39.54 million | $38.21 million |
| Gross profit | $12.78 million | $11.92 million | $25.50 million | $23.85 million |
| Income from operations | $2.66 million | $2.35 million | $5.62 million | $4.97 million |
| Net income | $1.77 million | $1.63 million | $3.62 million | $3.22 million |
| Diluted EPS | $0.17 | $0.16 | $0.35 | $0.32 |
- Sales grew 3.9% in Q2 and 3.5% in the first half; first-half operating income rose 13.2% and net income rose 12.6% year over year.
- Gross margin was approximately 64.9% in Q2 and 64.5% in the first half, compared with 62.8% and 62.4%, respectively, in 2013. Operating margin was approximately 13.5% in Q2 and 14.2% in the first half.
- First-half operating cash flow was negative $4.65 million, versus positive $2.23 million in 2013, principally reflecting a $9.70 million inventory increase. Investing cash outflow was $0.93 million; financing provided $1.90 million. Cash declined $3.68 million to $7.40 million.
- Inventory was $36.00 million, up $9.70 million from year-end, partly because new catalog products arrived earlier than usual. Annualized inventory turns fell to 2.5 from 2.9 in the first half of 2013.
- At June 30, total debt was $4.49 million, including $2.25 million drawn on the revolving line. The revolver’s limit was increased to $6 million and maturity extended to June 30, 2015. The company disclosed a further $3 million draw on August 5, leaving $750,000 available.
- Current assets were $46.67 million and current liabilities $13.76 million; the reported current ratio was 3.4, down from 5.0 at year-end. Total assets were $62.74 million and stockholders’ equity $45.81 million.
Material changes and management commentary
- Retail sales increased 8.5% in Q2, including 6.6% same-store growth and sales from four newer stores. Wholesale sales declined 4.0%; the company ended sales to national-account customers in April after discontinuing products it considered insufficiently profitable. International sales rose 4.2% in Q2.
- Retail operating expenses grew faster than sales, including higher compensation, rent, depreciation and advertising, partly due to newer stores. Wholesale operating income improved as higher-margin customer and product mix lifted gross margin and expenses declined.
- The board authorized a one-time $0.25-per-share dividend, totaling approximately $2.5 million, paid August 8, 2014. Management says future dividends will depend on earnings, cash flow, capital needs, liquidity and other conditions.
- Management expects to fund operations and store growth with cash, internally generated funds and occasional revolver borrowings. It did not provide numerical earnings or sales guidance. The company does not intend to open international stores in 2014, though it expects future international expansion.
Risks, contingencies and unusual items
- Management cites economic conditions and consumer spending, pressure on product margins and costs, and challenges and foreign-exchange exposure from international expansion as risks. It expects foreign-currency risk to increase with international operations.
- The company’s former-employee wage-and-hour lawsuit settlement was approved and dismissed with prejudice in 2013. The claims administrator paid $744,273 from the escrow; approximately $249,000 was returned to the company in Q1 2014. The company denies wrongdoing. Management says other ordinary-course litigation is not expected to materially affect results or financial position.
- No goodwill impairment indicators were identified in the first half. Management reported disclosure controls effective at a reasonable assurance level and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the large inventory build converts into sales without markdowns or further weakening inventory turnover.
- The effects of ending national-account sales and whether improved wholesale margins can be sustained.
- Cash and borrowing needs following the dividend, the August revolver draw and the $750,000 remaining availability.
- Store-level returns and expense trends, particularly for newer retail locations, and the company’s plans for international expansion.
- Any changes in foreign-exchange exposure, litigation status or other contingencies since the filing.