Tandy Leather Factory, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. The company operates wholesale, retail and international leathercraft businesses.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $18.52 million | $17.00 million | $56.74 million | $52.08 million |
| Gross profit | $11.70 million | $10.40 million | $35.55 million | $32.71 million |
| Income from operations | $2.41 million | $0.64 million | $7.37 million | $5.66 million |
| Net income | $1.56 million | $0.28 million | $4.78 million | $3.39 million |
| Diluted EPS | $0.15 | $0.03 | $0.47 | $0.33 |
| Operating cash flow | Not separately provided for the quarter | $1.34 million | $(4.70) million |
Sales increased 9% in both the quarter and year-to-date periods. Gross margin was approximately 63.2% in Q3 versus 61.2% a year earlier; nine-month gross margin was approximately 62.7% versus 62.8%. Operating margin increased to approximately 13.0% in Q3 from 3.8%, and to 13.0% year to date from 10.9%.
At September 30, cash was $6.29 million, inventory $29.49 million, and current assets and liabilities were $39.35 million and $8.42 million, respectively; the reported current ratio was 4.7. Total debt was $2.65 million, including $0.20 million current maturities. The $4 million revolving facility was entirely unused and extended to June 30, 2014. Stockholders’ equity was $42.34 million.
Changes and operating trends
- Q3 Retail Leathercraft sales rose 11.9%, including 10.6% same-store growth; Wholesale sales rose 3.8% and International sales rose 13.5%. Year-to-date sales gains were strongest in Retail (+12.8%) and International (+24.2%).
- Management attributed improved retail margins to stronger sales mix from higher-margin retail customers. Wholesale same-store sales increased 4.9% in Q3, while national-account sales fell 11.8%; year-to-date national-account sales declined 28.2%.
- Inventory increased $3.63 million from year-end and was approximately 20% above management’s internal optimal target. Annualized inventory turnover was 2.7 times, compared with 2.8 times for the first nine months of 2012.
- Investing cash outflow was $2.42 million, primarily for construction of the flagship store, which opened in June 2013, plus store fixtures and computer equipment. Cash declined $1.42 million from year-end to $6.29 million.
Outlook, risks and unusual items
The filing gives no numerical earnings or sales guidance. Management expects to fund operations and store growth through cash, internally generated funds and the revolving facility, and expects to open additional international stores, with locations and timing undetermined. It identifies economic conditions and consumer spending, margin pressure from input costs and pricing, execution of international expansion, and foreign-currency and other international-market risks.
Q3 2012 operating results included a $993,386 charge for settlement of a wage-and-hour lawsuit, which materially affected the year-over-year operating-income comparison. In Q2 2013, the company recorded an approximately $312,000 benefit for expected unused settlement escrow funds. The court approved the settlement and dismissed the case with prejudice in June 2013; the company expected the remaining escrow balance to be returned before year-end 2013. Management reported no other pending litigation expected to materially affect financial position or results.
Operating cash flow improved from a $4.70 million use to $1.34 million provided, but inventory growth remained a substantial cash use. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the earnings increase reflects ongoing operations versus the prior-year litigation charge and the 2013 escrow benefit.
- Whether inventory above internal targets converts into sales without markdowns or weakening margins.
- Whether strong retail same-store growth continues and offsets falling national-account sales.
- The timing, cost and profitability of planned international expansion, and the status of the expected settlement-escrow refund.
- Availability and terms of the revolving credit facility after its June 30, 2014 maturity date.