Tandy Leather Factory, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Tandy is a specialty retailer and manufacturer of leathercraft products, selling through stores, websites and commercial accounts. It operated 105 stores at quarter-end and reports as one segment. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $18.410 | $18.566 | $38.910 | $39.960 |
| Gross profit / margin | $10.501 / 57.0% | $11.281 / 60.8% | $22.432 / 57.7% | $23.467 / 58.7% |
| Operating expenses | $11.238 | $10.557 | $22.339 | $21.778 |
| Operating income (loss) | $(0.737) | $0.724 | $0.093 | $1.689 |
| Net income (loss) | $(0.589) | $0.540 | $0.056 | $1.285 |
- Q2 diluted EPS was $(0.07), versus $0.06 a year earlier; six-month diluted EPS was $0.01, versus $0.15.
- Six-month operating cash flow was negative $1.823 million, compared with negative $2.761 million in 2021. Investing cash outflow was $0.454 million and financing cash outflow was $2.204 million; cash declined $4.567 million to $5.588 million.
- At June 30, current assets were $49.230 million and current liabilities $12.421 million. Inventory was $40.112 million, up from $38.084 million at year-end 2021.
- The $0.4 million Spanish COVID-relief loan was repaid in full in Q2; no long-term debt remained at June 30. Operating lease liabilities totaled $10.553 million, including current and non-current portions.
Changes and drivers
- Q2 sales decreased 0.8%; six-month sales decreased 2.6%. Management attributed softness to inflation and uncertainty, with the half-year comparison also affected by prior-year COVID-era stimulus-supported sales.
- Gross margin fell 3.8 percentage points in Q2 and 1.0 point for the half. Management cited product and customer mix and higher product, warehouse-handling and freight costs; FIFO accounting and relatively low inventory turns delay the impact of cost increases.
- Operating expenses rose 6.4% in Q2 and 2.6% for the half. Higher payroll and wages, travel, service costs and other expenses were partly offset by lower performance-based compensation and restatement-related costs.
- The company closed one California store in March and opened none in the first half; the store count was 105 versus 106 a year earlier.
Liquidity, outlook and risks
Management expects to fund operating and liquidity needs primarily with existing cash and operating cash generation. The filing provides no quantified financial guidance. Management warned that inflation, fuel and labor costs, supply-chain disruption, higher interest rates, geopolitical and public-health uncertainty, and weaker discretionary demand could pressure sales and future results.
Disclosure controls and internal control over financial reporting were both deemed ineffective at June 30, 2022 because of material weaknesses across the control environment, risk oversight, control activities, information and communication, and monitoring. Remediation includes accounting staffing, ERP and point-of-sale implementation, documentation and stronger review processes; conversion of the remaining 12 stores to the new POS system was planned for the rest of 2022. The company also said it had not completed a formal cybersecurity risk assessment or documented related internal controls.
Other notable items: the company repurchased and cancelled 359,500 shares from two institutional holders for $1.8 million ($5.00 per share), outside its stated repurchase program. The filing reports $5.0 million still available under a program with an end date of July 31, 2022. The prior SEC investigation into historical accounting practices was settled in July 2021; the company paid a $200,000 penalty. Management reported no pending ordinary-course litigation expected to materially affect financial position or results.
Investor facts to verify
- Whether the repurchase program was extended or otherwise remained available after its stated July 31, 2022 expiration, and how future repurchases will be funded.
- Progress in remediating material weaknesses and whether controls become effective; consider the implications of the historical restatement and SEC settlement.
- Whether cash generation can recover while inventory is elevated and cash has declined, and whether higher costs continue to compress gross margin.
- Whether store demand, labor and freight costs, and economic conditions improve or worsen; the filing gives no quantified outlook.