Tandy Leather Factory, Inc. — Form 10-Q summary
Reporting period: Three and nine months ended September 30, 2019. Although the request metadata says “2019 Q1,” this filing covers the third quarter and year to date. The statements are unaudited; 2018 comparatives are restated. The report was signed June 21, 2021.
Business context and financial performance
Tandy sells leather and leathercraft products through company-owned stores and e-commerce, and manufactures selected products. At September 30, 2019, it operated 116 stores: 104 in the U.S., 11 in Canada and one in Spain.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $16.31 million; down 13.6% from restated 2018 | $54.45 million; down 7.0% |
| Gross profit / margin | $8.85 million / 54.2%; prior-year margin 63.0% | $30.46 million / 55.9%; prior-year margin 62.9% |
| Operating expenses | $11.25 million, up 2.3% | $31.90 million, down 1.2% |
| Operating income (loss) | $(2.40) million; prior-year income $0.90 million | $(1.44) million; prior-year income $4.54 million |
| Net income (loss) | $(1.72) million; prior-year income $0.61 million | $(1.07) million; prior-year income $3.28 million |
| Basic and diluted EPS | $(0.19); prior-year $0.07 | $(0.12); prior-year $0.36 |
Management attributed weaker sales to store closures, changed promotional timing and pricing, out-of-stocks, and lower commercial-customer sales during a new commercial program transition. Margin contraction reflected product and customer mix, pricing changes, higher freight, inventory write-down reserves, and clearance promotions.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $7.92 million, versus cash used of $4,650 in restated 2018. Management said inventory liquidation was a major cash source; inventory declined to $23.76 million from $33.30 million at year-end 2018.
- Investing cash flow was $(9.08) million, including $16.39 million of Treasury purchases and $7.40 million of proceeds from Treasury sales. Financing cash flow was $(9.70) million, including repayment of $8.97 million of debt and $0.74 million of share repurchases.
- Cash was $13.35 million and short-term investments were $9.10 million at September 30, 2019. Current assets totaled $49.47 million and current liabilities $10.09 million.
- No bank debt was outstanding at September 30, 2019. Operating lease liabilities totaled $15.32 million, including $3.92 million current and $11.40 million non-current; these are lease obligations, not reported borrowings.
Material changes, outlook and risks
- Restatement and controls: The filing restates specified prior periods and says previously issued statements for affected periods should no longer be relied upon. Errors included inventory costing and reserves, warehousing and freight accounting, returns and gift cards, taxes, foreign currency, accrued liabilities, and lease accounting. Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2019 because of material weaknesses. Remediation included new accounting systems, process documentation and staffing changes; remediation was not complete as of the filing.
- Strategy: Management described initiatives to simplify pricing, improve the web and product offering, build commercial-customer sales, invest in talent and systems, and manage store locations. It provided no quantified financial guidance in this filing.
- Bank facilities: Tandy repaid its outstanding $9.0 million share-repurchase borrowing in February 2019. Subsequent to the period, because it could not provide required reporting and compliance certificates amid delinquent SEC filings, its bank cancelled the notes on April 2, 2020; the company said it had no borrowings outstanding when cancelled.
- Subsequent developments: COVID-19 prompted temporary store closures in 2020, employee furloughs and cost-cutting. The company reported significant sales declines in the second and third quarters of 2020 and anticipated uncertainty; it later reported approximately $1.1 million of 2020 impairment charges. Nasdaq suspended trading in August 2020 and formally delisted the stock in February 2021; it traded OTC at the filing date.
- Contingencies: The company reported an SEC investigation into historical accounting practices and cooperation with the investigation. A proposed resolution in principle included a $0.2 million penalty, subject to final documentation and SEC approval. A stockholder class action related to the restatement was withdrawn in April 2020; further litigation was not ruled out.
Important facts for investors to verify
- Review the restatement footnote and determine how corrected inventory, sales, expenses, taxes and prior-period earnings affect trend analysis.
- Track remediation and independent testing of the material weaknesses; the filing states controls were ineffective and remediation remained ongoing.
- Assess whether operating cash generation is sustainable: 2019 cash flow benefited materially from inventory reduction.
- Confirm the status and final terms of the SEC matter, including whether the proposed penalty received final approval.
- Verify current listing, reporting compliance, liquidity and store footprint using subsequent filings; this filing also discloses delinquent reports and later delisting.