Tandy Leather Factory, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Tandy operates wholesale, retail and international leathercraft businesses.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $19.24 million | $18.18 million; up 5.8% |
| Gross profit | $11.93 million | $11.37 million; gross margin 62.0% vs. 62.5% |
| Operating income | $2.62 million | $2.55 million; up 2.6% |
| Net income | $1.59 million | $1.57 million; up 0.8% |
| EPS, basic and diluted | $0.16 | $0.15 |
| Operating cash flow | $495,000 provided | $1.95 million used |
| Capital expenditures | $983,000 | $140,000 |
Operating margin was approximately 13.6%, compared with 14.0% a year earlier; net margin was approximately 8.2% versus 8.7%. Cash decreased by $541,000 during the quarter to $7.16 million. Current assets were $35.57 million and current liabilities $7.09 million; management reported a current ratio of 5.0, up from 4.5 at year-end.
Long-term debt totaled $3.05 million, including $203,000 current maturities, under a real-estate-secured term loan bearing 7.1% and maturing in April 2018. The separate $4 million revolving facility, priced at LIBOR plus 2% (2.20% at March 31), was entirely unused and scheduled to mature June 30, 2013.
Business trends and material changes
- Retail Leathercraft sales rose 12.4% to $11.56 million, including same-store growth of 11.3%; operating income increased 11% to $1.51 million. The segment had 78 stores versus 77 a year earlier.
- Wholesale Leathercraft sales fell 5.9% to $6.73 million, and operating income declined 18% to $1.01 million. National-account sales dropped 64.8%, primarily following removal of products that had not produced acceptable gross margins. Wholesale gross margin fell to 61.9% from 63.3%, partly because leather represented a greater share of sales.
- International Leathercraft sales grew 27.8% to $948,000; the segment moved from a $37,000 operating loss to $93,000 operating income. It operated three stores in the UK, Australia and Spain.
- Operating cash flow improved year over year, principally because inventory declined $504,000 rather than increasing $4.15 million as in Q1 2012. The improvement was partly offset by a $1.45 million reduction in accrued expenses, primarily payment of 2012 manager bonuses.
Outlook, risks and contingencies
- Management expects to fund operations, liquidity needs and store growth from cash on hand and internally generated funds. No quantified earnings or sales guidance is provided.
- A flagship-store building was under construction, with opening expected in June 2013; first-quarter capital spending included construction and store fixtures. Management said it did not intend to open new international stores in 2013.
- Management identifies economic weakness and consumer-spending changes, pressure on product margins and costs, and execution, profitability and foreign-exchange risks from international operations as material risks. It expects currency exposure to increase as international activity grows.
- A proposed settlement of wage-and-hour claims requires a $993,386 escrow, funded and charged to operations in Q3 2012. Final court approval and dismissal remained pending at quarter-end; after a February 2013 hearing, the court required additional notice to potential class members, mailed April 23, 2013. The company said it was optimistic about final approval. Other ordinary-course litigation was not expected to materially affect results.
- Foreign-currency translation reduced Q1 comprehensive income by $188,000, compared with a $92,000 gain in Q1 2012. Management stated that operating results for this quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the wage-and-hour settlement received final court approval and whether escrow funds were sufficient to resolve claims.
- Whether the flagship store opened as expected and how construction and other planned investment affect cash and returns.
- Whether retail same-store growth persists and wholesale national-account declines or product-mix pressure continue.
- How the June 30, 2013 revolver maturity was addressed, given its full availability at quarter-end.
- Whether operating cash generation remains adequate as inventory, accrued expenses and capital spending fluctuate.