Tandy Leather Factory, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2011. Tandy sells leather and leathercraft products through wholesale, retail and international operations. At June 30, it operated 29 wholesale stores, 77 North American retail stores and one UK store.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $15.93 million | $14.35 million | $31.81 million | $28.94 million |
| Gross profit | $9.85 million | $8.71 million | $19.37 million | $17.69 million |
| Operating income | $1.77 million | $1.44 million | $3.68 million | $2.98 million |
| Net income | $1.08 million | $1.06 million | $2.23 million | $2.01 million |
| Diluted EPS | $0.11 | $0.10 | $0.22 | $0.20 |
- Q2 sales rose 11.0%; operating income rose 22.5%, while net income increased 1.4%. Q2 gross margin was approximately 61.8% versus 60.7%; operating margin was 11.1% versus 10.1%.
- First-half sales increased 9.9%, operating income 23.5%, and net income 10.8%. First-half gross margin was approximately 60.9% versus 61.1%; operating margin was 11.6% versus 10.3%.
- Retail was the largest growth contributor: Q2 sales increased 15.9%, including 15.8% same-store growth; first-half sales increased 14.8%. International sales rose 34% in Q2 and 33% for the first half. Wholesale Q2 sales increased 3.6%, but segment operating income declined 2.4%.
- Q2 net income growth lagged operating income growth partly because other expense was $108,000, versus $16,000 of other income in Q2 2010. The company cited a $66,000 quarterly currency-fluctuation loss. First-half currency-fluctuation expense was $138,000, versus $74,000 in the prior-year period.
Cash, liquidity and debt
- At June 30, cash was $4.90 million and short-term certificates of deposit were $976,000. Current assets were $29.19 million and current liabilities $4.73 million; the reported current ratio was 6.2, compared with 4.2 at year-end 2010.
- Operating cash flow was $529,000 for the first half, compared with $368,000 a year earlier. Net income of $2.23 million was substantially offset by a $1.87 million reduction in accrued expenses and other liabilities.
- Investing activities provided $176,000, including certificate-of-deposit maturities and equipment purchases; capital expenditures were $497,000. Financing used $101,000 for debt repayments. Cash increased $603,000 to $4.90 million.
- Total debt was $3.41 million, comprising a real-estate term loan at 7.1% with $202,500 classified as current. The separate $2.5 million Comerica revolving facility expired June 29, 2011 and was not renewed. Management said operating and liquidity needs, including store growth, were expected to be funded from cash balances and internally generated funds.
- Inventory was $20.26 million, approximately 14% above internal optimal targets; management said about half of the excess related to inventory for planned overseas stores. Annualized first-half inventory turnover was 3.14 times, versus 3.31 times in the prior-year period.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management planned to open a store in Australia in Q3 and one to two stores in Spain in Q4 2011; opening dates were not determined.
- Management described wholesale customers as appearing to stabilize but cautioned that it was too early to know whether the trend would continue. National Account sales fell 7.5% in Q2; management noted future sales depend on customer demand for stocked products.
- Risks highlighted include weak U.S. and global economic conditions affecting consumer and retailer spending, and pressure on margins from leather and metal costs and the possibility that price increases cannot be passed through.
- A lawsuit by former employees alleges violations of federal and state wage laws, including unpaid overtime, and seeks unspecified damages, fees and costs. The case was transferred to the Northern District of Texas; trial was set for the week of May 29, 2012. The company said liability and potential damages could not then be predicted or estimated and that it intended to defend the case.
- The 2010 special dividend of $0.75 per share was paid in July 2010; the filing does not announce a new dividend. Management stated future dividends would depend on profitability, cash flow, capital needs, liquidity and other conditions.
Important facts for investors to verify
- Whether retail same-store growth and planned overseas store openings translate into sustainable profitable growth.
- Whether inventory above internal targets can be reduced or sold without margin pressure, and how inventory purchases affect operating cash flow.
- The impact of the expired, nonrenewed Comerica facility and the company’s liquidity and funding needs as it expands.
- Developments in the wage-and-hour lawsuit, including potential class scope and any ability to estimate exposure.
- Whether currency movements, product-cost inflation and economic weakness affect margins and results; management noted quarterly results are not necessarily indicative of full-year performance.