Tandy Leather Factory, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparative periods ended June 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions unless noted.
Business context
Tandy Leather is a specialty retailer and supplier of leather and leathercraft products, selling through company-operated stores, websites and commercial sales representatives. It operated 103 stores at June 30, 2023: 92 in the U.S., 10 in Canada and one in Spain. The company reports as a single segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $17.482m | $18.410m | $37.842m | $38.910m |
| Gross profit | $10.921m | $10.501m | $22.740m | $22.432m |
| Gross margin | 62.5% | 57.0% | 60.1% | 57.7% |
| Operating expenses | $10.131m | $11.238m | $20.969m | $22.339m |
| Operating income (loss) | $0.790m | $(0.737)m | $1.771m | $0.093m |
| Net income (loss) | $0.531m | $(0.589)m | $1.195m | $0.056m |
| Diluted EPS | $0.06 | $(0.07) | $0.14 | $0.01 |
| Operating cash flow | Not separately provided | Not separately provided | $2.329m | $(1.823)m |
Q2 sales fell 5.0% year over year, while gross profit rose 4.0% and operating income improved by $1.527m. For the first half, sales declined 2.7%, gross profit increased 1.4%, and operating income rose to $1.771m from $0.093m. Management attributed margin improvement to a higher share of full-price sales and better warehouse handling and freight costs. Operating expense reductions included lower contract labor, traditional marketing, conference and outside-service costs; higher digital marketing partly offset the decreases.
Liquidity, debt and capital
- Cash and cash equivalents were $10.033m at June 30, 2023, up from $7.975m at December 31, 2022. First-half cash increased $2.058m.
- First-half investing cash use was $0.174m, primarily property and equipment purchases; financing cash use was $0.003m.
- The company had no borrowings under its new JPMorgan Chase credit facility, which provides up to $5.0m and is secured by specified assets, including cash deposit accounts, inventory and equipment. The prior $0.4m Spanish COVID-relief loan was repaid in 2022.
- Current assets were $48.802m and current liabilities $9.043m. Inventory was $37.513m. Operating lease liabilities totaled $11.446m, including current and non-current portions.
- Approximately $4.997m remained available under the share repurchase authorization at quarter-end; no shares were repurchased during Q2.
Outlook, risks and notable items
- No numerical financial guidance was provided. Management said its near-term focus is controlling expenses and gross margin to generate operating income and free operating cash amid potential economic headwinds, with selective investment in profitable growth.
- Management cited weaker consumer demand amid global political and economic uncertainty, reduced consumer response to promotions, and four fewer stores than the prior-year comparison as reasons for lower sales. The store base was 103 versus 106 a year earlier. The company closed one store in California and opened one store during the first half.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of June 30, 2023 because of material weaknesses across the control environment, risk oversight, control activities, information and communication, and monitoring. Remediation is ongoing, including staffing, ERP and point-of-sale implementations, process documentation and control testing. Two stores remained to be converted to the new point-of-sale system, with conversion planned for Q3.
- The company reported that it had not performed a formalized cybersecurity risk assessment or documented related internal controls. It uses third-party detection and prevention systems and periodic penetration testing.
- Management said no pending ordinary-course legal matters were expected to materially affect financial position or operating results. The filing also notes estimation risks for inventory valuation, impairment and uncertain tax positions; uncertain tax positions were $0.450m.
- The company adopted a new 2023 Incentive Stock Plan, replacing the 2013 plan for new awards. No compensation expense was recorded for the CEO’s performance-based RSUs because achievement of their conditions was deemed not probable.
Most important facts for investors to verify
- Whether weaker demand and lower sales persist, and whether margin gains from full-price sales and fulfillment efficiencies can be sustained.
- Progress in remediating the material weaknesses, including completion of store-system conversions and evidence that controls operate effectively.
- Cash generation and inventory levels, as inventory remains a substantial portion of current assets.
- Terms and covenant compliance for the secured $5.0m credit facility, and any future borrowing or share repurchases.
- Any subsequent updates to store footprint, outlook, cybersecurity controls, legal matters or tax uncertainties.