Tandy Leather Factory, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless otherwise noted. Tandy is a specialty retailer and manufacturer of leathercraft products, operating 102 stores and selling through stores, websites and its commercial division.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $20.360 million | $20.500 million |
| Gross profit / gross margin | $11.819 million / 58.1% | $11.931 million / 58.2% |
| Operating expenses | $10.838 million | $11.102 million |
| Operating income | $0.981 million | $0.829 million |
| Net income / diluted EPS | $0.664 million / $0.08 | $0.645 million / $0.08 |
| Operating cash flow | $0.797 million | $0.277 million |
| Capital expenditures | $0.087 million | $0.164 million |
Sales declined 0.7% year over year. Gross margin was nearly unchanged, while operating expenses fell 2.4%, lifting operating income 18.3%. The effective tax rate increased to 29.5% from 23.4%. Comprehensive income was $0.625 million versus $0.710 million, reflecting a $0.039 million foreign-currency translation loss in 2023 versus a $0.065 million gain in 2022.
Financial position and liquidity
- At March 31, 2023, cash was $8.646 million, inventory $35.873 million, current assets $45.812 million and current liabilities $6.750 million. Cash increased $0.671 million from year-end 2022.
- Inventory declined $2.354 million from December 31, 2022. Accounts payable declined $2.052 million over the same period.
- The company reported no borrowings under its new JPMorgan Chase credit facility, which provides up to $5 million and is secured by specified assets, including cash, inventory and equipment. The prior $0.4 million Spanish COVID-relief loan was repaid in 2022.
- Operating lease liabilities totaled $11.575 million, including current and non-current portions. Finance lease liabilities totaled $0.016 million.
- Operating cash flow was supported by lower inventory, partly offset by decreases in accounts payable and accrued liabilities and lease payments. The filing’s cash flow statement reports $0.797 million of operating cash flow; one MD&A cash-flow table instead lists $0.795 million.
Management commentary, outlook and risks
Management attributed the modest sales decline to weaker consumer demand amid global political and economic uncertainty. The store count was 102 at quarter-end, versus 106 a year earlier; one California store closed in March. Management says its near-term focus is controlling expenses and gross margin to produce operating cash and income, while selectively investing in profitable sales growth. The filing provides no specific numerical guidance.
Disclosure controls and internal control over financial reporting were deemed ineffective as of March 31, 2023 because of material weaknesses spanning the control environment, risk oversight, control activities, information and communication, and monitoring. Remediation efforts include accounting and systems upgrades, added qualified staff, process documentation and continued control testing. Management noted that cybersecurity risk assessment and related internal-control documentation were not formalized.
The company reported $0.450 million in liabilities for uncertain tax positions. Management said ordinary-course legal matters were not expected to have a material effect on financial position or results. Inventory valuation depends on estimates of net realizable value; store-level impairment assessments also rely on forecasts and other assumptions.
Important facts for investors to verify
- Whether sales trends and consumer demand improve, and whether margins and operating income remain resilient.
- Progress in remediating the disclosed material weaknesses and the timing of any conclusion that controls are effective.
- The cash-flow discrepancy in MD&A ($0.795 million) versus the financial statement ($0.797 million).
- The precise remaining authorization under the share-repurchase program: the filing cites approximately $4.9 million in one place, $5.0 million in another, and $4.997 million in the quarterly table.
- Credit-facility covenant and collateral terms, and any future borrowings; no funds had been drawn as of the filing date.