Tandy Leather Factory, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; quarterly results are not clearly provided in the filing text.
Business context
Tandy is a specialty retailer and manufacturer of leather and leathercraft products, selling through stores, websites and its Commercial Division. At year-end it operated 106 stores: 95 in the U.S., 10 in Canada and one in Spain. It reported as a single segment.
Financial performance and liquidity
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $82.661 | $64.084 |
| Gross profit / gross margin | $46.999 / 56.9% | $36.058 / 56.3% |
| Operating expenses | $44.699 | $41.328 |
| Impairment expense | — | $1.078 |
| Operating income (loss) | $2.300 | $(6.348) |
| Net income (loss) | $1.354 | $(4.901) |
| Basic and diluted EPS | $0.16 | $(0.54) |
| Cash from (used in) operations | $3.716 | $(12.527) |
| Capital expenditures | $1.001 | $1.313 |
| Cash and cash equivalents at year-end | $10.155 | $10.329 |
Sales increased 29.0% year over year, which management attributed to demand across stores, e-commerce and commercial customers, as well as improved product assortment, quality, service and marketing. Gross margin rose 0.6 percentage points, reflecting product and customer mix and a revised inventory-cost capitalization process, partly offset by higher freight and warehouse costs. Management reported adjusted operating expenses of $43.447 million for 2021 versus $37.353 million for 2020, excluding specified restatement and CFO-transition costs; this is a non-GAAP measure.
Operating cash flow improved substantially from the prior-year outflow. The 2021 result included a $2.777 million inventory increase, offset in part by higher accounts payable and accrued liabilities and tax-related cash effects. Cash declined by $0.174 million overall. Current assets were $50.449 million and current liabilities $12.207 million at year-end; inventory was $38.084 million.
Total debt was approximately $0.415 million, primarily the Spanish government-backed loan, with $0.079 million current and $0.336 million long-term. The loan bears fixed interest of 1.5% and matures in 2025. Operating and finance lease liabilities totaled $11.249 million; future undiscounted lease payments were $12.892 million for operating leases and $0.032 million for finance leases. The former $6 million inventory-secured working-capital line and $15 million real-estate-secured credit facility were terminated in 2020; the company reported no current binding commitments or readily available additional financing.
Changes versus FY2020
- Sales rose $18.577 million, and the company returned to operating and net profitability from 2020 losses.
- Operating cash flow swung to a $3.716 million inflow from a $12.527 million outflow, as the prior-year inventory cash build-up moderated.
- No impairment was recorded in 2021, compared with $1.078 million in 2020, when 26 stores failed recoverability testing.
- Year-end cash was nearly flat year over year, while inventory increased by $1.305 million.
Outlook, risks and unusual items
- Management said existing cash and expected operating cash flow should fund operations and contractual commitments through 2022, while cautioning that further pandemic-related restrictions could materially affect cash flow. No specific sales or earnings guidance was provided.
- Key risks include continuing COVID-19 effects, inflation and higher freight, energy and labor costs, supply-chain delays, discretionary consumer spending, store lease commitments and reliance on the Fort Worth distribution and manufacturing center. The 10 largest vendors generally represented 60–75% of inventory purchases.
- The company completed an SEC investigation settlement in July 2021 and paid a $200,000 civil penalty. The matter followed restatements of 2017, 2018 and first-quarter 2019 financial statements.
- Management concluded that internal control over financial reporting and disclosure controls were ineffective at December 31, 2021 because of material weaknesses. Remediation, including accounting-process improvements and systems implementation, remained ongoing. The independent auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness. Inventory valuation was identified as a critical audit matter.
- The shares were delisted from Nasdaq in February 2021 and traded on the OTC Pink Market. Trading remained restricted pending FINRA approval of a market maker; Nasdaq relisting was not assured.
- The company repurchased 712,690 shares in two private transactions during 2021 for $2.738 million in total. No dividends were authorized for 2021 or 2020. The separate $5 million repurchase-program authorization remained available at year-end.
Important facts for investors to verify
- Whether material control weaknesses are remediated and whether future filings remain timely and reliable.
- Whether sales growth and improved profitability persist after pandemic-era demand effects, and whether margin withstands sourcing, freight and labor cost pressures.
- Whether cash generation can support the inventory requirement, lease obligations and operations without restored credit facilities or new financing.
- The status of OTC trading restrictions and any application for Nasdaq relisting.
- Inventory valuation and obsolescence assumptions, given the $38.084 million balance and the auditor’s critical audit matter.