Tandy Leather Factory, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; it also provides unaudited fourth-quarter results. Tandy sells leathercraft products through wholesale, retail and international stores, and operates a light manufacturing facility.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $82.9 million | $84.2 million | Down 1.5% |
| Gross profit / margin | $51.7 million / 62.4% | $52.1 million / 61.9% | Margin up 0.5 percentage points |
| Operating income | $10.3 million | $10.5 million | Down 1.7% |
| Net income | $6.4 million | $6.4 million | Essentially unchanged |
| Diluted EPS | $0.69 | $0.63 | Up 9.5% |
| Operating cash flow | $7.5 million | $8.2 million | Down $0.7 million |
Net income was approximately flat as lower sales were offset by lower cost of sales, operating expenses and interest expense. EPS benefited from a lower weighted-average share count following repurchases. Cash from operations less capital expenditures was approximately $5.8 million.
At year-end, cash was $16.9 million (up from $11.0 million), inventory was $33.2 million (down from $33.6 million), total assets were $70.7 million and stockholders’ equity was $53.7 million. Total long-term debt, including current maturities, was $7.4 million; current liabilities were $8.2 million. The company reported a 6.47 current ratio and 2.11 quick ratio. It had no balance on its $6 million inventory-secured revolving facility. Debt covenants were reported as satisfied.
Capital expenditures were $1.7 million. The company repurchased approximately 520,500 shares for $3.7 million, at an average $7.06 per share; it drew approximately $3.7 million under its stock-purchase loan to fund those purchases. No dividend was paid in 2016.
Segment results and changes
- Wholesale Leathercraft: Sales fell 5.2% to $25.4 million; same-store sales declined 3%. Operating income rose to $5.3 million from $4.7 million, with margin increasing to 20.7%, primarily as operating expenses declined.
- Retail Leathercraft: Sales were nearly flat at $53.7 million. Two store closures partly offset four openings and modest same-store improvement. Operating income fell 12.6% to $5.0 million; margin decreased to 9.3% from 10.6%, reflecting higher occupancy and other operating costs.
- International Leathercraft: Sales rose 5.1% to $3.9 million, but operating income fell 37.4% to $76,000 and margin declined to 2.0%. Management cited higher operating expenses, foreign currency effects and European store performance.
For the fourth quarter, sales were $24.1 million versus $24.3 million a year earlier; net income was $2.06 million versus $2.34 million. Fourth-quarter results are identified as unaudited in the filing.
Outlook, risks and other notable items
- Management expected to open three or four North American stores in 2017 and stated a longer-term goal of expanding the Tandy Leather retail chain from 84 stores to 120–150, subject to financial viability. It also expected 2017 capital expenditures to increase, including for store growth, district-manager infrastructure and partial roof replacement.
- Management believed operating cash flow would be adequate to fund 2017 operations and planned expansion, while noting that expansion could be deferred if cash flow weakened. No earnings or sales guidance was provided.
- Key risks include discretionary consumer spending, leather and other input costs, margin pressure, execution of store expansion, foreign-exchange movements, information-system and data-security disruptions, and reliance on the centralized Fort Worth distribution center. The ten largest vendors represented approximately 77% of inventory purchases, although the company said alternative supply sources were available.
- Operating lease commitments totaled $13.4 million, including $3.9 million due within one year. Variable-rate borrowings expose the company to interest-rate risk; management estimated a one-percentage-point LIBOR increase would add about $74,000 in annual interest expense at year-end debt levels.
- The filing reported no pending ordinary-course litigation expected to materially affect financial position or results, and no off-balance-sheet arrangements. The independent auditor issued an unqualified opinion on the financial statements. Management stated disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
- Management expected the new revenue-recognition standard to have no material financial impact, though disclosures would expand. The forthcoming lease standard was expected to add lease-related assets and liabilities to the balance sheet.
Investor verification points
- Check whether 2017 store openings and the longer-term retail expansion target are supported by comparable-store growth and segment profitability.
- Monitor retail and international operating margins, particularly the international segment’s sharp profit decline despite higher sales.
- Assess whether buybacks funded with borrowing, together with planned capital spending and lease obligations, remain consistent with liquidity and debt-covenant capacity.
- Verify the sustainability of the gross-margin improvement against input-cost, product-mix and pricing pressures.
- Review subsequent disclosures on revenue-standard adoption, lease accounting, foreign-currency exposure and supplier concentration.