Tandy Leather Factory, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also presents unaudited fourth-quarter results. Tandy Leather operates wholesale, retail, and international leathercraft businesses through company-owned stores and a light manufacturing facility.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $84.16 million | $83.43 million | +0.9% |
| Gross profit / margin | $52.07 million / 61.9% | $52.12 million / 62.5% | Margin down 0.6 percentage points |
| Operating income | $10.47 million | $11.96 million | -12.4% |
| Net income | $6.40 million | $7.71 million | -16.9% |
| Diluted EPS | $0.63 | $0.75 | Down $0.12 |
| Cash from operations | $8.20 million | $1.18 million | Up from unusually low 2014 |
Operating expenses rose 3.6% to $41.60 million, outpacing sales growth; management cited higher advertising, employee benefits and headcount, rent, and professional fees. Interest expense was $330,000, including a $200,000 penalty for early repayment of the former headquarters loan. The effective tax rate was 37%, versus 35% in 2014.
By segment, Retail Leathercraft sales increased 3.7% to $53.71 million, while Wholesale Leathercraft sales fell 1.9% to $26.75 million and International sales fell 14.9% to $3.69 million. Retail operating income declined 6.4% to $5.69 million; International operating income fell to $121,000 from $580,000. Foreign exchange and costs for a new U.K. store contributed to the international decline.
Fourth-quarter sales were $24.29 million versus $24.47 million in Q4 2014; net income was $2.34 million versus $2.46 million. Q4 diluted EPS was $0.24 in both periods.
Financial position, cash flow, and capital
- At year-end, cash was $10.96 million, inventory $33.58 million, current assets $47.56 million, and current liabilities $8.33 million. The reported current ratio was 5.71 and quick ratio 1.38.
- Total assets were $64.57 million and stockholders’ equity $50.97 million. Debt was $3.71 million, plus $152,000 of capital lease obligations. Cash exceeded reported debt.
- Operating cash flow was $8.20 million; capital expenditures were $2.16 million. Cash increased $326,000 to $10.96 million after $5.71 million of net financing cash outflow.
- Inventory rose $709,000 to $33.58 million, while inventory turnover declined to 2.53 from 2.82. Accounts receivable decreased to $553,000.
- The company repurchased approximately 529,000 shares for $3.71 million, averaging $7.01 per share, funded through a BOKF stock-purchase facility. It had $3.71 million outstanding under that facility at year-end. A separate $6 million working-capital line was available; no borrowing under it was reported.
- Debt facilities carry interest at LIBOR plus 1.85%. The working-capital agreement includes leverage and fixed-charge-coverage covenants; the company reported compliance at year-end. Total contractual obligations were $16.79 million, primarily $12.93 million of operating lease payments.
Changes, outlook, and risks
- Sales growth slowed sharply from 6.6% in 2014 to 0.9% in 2015, and net income declined. Management attributed the earnings decrease to higher cost of goods sold and operating expenses, partly offset by sales growth.
- Retail sales growth came from same-store sales and stores opened in late 2014. Wholesale results were affected by the discontinuation of low-margin national-account products. International sales and margins were pressured by currency movements and the Manchester store opening.
- Management planned two to three North American retail openings in 2016, with longer-term plans to grow the chain toward 100–120 stores. It expected few openings in 2016, lower capital expenditures than 2015, and continued investment in store technology. International openings were contingent on building adequate customer bases; no schedule was set.
- Management stated that operating cash flow should fund 2016 operations and planned expansion, while noting expansion could be deferred if cash flow weakened. No earnings or revenue guidance was provided.
- Key disclosed risks include discretionary consumer spending and economic weakness; leather and other input-cost increases; margin pressure; foreign currency exposure; and execution, staffing, and profitability risks from new stores. The company does not hedge foreign currency or inventory-cost exposure. A 1% LIBOR increase was estimated to add about $38,000 to annual interest expense at year-end debt levels.
- Former CEO and President Jon Thompson resigned in February 2016; CFO Shannon Greene became interim CEO and Mark Angus interim President. The company reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
- A previously disclosed wage-and-hour class action settlement was completed; the filing says no other pending ordinary-course litigation was expected to materially affect results or financial position.
Important facts for investors to verify
- Reconcile weighted-average basic shares: the income statement and EPS note report 10,177,506 for 2015, while selected financial data reports 10,077,506.
- Review the economics of the share repurchase program and the stock-purchase borrowing, including remaining authorization, maturity, and effects on per-share results and leverage.
- Monitor inventory turnover, gross-margin trends, and the contribution of higher-margin retail sales versus lower-margin wholesale and leather product sales.
- Assess international performance and foreign-currency translation exposure, alongside the cost and progress of store expansion plans.
- Track the interim leadership transition and compliance with debt covenants and scheduled repayments.