Tandy Leather Factory, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial results are unaudited. Tandy operates wholesale, retail, and international leathercraft businesses.
Financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $18.18 million | $15.88 million | +14.5% |
| Gross profit | $11.37 million | $9.52 million | +19.3% |
| Gross margin | 62.5% | 60.0% | +2.5 percentage points |
| Operating income | $2.55 million | $1.91 million | +33.6% |
| Net income | $1.57 million | $1.15 million | +36.8% |
| Diluted EPS | $0.15 | $0.11 | — |
| Cash from operations | $(1.95) million | $(0.50) million | Higher cash use |
Net margin was approximately 8.7%, versus 7.2% a year earlier. Cash and short-term investments totaled $6.52 million at quarter-end, compared with $11.19 million at December 31, 2011. Total debt was $3.26 million, including $0.20 million current; the term loan bears 7.1% interest and matures in April 2018. The reported current ratio was 4.2, down from 4.7 at year-end.
Performance and material changes
- Retail Leathercraft sales rose 18.9%, with same-store sales up 17.7%; operating income increased 35% to $1.36 million. The segment operated 77 stores at quarter-end, versus 76 a year earlier.
- Wholesale Leathercraft sales increased 6.4%, including 6.9% same-store growth; operating income rose 53% to $1.23 million. Gross margin increased to 63.3% from 58.7%, primarily reflecting higher retail sales.
- International Leathercraft sales rose 46% to $0.74 million, but the segment recorded a $37,000 operating loss versus $100,000 income a year earlier. Management attributed the loss to the recently opened Australia and Spain stores.
- Inventory increased $4.15 million from year-end to $24.09 million. Management cited expanded product selection, international growth, purchases for an April customer event, and opportunities to buy leather at favorable prices. Accounts payable rose $0.73 million, partly reflecting increased inventory purchases.
- Operating cash use was principally driven by inventory growth. Investing activities provided $0.20 million, mainly from certificate-of-deposit maturities; financing activities used $2.59 million, including debt repayments and the special dividend. Cash declined $4.33 million during the quarter.
Outlook, risks, and unusual items
- The company expects to fund operations, liquidity needs, and store growth with existing cash and internally generated funds. Management expected to open one or two additional international stores in 2012; locations and timing were undetermined. No quantified earnings or revenue guidance was provided.
- The board authorized a one-time $0.25-per-share dividend, totaling approximately $2.54 million. Funds were released in March and the dividend was paid April 2, 2012. Future dividends will depend on profits, cash flow, capital needs, liquidity, and business conditions.
- Management cited economic and consumer-spending weakness, pressure on margins from product-cost fluctuations, and execution and profitability risks in international expansion. Foreign-currency exposure is expected to increase as international operations grow.
- A proposed settlement of a wage-and-hour class and collective action lawsuit was awaiting court approval. If not approved, litigation could proceed; the company said it could not predict potential liability or estimate damages. Trial was then scheduled for the week of May 29, 2012.
- Management reported no goodwill impairment indicators in Q1 and no material impact from adoption of the accounting updates described in the filing. Disclosure controls were assessed as effective; no material change in internal controls was reported.
Important facts for investors to verify
- Whether the inventory build converts into sales and cash without markdowns or weakening turnover.
- Subsequent results and profitability of the Australia and Spain stores, and the timing and cost of further international openings.
- The court’s decision on the proposed wage-and-hour settlement and any resulting company obligation.
- Cash and liquidity after the special dividend, and the company’s capacity to fund growth while servicing debt.
- Whether strong same-store sales and improved gross margins persist amid the economic and product-cost risks identified by management.