Tandy Brands Accessories (TBACQ) 10-Q 2007 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2007

Commission File Number 0-18927

TANDY BRANDS ACCESSORIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2349915
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

690 East Lamar Boulevard, Suite 200, Arlington, TX 76011
(Address of principal executive offices and zip code)

817-548-0090
(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report:

Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero       Accelerated filero      Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes      þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

	Number of shares outstanding
Class	at May 10, 2007
Common stock, $1.00 par value	6,897,893

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1 Financial Statements	4-10
Item 2 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	10-14
Item 3 Quantitative And Qualitative Disclosures About Market Risk	14
Item 4 Controls And Procedures	14
PART II — OTHER INFORMATION
Item 1A Risk Factors	14
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 6 Exhibits	15
SIGNATURES	15
Exhibit Index
Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer)	Exhibit 31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Financial Officer)	Exhibit 31.2
Section 1350 Certifications — Chief Executive Officer and Chief Financial Officer	Exhibit 32.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a)
Certification Pursuant to Rule 13a-14(a)/15d-14(a)
Section 1350 Certifications

2

This Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continue,” “may,” variations of such words, and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances are forward-looking statements. We have based these forward-looking statements on our current expectations about future events and estimates and projections about the industry in which we operate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified under “Risk Factors” included in our 2006 Annual Report on Form 10-K. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the United States Securities and Exchange Commission, we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

Tandy Brands Accessories, Inc. And Subsidiaries
Consolidated Statements Of Operations
(in thousands except per share amounts)
(unaudited)

	Three Months Ended						Nine Months Ended
	March 31						March 31
	2007			2006			2007			2006
Net sales	$	37,905		$	45,414		$	159,444		$	180,228
Cost of goods sold		24,303			30,613			100,625			120,192
Provision for discontinued product line inventory		—			6,900			—			6,900
		24,303			37,513			100,625			127,092
Gross margin		13,602			7,901			58,819			53,136
Selling, general and administrative expenses		15,062			15,625			46,832			49,999
Depreciation and amortization		1,175			1,307			3,606			3,836
Goodwill impairment		—			—			—			938
Total operating expenses		16,237			16,932			50,438			54,773
Operating (loss) income		(2,635	)		(9,031	)		8,381			(1,637	)
Interest expense		(141	)		(477	)		(1,033	)		(1,591	)
Royalty and other income		459			42			540			139
(Loss) income before income taxes		(2,317	)		(9,466	)		7,888			(3,089	)
Income taxes (benefit)		(934	)		(3,545	)		3,036			(671	)
Net (loss) income	$	(1,383	)	$	(5,921	)	$	4,852		$	(2,418	)
(Loss) earnings per common share	$	(0.21	)	$	(0.89	)	$	0.72		$	(0.37	)
(Loss) earnings per common share assuming dilution	$	(0.21	)	$	(0.89	)	$	0.71		$	(0.37	)
Cash dividends declared per common share	$	0.04		$	0.0275		$	0.095		$	0.0825
Common shares outstanding		6,730			6,619			6,705			6,586
Common shares outstanding assuming dilution		6,730			6,619			6,877			6,586

The accompanying notes are an integral part of these consolidated financial statements.

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Tandy Brands Accessories, Inc. And Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
(unaudited)

	March 31			June 30
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	3,775		$	4,182
Accounts receivable		30,438			27,322
Inventories:
Raw materials and work in process		4,357			5,320
Finished goods		56,823			56,450
Deferred income taxes		3,307			3,792
Other current assets		2,998			5,784
Total current assets		101,698			102,850
Property and equipment		38,785			37,119
Accumulated depreciation		(27,460	)		(24,689	)
Net property and equipment		11,325			12,430
Other assets:
Goodwill		16,245			16,292
Other intangibles		5,057			5,653
Other assets		1,766			1,719
Total other assets		23,068			23,664
	$	136,091		$	138,944
Liabilities And Stockholders’ Equity
Current liabilities:
Accounts payable	$	14,636		$	10,106
Accrued expenses		6,564			6,214
Notes payable		1,108			—
Total current liabilities		22,308			16,320
Other liabilities:
Notes payable		—			14,000
Supplemental executive retirement obligation		1,477			1,133
Deferred income taxes		871			1,640
Other liabilities		1,431			1,012
Total other liabilities		3,779			17,785
Stockholders’ equity:
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued		—			—
Common stock, $1 par value, 10,000,000 shares authorized, 6,875,847 shares and 6,795,183 shares issued and outstanding		6,876			6,795
Additional paid-in capital		33,166			31,911
Retained earnings		70,160			65,960
Other comprehensive income		707			988
Shares held by Benefit Restoration Plan Trust		(905	)		(815	)
Total stockholders’ equity		110,004			104,839
	$	136,091		$	138,944

The accompanying notes are an integral part of these consolidated financial statements.

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Tandy Brands Accessories, Inc. And Subsidiaries
Consolidated Statements Of Cash Flows
(in thousands)
(unaudited)

	Nine Months Ended
	March 31
	2007			2006
Cash flows provided (used) by operating activities:
Net income (loss)	$	4,852		$	(2,418	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Provision for discontinued product line inventory		—			6,900
Depreciation and amortization		3,722			4,002
Goodwill impairment		—			938
Share-based compensation expense		441			724
Amortization of debt origination costs		135			102
Excess income tax benefit from stock option exercises		(19	)		(71	)
Deferred income taxes		(284	)		(172	)
Other		(310	)		(157	)
Changes in assets and liabilities:
Accounts receivable		(3,116	)		(1,930	)
Inventories		590			(5,572	)
Other assets		2,461			(1,951	)
Accounts payable		4,513			(1,811	)
Accrued expenses		621			(2,078	)
Net cash provided (used) by operating activities		13,606			(3,494	)
Cash flows used for investing activities:
Purchases of property and equipment		(2,040	)		(2,355	)
Proceeds from trademark sale		500			—
Net cash used for investing activities		(1,540	)		(2,355	)
Cash flows (used) provided by financing activities:
Stock sold to stock purchase program		795			969
Stock options exercised		170			428
Dividends paid		(563	)		(551	)
Change in cash overdrafts		17			(1,453	)
Note net (repayments) borrowings		(12,892	)		4,945
Net cash (used) provided by financing activities		(12,473	)		4,338
Net decrease in cash and cash equivalents		(407	)		(1,511	)
Cash and cash equivalents beginning of year		4,182			3,429
Cash and cash equivalents end of period	$	3,775		$	1,918
Supplemental cash flow information:
Interest paid	$	1,013		$	1,411
Income taxes paid	$	690		$	1,675

The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Accounting Principles

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain fiscal 2006 amounts have been reclassified to conform to the fiscal 2007 presentation.

The preparation of our financial statements requires the use of estimates that affect the reported value of assets, liabilities, revenues, and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for our conclusions. We continually evaluate the information used to make these estimates as the business and economic environment changes. Actual results may differ from these estimates under different assumptions or conditions. Such differences could have a material impact on our future financial position, results of operations, and cash flows.

The consolidated balance sheet at June 30, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Our first and second quarter sales and net income normally reflect a seasonal increase compared to the third and fourth quarters of our fiscal year. Consequently, operating results for the three- and nine-month periods ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ended June 30, 2007.

Note 2 — Impact Of Recently Issued Accounting Standard

In June 2006 the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN No. 48”) which becomes effective for fiscal years beginning after December 15, 2006. While we have not fully assessed the potential impact on our financial statements of adopting the interpretation in fiscal 2008, we do not believe the impact will be material. FIN No. 48 clarifies the accounting in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Note 3 — Trademark Sale

During the third quarter of fiscal 2007, we recognized a $440,000 pretax gain from the sale of the rights to one of our trademarks for use within the Republic of Mexico. Cash receipts under the prior license agreement for the trademark were approximately 40% of our royalty and other income in fiscal 2005 and 2006 and, excluding the gain, 70% of such income in fiscal 2007.

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Note 4 — Credit Arrangements

Our $75 million unsecured revolving credit facility, entered into on September 7, 2006, expires June 30, 2009. A $10 million sub-limit of the facility (“swing line”) may be used for same day advances provided by the facility’s administrative agent, a financial institution of the credit facility. The facility bears interest at LIBOR plus 0.75% to 1.75% based on various debt to equity ratios. It also requires us to pay commitment fees based on certain financial performance objectives ranging from 20 to 37.5 basis points on the unused balance. The facility contains an accordion feature allowing us to increase it by up to an additional $25 million including, if necessary, by adding an additional financial institution in the future.

At March 31, 2007 we had outstanding borrowings under the credit facility of $1.1 million bearing interest at 8.25% and outstanding letters of credit used in conjunction with merchandise procurement totaling $1.9 million. Principal payments are due on the facility’s expiration date; however, the outstanding borrowings have been classified as a current liability as they are expected to be repaid within the succeeding twelve months.

The credit facility is guaranteed by all of our subsidiaries, except our Canadian subsidiary, and requires the maintenance of certain financial covenants, which, if not met, could adversely impact our liquidity. It permits the payment of dividends and does not require us to enter into an interest rate swap agreement against our borrowings under the credit facility.

We also have a Canadian line of credit for $867,000 secured by a letter of credit from a U.S. bank. At June 30, 2006 and March 31, 2007 there were no borrowings under this line of credit. At March 31, 2007 we had credit availability under our credit facility and our Canadian line of credit as follows (in thousands):

Total credit facilities	$	75,867
Less:
Debt outstanding		1,108
Letters of credit outstanding		1,942
Canadian standby letter of credit		867
Credit available	$	71,950

Note 5 — Income Taxes

The effective income tax rate for the nine months this year was 38.5%, which is more in line with our historical rates. The fiscal 2006 effective tax benefit rate for the nine months was 21.7% with the primary differences from the 34% federal statutory tax rated being 5.7% for the goodwill impairment charge which was not deductible for income tax purposes and 3.7% for state income taxes based on subsidiaries’ earnings which were not offset by the provision for discontinued product line inventory.

Note 6 — Comprehensive Income

The following table presents the components of comprehensive income, net of related tax (in thousands).

	Three Months Ended						Nine Months Ended
	March 31						March 31
	2007			2006			2007			2006
Net (loss) income	$	(1,383	)	$	(5,921	)	$	4,852		$	(2,418	)
Currency translation adjustments		43			(21	)		(281	)		313
SERP minimum liability decrease		—			—			—			269
Comprehensive (loss) income	$	(1,340	)	$	(5,942	)	$	4,571		$	(1,836	)

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Note 7 — Share-Based Compensation Award

Performance units payable in shares of our common stock following the end of the performance cycle were awarded during the second quarter of fiscal 2007 and granted to employees in the second and third quarters. The units earned during the July 1, 2006 to June 30, 2009 performance cycle, based on the Company’s return on noncash assets, may vary from 0% to 150% of the target payout. Employees vest in the portion of units earned equal to the months employed during the cycle upon death, disability, or normal (age 65) or early (age 55 and 15 years service) retirement; otherwise, units cliff vest at the end of the cycle.

Unit fair values are based on the market price of the Company’s stock on the grant date reduced by the present value of estimated future dividends. The estimated weighted-average grant-date fair value per unit assumes quarterly dividends of $0.0275 and $0.04 per share discounted at risk-free interest rates of 4.62% and 4.71%. Based on 150% of target payout, 141,984 units ($11.46 weighted-average fair value) were granted and are outstanding at March 31, 2007 and 61,060 units ($11.40 weighted-average fair value) are vested or are expected to vest. Compensation expense is adjusted for changes in the number of units expected to vest. The $619,000 estimated future expense at March 31, 2007 is being amortized using the straight-line method to the end of the performance cycle.

Note 8 — Earnings Per Share

The following table presents the computation of basic and diluted earnings per share (in thousands except per share amounts).

	Three Months Ended						Nine Months Ended
	March 31						March 31
	2007			2006			2007		2006
Numerator for basic and diluted earnings per share:
Net (loss) income	$	(1,383	)	$	(5,921	)	$	4,852	$	(2,418	)
Denominator:
Weighted-average shares outstanding		6,726			6,595			6,701		6,563
Contingently issuable shares		4			24			4		23
Denominator for basic earnings per share		6,730			6,619			6,705		6,586
Effect of dilutive share-based compensation		—			—			172		—
Denominator for diluted earnings per share		6,730			6,619			6,877		6,586
(Loss) earnings per common share	$	(0.21	)	$	(0.89	)	$	0.72	$	(0.37	)
(Loss) earnings per common share assuming dilution	$	(0.21	)	$	(0.89	)	$	0.71	$	(0.37	)

Note 9 — Disclosures About Segments Of Our Business And Related Information

We sell our products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men’s and women’s specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores, and the retail exchange operations of the United States military. We and our corresponding customer relationships are organized along men’s and women’s product lines. As a result we have two reportable segments: (1) men’s accessories, consisting of belts, wallets and other small leather goods, gifts, neckwear, and sporting goods; and (2) women’s accessories, consisting of belts, small leather goods, handbags, and gift accessories. General corporate expenses and depreciation are allocated to each segment based on the respective segment’s asset base. Management measures each segment based upon income before income taxes utilizing accounting policies consistent in all material respects with those described in Note 2 of our 2006 Annual Report on Form 10-K. No inter-segment revenue is recorded.

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Note 9 — Disclosures About Segments Of Our Business And Related Information(continued)

The following table presents operating and asset information by reportable segment (in thousands).

	Three Months Ended						Nine Months Ended
	March 31						March 31
	2007			2006			2007			2006
Net sales to external customers:
Men’s accessories	$	26,238		$	26,052		$	110,649		$	107,048
Women’s accessories		11,667			19,362			48,795			73,180
	$	37,905		$	45,414		$	159,444		$	180,228
Operating (loss) income:(1)
Men’s accessories	$	(1,513	)	$	(525	)	$	6,892		$	7,713
Women’s accessories(2)		(1,122	)		(8,506	)		1,489			(9,350	)
		(2,635	)		(9,031	)		8,381			(1,637	)
Interest expense		(141	)		(477	)		(1,033	)		(1,591	)
Other income(3)		459			42			540			139
(Loss) income before income taxes	$	(2,317	)	$	(9,466	)	$	7,888		$	(3,089	)
Depreciation and amortization:
Men’s accessories	$	795		$	837		$	2,471		$	2,441
Women’s accessories		380			470			1,135			1,395
	$	1,175		$	1,307		$	3,606		$	3,836
Capital expenditures:
Men’s accessories	$	84		$	95		$	723		$	344
Women’s accessories		10			88			77			272
Corporate		198			262			1,240			1,739
	$	292		$	445		$	2,040		$	2,355

(1)	Operating (loss) income consists of net sales less cost of goods sold and specifically identifiable and allocated selling, general and administrative expenses.
(2)	Women’s accessories fiscal 2006 operating loss includes a $7.1 million charge for discontinued product line inventory, associated packaging costs, and severance payments in the third quarter and a $938,000 charge for goodwill impairment in the second quarter.
(3)	Other income includes a $440,000 gain from the sale of a trademark in the third quarter of fiscal 2007 and royalty income from corporate trade names and other income not specifically identifiable with a segment.

Note 10 — Subsequent Event

On April 23, 2007 we announced we will be converting our Yoakum, Texas belt manufacturing operations of our men’s accessories segment into a receiving and distribution facility during the fourth quarter of fiscal 2007. We expect the majority of our manufacturing at the facility will be concluded by June 30, 2007 without incurring any impairment charges related to the property and equipment. Belts currently produced at the facility are expected to transition to overseas manufacturing facilities. Severance and payroll related costs in the range of $650,000 to $850,000 are expected to be incurred in the fourth quarter related to the elimination of approximately 165 salaried and hourly positions.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item 2 should be read in the context of the information included in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission and elsewhere in this Quarterly Report, including our consolidated financial statements and accompanying notes in Item 1 of this Quarterly Report.

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OVERVIEW

We are a leading designer, manufacturer and marketer of branded men’s, women’s and children’s accessories, including belts and small leather goods, such as wallets. Our product line also includes gift accessories, handbags, sporting goods, and neckwear. Our merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names including DOCKERS®, LEVI’S®, LEVI STRAUSS SIGNATURE™, JONES NEW YORK®, TOTES®, ROLFS®, HAGGAR®, WOOLRICH®, JORDACHE®, CANTERBURY®, PRINCE GARDNER®, PRINCESS GARDNER®, AMITY®, COLETTA®, STAGG®, ACCESSORY DESIGN GROUP®, TIGER®, ETON®, SURPLUS® and EILEEN WEST™ as well as private brands for major retail customers. We sell our products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men’s and women’s specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores and the retail exchange operations of the United States military.

Net sales for the fiscal 2007 third quarter and nine months of $37.9 million and $159.4 million, respectively, were less than the same fiscal 2006 periods. Fiscal 2006 included $4.2 and $25.3 million, respectively, in sales of products by our women’s accessories segment which have been discontinued. Our gross margins improved without the negative effect of sales of lower margin discontinued products. In addition, our selling, general and administrative expenses were less as a result of consolidating our women’s accessories segment operations. For the third quarter of fiscal 2007 we incurred a net loss of $1.4 million which reduced our seasonally higher first and second quarter earnings to $4.9 million for the nine-month period. In the third quarter of fiscal 2006 we incurred a pretax $7.1 million restructuring charge.

We will be converting our Yoakum, Texas belt manufacturing operations into a receiving and distribution facility during the fourth quarter of fiscal 2007. No impairment charges related to the property and equipment are expected to be incurred; however, severance and payroll related costs in the range of $650,000 to $850,000 are expected to be incurred in the fourth quarter related to the elimination of approximately 165 salaried and hourly positions. Belts currently produced at the facility are expected to transition to overseas manufacturing facilities resulting in cost savings of approximately $1.5 million in fiscal 2008.

On May 2, 2007 we announced a license agreement with The Goodyear Tire & Rubber Company to market the Goodyear line of selected gifts and auto accessories to auto parts retail outlets, tire dealers, and mass market auto departments beginning in the Spring of 2008. This will open a new distribution channel for us.

2007 COMPARED TO 2006

Net Sales And Gross Margins

The following table presents sales and gross margin data for our reportable segments (in thousands of dollars).

	Three Months Ended						Nine Months Ended
	March 31						March 31
	2007			2006			2007			2006
Net sales:
Men’s accessories	$	26,238		$	26,052		$	110,649		$	107,048
Women’s accessories		11,667			19,362			48,795			73,180
	$	37,905		$	45,414		$	159,444		$	180,228
Gross margin:
Men’s accessories	$	9,575		$	9,604		$	41,600		$	40,640
Women’s accessories(1)		4,027			(1,703	)		17,219			12,496
	$	13,602		$	7,901		$	58,819		$	53,136
Gross margin percent of sales:
Men’s accessories		36.5	%		36.9	%		37.6	%		38.0	%
Women’s accessories		34.5			(8.8	)		35.3			17.1
Total		35.9			17.4			36.9			29.5

⁽¹⁾ Women’s accessories fiscal 2006 gross margins were reduced by a $6.9 million provision for discontinued product line inventory.

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2007 COMPARED TO 2006(continued)

Overall net sales for the three- and nine-month periods ended March 31, 2007 were $7.5 and $20.8 million, respectively, less than the same periods in the prior year primarily as the result of the decision last year to exit several of the women’s accessories segment product lines. Men’s accessories third quarter net sales increase to $26.2 million compared to the prior year’s $26.1 million was attributable to greater sales of belts and small leather goods to mass merchant customers, while gift accessories sales were off $0.7 million following improved second quarter sales. Women’s accessories third quarter net sales of small leather goods were $0.9 million greater than the prior year while the overall $7.7 million decline compared to last year’s third quarter was attributable to discontinued products and lower handbag sales. For the fiscal 2007 nine-month period compared to fiscal 2006, sales of belts increased $3.9 million (men’s — $2.4 million; women’s — $1.5 million) and sales of gift accessories increased $3.5 million (men’s — $2.7 million; women’s — $0.8 million). Discontinued women’s accessories products accounted for $25.3 million of the nine-month net sales in fiscal 2006.

Gross margins of 35.9% and 36.9% for the three- and nine-month periods ended March 31, 2007 were 18.5 and 7.4 percentage points, respectively, greater than the same periods last year due to the women’s accessories segment margins increasing from a negative 8.8% to 34.5% for the quarter and from 17.1% to 35.3% for the nine months. The increases for the women’s accessories segment were primarily a result of discontinuing low margin product lines. The men’s accessories segment gross margins were slightly lower due to markdowns of gift accessories in the third quarter related to lower demand for emergency crank items attributable to there being no major hurricanes in the 2006 season. Also, belt sales to mass merchants experienced price pressure during the first half of fiscal 2007 even though direct shipment sales and margins increased.

Direct shipments have lower gross margins because these goods are shipped from our suppliers to our customers and are not handled in our distribution centers, thereby reducing the general and administrative costs related to the sales. Any material changes in sales mix, such as higher mass merchant accessory sales or direct shipments, could lower our gross margin percentages during a particular season.

Operating Expenses

The following table presents expense data for our reportable segments (in thousands).

	Three Months Ended				Nine Months Ended
	March 31				March 31
	2007		2006		2007		2006
Selling, general and administrative expense:
Men’s accessories	$	10,293	$	9,292	$	32,237	$	30,486
Women’s accessories		4,769		6,333		14,595		19,513
	$	15,062	$	15,625	$	46,832	$	49,999
Depreciation and amortization:
Men’s accessories	$	795	$	837	$	2,471	$	2,441
Women’s accessories		380		470		1,135		1,395
	$	1,175	$	1,307	$	3,606	$	3,836
Interest expense	$	141	$	477	$	1,033	$	1,591

Selling, general and administrative expenses (“SG&A”) for the third quarter and nine months of fiscal 2007 were $0.6 and $3.2 million, respectively, less than the prior year primarily due to consolidation of the women’s segment mass merchant and department store businesses and discontinuing product lines. Payroll costs, excluding approximately $200,000 in the third quarter of fiscal 2006 related to restructuring our women’s accessories segment, were lower (quarter - $166,000; year �� $1,993,000) while contract labor costs in our distribution centers increased (quarter — $368,000; year — $1,488,000).

12

2007 COMPARED TO 2006(continued)

Among other SG&A fluctuations were lower director share-based compensation as a result of awards not being granted this year (quarter — $29,000; year — $155,000), legal and professional fees (quarter — up $99,000; year — down $141,000), and the following expense reductions:

	Quarter		Nine Months
Product distribution	$	629,000	$	1,492,000
Travel		56,000		343,000
Royalties		124,000		174,000
Product development		193,000		145,000

Interest expense for this year’s third quarter and nine months was less than the same periods last year due to lower average amounts borrowed over the nine-month period ($11.5 million in fiscal 2007 vs. $27.4 million in fiscal 2006) even though average interest rates for the nine months were higher (6.42% in fiscal 2007 vs. 5.67% in fiscal 2006). The higher debt level at June 30, 2006 related to inventory purchased for the holiday season.

Royalty and other income for fiscal 2007 includes a $440,000 gain from the sale of the rights to use one of our trademarks within the Republic of Mexico. Cash receipts under the prior license agreement for the trademark were approximately 40% of our royalty and other income in fiscal 2005 and 2006 and, excluding the gain, 70% of such income in fiscal 2007.

The effective income tax rate for the nine months this year was 38.5%, which is more in line with our historical rates. The fiscal 2006 effective tax benefit rate for the nine months was 21.7% with the primary differences from the 34% federal statutory tax rate being 5.7% for the goodwill impairment charge which was not deductible for income tax purposes and 3.7% for state income taxes based on subsidiaries’ earnings which were not offset by the provision for discontinued product line inventory.

SEASONALITY

Historically our quarterly sales and operating results reflect a seasonal increase during the first and second quarters of our fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

The $17.1 million operating cash flow increase for the nine months ended March 31, 2007 compared to last year resulted from the increase in net income ($7.3 million), lower men’s accessories inventories ($6.8 million) which had been carried at higher levels throughout the same period last year, and increased accounts payable ($6.3 million) related to the timing of payments to vendors offset by slightly higher accounts receivable ($1.2 million).

Capital expenditures during the nine months ended March 31, 2007 totaled $2 million primarily in support of inventory management, other computer related functions, and sales office remodeling. These investing activity outlays were offset in the third quarter by $0.5 million in proceeds from the sale of a trademark. Borrowings under our credit facility were substantially less at March 31, 2007 due to improved operating cash flows. The $1.1 million balance is expected to be repaid within the next twelve months.

Our primary sources of liquidity are cash flows from operating activities and our credit facility. Information about our credit facility is incorporated herein by reference to Note 4 of the notes to consolidated financial statements included in Item 1 of this Quarterly Report. We believe we have adequate financial resources and access to sufficient credit lines to satisfy our future working capital needs.
During fiscal 2007 we declared the following cash dividends:

			Dividend
Declaration Date	Record Date	Payable Date	Per Share
August 16, 2006	September 30, 2006	October 20, 2006	$	0.0275
October 16, 2006	December 29, 2006	January 19, 2007	$	0.0275
January 31, 2007	March 30, 2007	April 20, 2007	$	0.04
April 17, 2007	June 29, 2007	July 20, 2007	$	0.04

13

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

There have been no material changes outside the ordinary course of our business in any of our contractual obligations, contingent liabilities, or commitments since June 30, 2006.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 2007 our borrowings under our credit facility, which are expected to be repaid within the succeeding twelve months, totaled $1.1 million bearing interest at 8.25%. We are subject to interest rate risk on our credit facility borrowings. We are also exposed to market risk with respect to changes in the global price level of certain commodities used in the production of our products.

We historically have been exposed to unanticipated material increases in the market prices of leather which can increase the cost of manufacturing belts and, therefore, negatively affect our operating results. Our plan announced on April 23, 2007 to cease belt manufacturing at our Yoakum, Texas facility and transition to overseas manufacturing facilities will help reduce our exposure to price increases of the raw materials used in manufacturing our belts. However, we may in the future have increased market risk exposure if our suppliers do not adequately manage their risks and if we are unable to contractually mitigate the pass-through of unanticipated commodity cost increases.

Market risk related to foreign currency historically has not been material to our operations since we generally have negotiated and settled agreements for the procurement of our products in U.S. dollars.

ITEM 4 — CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There has been no change in our internal control over financial reporting during the third quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1A — RISK FACTORS

No material changes have occurred to the risk factors disclosed in our Annual Report on Form 10-K for the year ended June 30, 2006. However, our plan announced on April 23, 2007 to cease belt manufacturing at our Yoakum, Texas facility and transition to overseas manufacturing facilities may in the future increase our risks relating to the following as disclosed in our Annual Report on Form 10-K for the year ended June 30, 2006:

• International operations,

• The loss, or problems with, third-party manufacturers, and

• Our ability to maintain proper inventory levels.

14

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information regarding repurchases of shares of common stock made by us during the quarter ended March 31, 2007. All such shares were purchased in the open market and are held in a rabbi trust established under our Benefit Restoration Plan.

					Total Number Of		Maximum Number
	Total				Shares Purchased		Of Shares That May
	Number		Average		As Part Of Publicly		Yet Be Purchased As
	Of Shares		Price Paid		Announced Plans		Part Of The Plans
Period	Purchased		Per Share		Or Programs		Or Programs
January 1, 2007 to January 31, 2007		2,101	$	11.80		N/A		N/A
Total		2,101		11.80		N/A		N/A

ITEM 6 — EXHIBITS

The Exhibit Index immediately preceding the exhibits required to be filed is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TANDY BRANDS ACCESSORIES, INC. (Registrant)
May 10, 2007	/s/ J.S.B. Jenkins
	J.S.B. Jenkins
	President, Chief Executive Officer (Principal Executive Officer)

/s/ Mark J. Flaherty  

Mark J. Flaherty 

Chief Financial Officer
(Principal Accounting and Financial Officer) 

15

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES

EXHIBIT INDEX

				Incorporated by Reference
				(if applicable)
	Exhibit Number and Description			Form	Date	File No.	Exhibit
(3)	Articles of Incorporation and Bylaws
		3.1	Certificate of Incorporation of Tandy Brands Accessories, Inc.	S-1	11/02/90	33-37588		3.1
		3.2	Restated Bylaws of Tandy Brands Accessories, Inc.	10-Q	2/11/05	0-18927		3.2
(4)	Instruments defining the rights of security holders, including indentures
		4.1	Certificate of Designations, Powers, Preferences, and Rights of Series A Junior Participating Cumulative Preferred Stock of Tandy Brands Accessories, Inc.	S-1	12/17/90	33-37588		4.1
		4.2	Form of Common Stock Certificate of Tandy Brands Accessories, Inc.	S-1	12/17/90	33-37588		4.2
		4.3	Form of Preferred Share Purchase Rights Certificate of Tandy Brands Accessories, Inc.	S-1	12/17/90	33-37588		4.3
		4.4	Form of Rights Certificate of Tandy Brands Accessories, Inc.	8-K	11/02/99	0-18927		4
		4.5	Amended and Restated Rights Agreement, dated October 19, 1999, between Tandy Brands Accessories, Inc. and Bank Boston, N.A.	8-K	11/02/99	0-18927		4
		4.6	Amendment to Rights Agreement, dated October 19, 1999, between Tandy Brands Accessories, Inc. and Fleet National Bank (f.k.a. Bank Boston, N.A.)	10-Q	5/10/02	0-18927		4.7
		4.7	Amended and Restated Credit Agreement among Tandy Brands Accessories, Inc. as the Borrower, Wells Fargo HSBC Trade Bank, N.A. as Administrative Agent and as a Lender, and Certain Financial Institutions, as Lenders and Wells Fargo Bank, N.A. as Arranger as of September 7, 2006	10-K	9/22/06	0-18927		4.7
(10)	Material Contracts
		10.1	Tandy Brands Accessories, Inc. Benefit Restoration Plan and related Trust Agreement and Amendments Nos. 1 and 2 thereto*	10-K	9/25/97	0-18927		10.14
		10.2	Amendment No. 3 to the Tandy Brands Accessories, Inc. Benefit Restoration Plan, effective as of July 1, 2003*	10-K	9/23/03	0-18927		10.32

E-1

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

		Incorporated by Reference
		(if applicable)
	Exhibit Number and Description	Form	Date	File No.	Exhibit
10.3	Succession Agreement, dated July 1, 2001, between Tandy Brands Accessories, Inc. and Chase Texas, N.A. (the Former Trustee) and Comerica Bank – Texas (the Trustee), relating to the Tandy Brands Accessories, Inc. Benefit Restoration Plan*	10-K	9/23/03	0-18927		10.34
10.4	Form of Indemnification Agreement between Tandy Brands Accessories, Inc. and each of its Directors	S-1	12/17/90	33-37588		10.16
10.5	Form of Indemnification Agreement between Tandy Brands Accessories, Inc. and each of its Officers	S-1	12/17/90	33-37588		10.17
10.6	Tandy Brands Accessories, Inc. Non-Qualified Formula Stock Option Plan for Non-Employee Directors*	S-8	2/10/94	33-75114		28.1
10.7	Amendment No. 4 to the Tandy Brands Accessories, Inc. Nonqualified Formula Stock Option Plan For Non-Employee Directors*	10-Q	5/10/02	0-18927		10.39
10.8	Tandy Brands Accessories, Inc. 1993 Employee Stock Option Plan and form of Stock Option Agreement thereunder*	S-8	2/10/94	33-75114		28.2
10.9	Tandy Brands Accessories, Inc. Non-Qualified Stock Option Plan for Non-Employee Directors*	S-8	2/10/94	33-75114		28.3
10.10	Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors*	S-8	6/03/96	33-08579		99.1
10.11	Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan*	S-8	12/12/97	333-42211		99.1
10.12	Amendment No. 2 to the Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan*	10-Q	5/10/02	0-18927		10.38
10.13	Tandy Brands Accessories, Inc. Employees Investment Plan, as Amended and Restated effective July 1, 2000*	10-K	9/26/00	0-18927		10.39

E-2

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

		Incorporated by Reference
		(if applicable)
	Exhibit Number and Description	Form	Date	File No.	Exhibit
10.14	Mid-Market Trust Agreement, dated August 19, 2001, between Tandy Brands Accessories, Inc. and State Street Bank and Trust Company, relating to the Tandy Brands Accessories, Inc. Employees Investment Plan*	10-K	9/23/03	0-18927		10.28
10.15	Amendments Nos. 1-3 to the Tandy Brands Accessories, Inc. Employees Investment Plan, as Amended and Restated effective July 1, 2000*	10-K	9/23/03	0-18927		10.31
10.16	Succession Agreement, dated June 20, 2002, between Tandy Brands Accessories, Inc. and Comerica Bank – Texas, (the Trustee), relating to the Tandy Brands Accessories, Inc. Employees Investment Plan*	10-K	9/23/03	0-18927		10.35
10.17	Amendment No. 4 to the Tandy Brands Accessories, Inc. Employees Investment Plan, dated December 22, 2003*	10-Q	2/12/04	0-18927		10.38
10.18	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Dr. James F. Gaertner*	S-8	5/15/02	33-88276		10.2
10.19	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Gene Stallings*	S-8	5/15/02	33-88276		10.4
10.20	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Roger R. Hemminghaus*	S-8	5/15/02	33-88276		10.5
10.21	Nonqualified Stock Option Agreement for Non-Employee Directors, dated October 16, 2001, by and between Tandy Brands Accessories, Inc. and Colombe M. Nicholas*	S-8	5/15/02	33-88276		10.6
10.22	Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-Q	11/12/02	0-18927		10.24
10.23	Form of Non-Employee Director Nonqualified Stock Option Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.39

E-3

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

		Incorporated by Reference
		(if applicable)
	Exhibit Number and Description	Form	Date	File No.	Exhibit
10.24	Form of Employee Nonqualified Stock Option Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.40
10.25	Form of Non-Employee Director Restricted Stock Award Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.41
10.26	Form of Employee Restricted Stock Award Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-K	9/23/04	0-18927		10.42
10.27	Form of Severance Agreement between Tandy Brands Accessories, Inc. for Executive and Senior Officers*	10-K	9/23/03	0-18927		10.33
10.28	Office Lease Agreement, dated January 31, 2004, between Koll Bren Fund VI, LP and Tandy Brands Accessories, Inc. relating to the corporate office	10-Q	2/12/04	0-18927		10.36
10.29	Acknowledgement and Release Agreement between Tandy Brands Accessories, Inc. and J.S.B. Jenkins relating to the termination of the Supplemental Executive Retirement Plan*	8-K	8/22/05	0-18927		10.45
10.30	Tandy Brands Accessories, Inc. Stock Purchase Program (As Amended And Restated Effective December 1, 2005)*	10-Q	2/10/06	0-18927		10.46
10.31	Executive Officer Compensation Summary – Fiscal 2007 and 2006 and Non-Employee Director Compensation Summary – Fiscal 2007*	8-K	4/24/06	0-18927		10.1
10.32	Summary of Incentive Bonus Plan for Executive Officers*	8-K	4/24/06	0-18927		10.2
10.33	Amendments Nos. 5-6 to the Tandy Brands Accessories, Inc. Employees Investment Plan, as Amended and Restated effective July 1, 2000*	10-Q	5/11/06	0-18927		10.44
10.34	Amendment No. 2 to the Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors*	10-K	9/22/06	0-18927		10.35

E-4

TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX

				Incorporated by Reference
				(if applicable)
			Exhibit Number and Description	Form	Date	File No.	Exhibit
	10.35		Amended and Restated Credit Agreement among Tandy Brands Accessories, Inc. as the Borrower, Wells Fargo HSBC Trade Bank, N.A. as Administrative Agent and as a Lender, and Certain Financial Institutions, as Lenders and Wells Fargo Bank, N.A. as Arranger as of September 7, 2006	10-K	9/22/06	0-18927		10.36
	10.36		Amendment No. 4 to the Tandy Brands Accessories, Inc. Benefit Restoration Plan, dated July 1, 2001*	10-Q	11/14/06	0-18927		10.37
	10.37		Form of 2006 Performance Unit Award Agreement pursuant to the Tandy Brands Accessories, Inc. 2002 Omnibus Plan*	10-Q	2/14/07	0-18927		10.37
	10.38		Amendment No. 7 to the Tandy Brands Accessories, Inc. Employees Investment Plan, effective as of January 1, 2006*	10-Q	2/14/07	0-18927		10.38
(31	)	Rule 13a-14(a)/15d-14(a) Certifications
	31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer)**	N/A	N/A	N/A		N/A
	31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) (Chief Financial Officer)**	N/A	N/A	N/A		N/A
(32	)	Section 1350 Certifications
	32.1		Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer)**	N/A	N/A	N/A		N/A

*	Management contract or compensatory plan
**	Filed herewith

E-5