| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The Business and Strategy
Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, and organized in 2005 as a Delaware corporation, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
Currently, the Company operates a total of 100 retail stores. There are 90 stores in the United States (“U.S,”), nine stores in Canada and one store in Spain.
Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn the craft in classes, open table , and from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather. Our websites provide inspiration, detailed product descriptions and specifications, educational information and videos, and a convenient place to also purchase products – especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web customers, leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the needs of those customers who build businesses around leather. With dedicated direct account representatives, a direct-from-our-warehouse shipping model, bulk and volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers.
In 2019, with the arrival of a new management team, we began the process of assessing and reinvigorating the business. We focused in three broad strategic initiative areas: 1) improving our brand proposition, 2) rebuilding our foundation: the talent, processes, tools and systems needed to modernize and efficiently operate the business, and 3) creating a vision and road map for long-term growth. We had significant achievements in all of these areas including significantly improving the product quality, breadth of assortment and value, dramatically improving the website and web operations, rebuilding the team, people policies and culture, and replacing all of the key systems, among many other accomplishments.
We made this steady progress to transform and reinvigorate our business even in the face of two very significant obstacles: a financial restatement and COVID-19. With those obstacles behind us, we have been focused on improving our financial sustainability and profitability. In the short-term, we are managing operating expenses and gross margin to deliver free operating cash and operating income even in the face of possible continued economic headwinds. We will also continue to selectively invest in profitable sales growth where it makes sense, but rebuilding a durable, profitable business model is the highest priority.
Results of Operations
Three Months Ended September 30, 2024 and 2023
The following table presents selected financial data:
| | Three Months Ended September 30, | |
| (in thousands) | | 2024 | | | 2023 | | | $ Change | | | % Change | |
| Sales | | $ | 17,351 | | | $ | 17,542 | | | $ | (191 | ) | | | (1.1 | )% |
| Gross profit | | | 10,022 | | | | 10,938 | | | | (916 | ) | | | (8.4 | )% |
| Gross margin percentage | | | 57.8 | % | | | 62.4 | % | | | | | | | (4.6 | )% |
| Operating expenses | | | 10,289 | | | | 10,058 | | | | 231 | | | | 2.3 | % |
| Income (loss) from operations | | $ | (267 | ) | | $ | 880 | | | $ | (1,147 | ) | | | (130.3 | )% |
Net Sales
Consolidated net sales for the quarter ended September 30, 2024 decreased $0.2 million, or 1.1%, compared to the corresponding prior year period. We believe the decrease in sales was due in part to temporary store closures related to store relocation and weather including Hurricanes Beryl, Debby, Francine and Helene, and ongoing weak consumer demand compared to a year ago resulting from uncertainty related to global political, economic and other uncontrollable factors.
Our store footprint consisted of 100 and 103 stores at September 30, 2024 and September 30, 2023, respectively. During the 12-month period ending September 30, 2024, we closed 5 stores and opened 2 new stores for a net decrease of 3 stores. Of the 100 current stores, 2 are temporarily closed during relocation and will reopen before the end of the year.
We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projection for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the store and location, and the size and potential of the trade area including proximity to other existing stores, among other variables. We use similar factors to determine whether to open new stores.
Gross Profit
Gross profit for the quarter decreased by $0.9 million, or 8.4%, compared to the same period in 2023, and our gross margin percentage for the quarter ended September 30, 2024, decreased year-over-year by 460 basis points due primarily to timing of capitalization of our inventoriable costs, and greater promotional activity this year compared to same period last year, to help overcome decreased consumer discretionary spend.
Operating expenses
| | | Three Months Ended September 30, | |
| (in thousands) | | 2024 | | | 2023 | |
| Operating expenses | | $ | 10,289 | | | $ | 10,058 | |
| Adjusted operating expenses | | $ | 10,289 | | | $ | 10,058 | |
| | | | | | | | | |
| Operating expenses % of sales | | | 59.3 | % | | | 57.3 | % |
| Adjusted operating expenses % of sales | | | 59.3 | % | | | 57.3 | % |
Operating expenses for the quarter increased by $0.2 million or 2.3% compared to the corresponding prior year period, primarily as a result of an increase in employment costs of $0.6 million due to higher wages, in particular for retail and other hourly employees, partially offset by a decrease in bonus accrual of $0.3 million and a decrease of $0.1 million in miscellaneous operating expenses including travel, repairs, and insurance.
Income Taxes
Our effective tax rate for the three months ended September 30, 2024 and September 30, 2023 was 27.7% and 24.0% respectively. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, and expenses that are nondeductible for tax purposes, and the estimates in our valuation allowance associated with our deferred tax assets.
Nine Months Ended September 30, 2024 and 2023
The following table presents selected financial data:
| | | Nine Months Ended September 30, | |
| (in thousands) | | 2024 | | | 2023 | | | $ Change | | | % Change | |
| Sales | | $ | 53,913 | | | $ | 55,384 | | | $ | (1,471 | ) | | | (2.7 | )% |
| Gross profit | | | 30,960 | | | | 33,677 | | | | (2,717 | ) | | | (8.1 | )% |
| Gross margin percentage | | | 57.4 | % | | | 60.8 | % | | | | | | | (3.4 | )% |
| Operating expenses | | | 30,515 | | | | 31,027 | | | | (512 | ) | | | (1.8 | )% |
| Income from operations | | $ | 445 | | | $ | 2,650 | | | $ | (2,206 | ) | | | (83.3 | )% |
Net Sales
Consolidated net sales for the nine months ended September 30, 2024 decreased $1.5 million, or 2.7%, compared to the corresponding prior year period. We believe the decrease in sales was due in part to temporary store closure and ongoing weak consumer demand compared to a year ago, continued weaker consumer demand resulting from ongoing uncertainty related to global political, economic and other uncontrollable factors, exacerbated by temporary store closures and moves.
Our store footprint consisted of 100 and 103 stores at September 30, 2024 and September 30, 2023, respectively. During the 12-month period ending September 30, 2024, we closed 5 stores and opened 2 new stores for a net decrease of 3 stores. Of the 100 current stores, 2 are temporarily closed during relocation and will reopen before the end of the year.
We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projection for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the store and location, and the size and potential of the trade area including proximity to other existing stores, among other variables. We use similar factors to determine whether to open new stores.
Gross Profit
Gross profit decreased by $2.7 million, or 8.1%, compared to the same period in 2023, and our gross margin percentage for the nine months ended September 30, 2024, decreased year over year by 340 basis points due to a one-time accounting adjustment in cost of sales as reported in our 2023 second quarter 10-Q, and timing of capitalization of inventoriable costs in Q3 2024 and greater promotional activity to help overcome decreased consumer discretionary spend .
Operating expenses
| | | Nine Months Ended September 30, | |
| (in thousands) | | 2024 | | | 2023 | |
| Operating expenses | | $ | 30,515 | | | $ | 31,027 | |
| Adjusted operating expenses | | $ | 30,515 | | | $ | 31,027 | |
| | | | | | | | | |
| Operating expenses % of sales | | | 56.6 | % | | | 56.0 | % |
| Adjusted operating expenses % of sales | | | 56.6 | % | | | 56.0 | % |
Operating expenses decreased by $0.5 million or 1.7% compared to the corresponding prior year period, primarily as a result of a decrease in bonus accrual of $1.0 million, partially offset by an increase in medical insurance of $0.2 million, an increase in employment costs of $0.2 million, and an increase in utilities of $0.1 million.
Income Taxes
Our effective tax rate for the nine months ended September 30, 2024 was 26.5% compared to 28.8% for the same period in 2023. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, expenses that are nondeductible for tax purposes, and the change in our valuation allowance associated with our deferred tax assets.
Capital Resources, Liquidity and Financial Condition
We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments. We expect to fund our operating and liquidity needs primarily from a combination of current cash balances and cash generated from operating activities. Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy. Our cash balances as of September 30, 2024 totaled $10.1 million.
On November 2, 2023, the Company renewed the promissory note under its credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. through October 31, 2024. Under the Credit Agreement, the bank will provide the Company a credit facility of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement. As security for the credit facility, the Company has pledged as collateral certain of its assets, including the Company’s cash in deposit accounts, inventory and equipment. The interest rate is based on CME term SOFR + 210 basis points and the maturity is 1 year. As of the date of this filing, no funds had been borrowed under this facility, and we are in compliance with all covenants.
Share Repurchase Program and Share Repurchase
On August 7, 2022, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock between that date and August 31, 2024. As of August 31, 2024, the Company had purchased less than $10,000 of shares under this plan.
On September 17, 2024, the Board of Directors approved the renewal of the stock plan and the Company shall be authorized to repurchase up to $5 million (at then-current market value) of the Company’s common stock in open-market transactions at prevailing market prices upon periodic instructions from the Board or an authorized sub-committee of the Board until September 30, 2026. As of September 30, 2024, $5.0 million remained available for repurchase under this new program.
Cash Flows (Nine months)
| (amounts in thousands) | | 2024 | | | 2023 | |
| Net cash provided by operating activities | | $ | 37 | | | $ | 1,204 | |
| Net cash used in investing activities | | | (2,315 | ) | | | (334 | ) |
| Net cash used in financing activities | | | (1 | ) | | | (23 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | | 175 | | | | (199 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | (2,104 | ) | | $ | 648 | |
For the nine months ended September 30, 2024, cash from operations generated $0.1 million driven by a net income of $0.5 million, non-cash expense of $4.1 million, including depreciation, amortization, and stock-based compensation, a decrease in deferred income taxes of $0.2 million, partially offset by a reduction in lease liability payments of $2.7 million, an increase in income tax payments of $1.0 million, decrease in accrued expense and other liabilities of $0.6 million, an increase in prepaid expense of $0.3 million, and an increase in inventory of $0.1 million. We invested $2.3 million in capital expenditure primarily related to replacing a new roof at our corporate headquarters and other new capital investments due to new store openings and store relocations. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $2.1 million.
For the nine months ended September 30, 2023, cash from operations generated $1.2 million driven by a net income of $1.7 million, non-cash expense of $4.1 million, including depreciation, amortization, and stock-based compensation, accounts receivable of $0.1 million, prepaid expense of $0.1 million, offset by a reduction in lease liability payments of $2.7 million, a reduction in accounts payable of $1.7 million, and an increase in inventory of $0.4 million. We invested $0.3 million in capital expenditures primarily related to system modifications and improvements. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $0.6 million.
| Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Our management team, under the supervision and with the participation of our Chief Executive Officer (who serves as our principal executive officer and principal financial officer) , evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the last day of the fiscal period covered by this report, September 30, 2024. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our management, with the participation of our Chief Executive Officer, concluded that, as of September 30, 2024, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| PART II. | OTHER INFORMATION |
| Item 1. | Legal Proceedings. |
The information contained in Note 6, Commitments and Contingencies to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report is hereby incorporated into this Item 1 by reference.
Our Risk Factors are discussed fully in Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and incorporated herein by reference. We have not identified any new risk factors as of September 30, 2024.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about purchases we have made of our common stock during the quarter ended September 30, 2024:
| ISSUER PURCHASES OF EQUITY SECURITIES | |
| Period | | (a) Total number of shares purchased | | | (b) Average price paid per share | | | (c) Total number of shares purchased as part of publicly announced plans or programs | | | (d) Maximum value of shares that may yet be purchased under the plans or programs | |
| July 1 – July 31, 2024 | | | — | | | | — | | | | — | | | $ | 4,997,000 | |
| August 1 – August 31, 2024 | | | — | | | | — | | | | — | | | $ | 4,997,000 | |
| September 1 – September 30, 2024 | | | - | | | $ | 4.22 | | | | 32 | | | $ | 4,997,000 | |
| Total | | | — | | | | — | | | | 32 | | | | | |
Exhibit Number | Description |
| 3.1 | |
| | |
| 3.2 | |
| | |
3.3 | |
| | |
| 3.4 | |
| | |
| 4.1 | |
| | |
| 10.1 | |
| 10.2 | |
| | |
| 10.3 | |
| | |
| 10.4 | |
| | |
| 10.5 | |
| | |
| 10.6 | |
| | |
| 10.7 | |
| | |
| 10.8 | |
| | |
| 14.1 | |
| | |
| 21.1 | |
| | |
| 13a-14(a) or 15d-14(a) Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended. |
| | |
| Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2022. |
| | |
| *101.INS | XBRL Instance Document. |
| | |
| *101.SCH | XBRL Taxonomy Extension Schema Document. |
| | |
| *101.CAL | XBRL Taxonomy Extension Calculation Document. |
| | |
| *101.DEF | XBRL Taxonomy Extension Definition Document. |
| | |
| *101.LAB | XBRL Taxonomy Extension Labels Document. |
| | |
| *101.PRE | XBRL Taxonomy Extension Presentation Document. |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TANDY LEATHER FACTORY, INC. |
| |
|
|
| |
| |
| |
| (principal executive officer and principal financial officer)
|
24
