Our Business

We are the world's largest specialty retailer and wholesale distributor of leather and leathercraft related items. We market our products to our growing list of customers through company-owned retail and wholesale stores. We are a Delaware corporation and our common stock trades on the NYSE Amex (formerly the American Stock Exchange) under the symbol "TLF." We operate our business in four segments: Wholesale Leathercraft, which operates wholesale stores in North America under the trade name, The Leather Factory, Retail Leathercraft, which operates retail stores in North America under the trade name, Tandy Leather Company, International Leathercraft, which operates combination retail/wholesale stores outside of North America under the trade name, Tandy Leather Factory, and Other. See Note 6 to the Consolidated Financial Statements for additional information concerning our segments, as well as our foreign operations.

Our Wholesale Leathercraft segment operates 30 company-owned wholesale stores in 20 states and three Canadian provinces. These stores are engaged in the wholesale distribution of leather and related items, including leatherworking tools, buckles and belt adornments, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits, to retailers, manufacturers, and end users. Our Wholesale Leathercraft segment also includes our National Account sales group.

Our Retail Leathercraft segment operates company-owned Tandy Leather Company retail stores in 35 states and five Canadian provinces. Tandy Leather, the oldest and best-known supplier of leather and related supplies used in the leathercraft industry, has been the primary leathercraft resource for decades. Tandy Leather's products include quality tools, leather, accessories, kits and teaching materials. In 2002, we began expanding Tandy Leather's industry presence by opening retail stores. As of May 1, 2009, we were operating 74 Tandy Leather retail stores located throughout the United States and Canada.

Our International Leathercraft segment operates one company-owned store in Northampton, United Kingdom. The store, which opened in February 2008, operates as a combination retail and wholesale store.

Our "Other" segment consists of Roberts, Cushman and Co., a wholly-owned subsidiary that custom designs and distributes decorative hat trims for headwear manufacturers.

Critical Accounting Policies

A description of our critical accounting policies appears in Item 7 "Management's Discussions and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Forward-Looking Statements

Certain statements contained in this report and other materials we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made or to be made by us, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally are accompanied by words such as "may," "will," "could," "should," "anticipate," "believe," "budgeted," "expect," "intend," "plan," "project," "potential," "estimate," "continue," or "future" variations thereof or other similar statements. There are certain important risks that could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of the important risks, including those described below, could cause actual results to differ materially from those suggested by the forward-looking statements. Please refer also to our annual report on Form 10-K for fiscal year ended December 31, 2008 for additional information concerning these and other uncertainties that could negatively impact the Company.

††† We believe that a rise in oil and natural gas prices will increase the costs of the goods that we sell, including the costs of shipping those goods from the manufacturer to our stores and customers.

Various oils used to manufacture certain leather and leathercrafts are derived from petroleum and natural gas. Also, the carriers who transport our goods rely on petroleum-based fuels to power their ships, trucks and trains. They are likely to pass any incurred cost increases on to us. We are unsure how much of this increase we will be able to pass on to our customers.

††† Continued weakness in the economy in the United States, as well as abroad, may cause our sales to decrease or not to increase or adversely affect the prices charged for our products. Furthermore, negative trends in general consumer-spending levels, including the impact of the availability and level of consumer debt and levels of consumer confidence could adversely affect our sales.

General economic factors that are beyond our control impact our forecasts and actual performance. These factors include interest rates, recession, inflation, deflation, consumer credit availability, consumer debt levels, tax rates and policy, unemployment trends and other matters that influence consumer confidence and spending.

We assume no obligation to update or otherwise revise our forward-looking statements even if experience or future changes make it clear that any projected results, express or implied, will not be realized.

Results of Operations

The following tables present selected financial data of each of our four
segments for the quarters ended March 31, 2009 and 2008.

                        Quarter Ended March 31, 2009     Quarter Ended March 31, 2008
                          Sales      Operating Income      Sales      Operating Income
Wholesale Leathercraft  $6,286,702           $366,247    $6,738,210           $123,955
Retail Leathercraft      6,603,522            550,168     6,270,774            614,451
Int'l Leathercraft         292,872             81,116        41,738           (41,461)
Other                      177,894             39,778       209,438             24,439
Total Operations       $13,360,990         $1,037,309   $13,260,160           $721,384

Consolidated net sales for the quarter ended March 31, 2009 increased $101,000, or 0.8%, compared to the same period in 2008. Retail and International Leathercraft's sales increased $333,000 and $251,000, respectively, while Wholesale Leathercraft and Other reported sales decreases of $451,000 and $32,000, respectively. Operating income on a consolidated basis for the quarter ended March 31, 2009 was up 43.8%, or $316,000, from the first quarter of 2008.

The following table shows in comparative form our consolidated net income for the first quarters of 2009 and 2008:

2009 2008 % change Net income $697,917 $584,498 19.4%

All segments contributed to our consolidated net income. Additional information appears below for each segment.

Wholesale Leathercraft

Our Wholesale Leathercraft operation consists of 30 wholesale stores and our
National Account group. The following table presents the combined sales mix by
customer categories for the quarters ended March 31, 2009 and 2008:
                                                          Quarter ended
         Customer Group                                03/31/09   03/31/08
          RETAIL (end users, consumers, individuals)        29%        28%
          INSTITUTION (prisons, prisoners, hospitals,        7%         7%
         schools, youth organizations, etc.)
          WHOLESALE (resellers & distributors, saddle       41%        43%
         & tack shops, authorized dealers, etc.)
          MANUFACTURERS                                      7%        10%
          NATIONAL ACCOUNTS                                 16%        12%
                                                           100%       100%

Net sales decreased 6.7%, or $451,000, for the first quarter of 2009 as follows:

                               Quarter          Quarter        $ change  % change
                            Ended 03/31/09   Ended 03/31/08
     Same store sales (29)      $5,414,997       $5,991,951   $(576,954)   (9.6)%
     National account group        871,705          746,259      125,446    16.8%
                                $6,286,702       $6,738,210   $(451,508)   (6.7)%

Sales to our retail customers and national account group customers were up in the first quarter of 2009 compared to the first quarter of 2008. The increase in retail sales is consistent with our sales trend for the last several quarters; that being stronger retail sales and continued weakness in sales to our wholesale customers. We gained placement of some additional product with a few of our National Account customers which accounted for the sales gain for that group.

Operating income for Wholesale Leathercraft during the current quarter increased by $242,000 from the comparative 2008 quarter, an improvement of 195%. Lower operating expenses accounted for the majority of the increase in operating income, despite the lower sales. Because of the relocation of our corporate headquarters last year to the building we purchased, we reduced our rent and utilities expense by approximately $150,000 in the current quarter compared to 2008. Also, we incurred a one-time expense in the first quarter of 2008 of $110,000 to move our corporate offices to our new building that we didn't incur this year. Finally, due to the reduction in sales, our freight costs to ship product to customers were down by approximately $75,000 this quarter as compared to the same quarter of 2008.

Retail Leathercraft

Our Retail Leathercraft operation consists of 74 Tandy Leather retail stores at
March 31, 2009, compared to 72 stores at March 31, 2008. Net sales increased
5.3% for the first quarter of 2009 over the same quarter last year. A store is
categorized as "new" until it is operating for the full comparable period in the
prior year.

                               # Stores Qtr ended  Qtr ended  $ Incr (decr) % Incr
                                         03/31/09   03/31/08                (decr)
   Same (existing) store sales    72    $6,468,173 $6,270,774      $197,399   3.1%
   New store sales                2        135,349          -       135,349    N/A
   Total sales                    74    $6,603,522 $6,270,774      $332,748   5.3%

The following table presents sales mix by customer categories for the quarters ended March 31, 2009 and 2008 for our Retail Leathercraft operation:

                                                          Quarter ended
         Customer Group                                03/31/09   03/31/08
          RETAIL (end users, consumers, individuals)        65%        64%
          INSTITUTION (prisons, prisoners, hospitals,         7          8
         schools, youth organizations, etc.)
          WHOLESALE (resellers & distributors, saddle        27         27
         & tack shops, authorized dealers, etc.)
          NATIONAL ACCOUNTS                                   -          -
          MANUFACTURERS                                       1          1
                                                           100%       100%

Sales to each customer group increased slightly over the first quarter of 2008 except for the Manufacturers group. Our experience is that small manufacturers and wholesalers tend to be especially cautious in their purchasing during a weak economy since they generally do not maintain excess cash to invest in raw materials and inventory. As a result, their purchases from us tend to be more sporadic and smaller in dollars spent.

Operating income decreased $64,000 from the comparative 2008 quarter. Operating income as a percentage of sales also decreased slightly from 9.8% in the first quarter of 2008 to 8.3% in the first quarter of 2009. Our gross margin decreased from 62.3% to 59.8%. Operating expenses as a percentage of sales decreased from 52.5% to 51.5%. Operating expenses increased $106,000 over the first quarter of 2008. The two new stores opened since March 31, 2008 account for additional operating expenses of $78,000. Adding to those expenses are additional advertising expenses associated with local store promotions, supplies, and employee benefits.

International Leathercraft

Consisting of one store located in the UK, this division's sales totaled $293,000 for the first quarter of 2009, compared to $42,000 in the first quarter of 2008. The UK store was opened in February 2008. Gross profit margin was 75% for 2009's first quarter, which is significantly higher than comparable stores in the U.S. The store generated higher profit margins primarily due to the store's unique sales mix of more tools and supplies and less leather compared to the sales mix in our U.S. stores. Operating expenses totaled $141,000 in the first quarter of 2009, the largest components being employee compensation, advertising, rent and shipping costs to customers.

Other (Roberts, Cushman)

Sales decreased $31,000 or 15% for the first quarter of 2009. Gross profit margins improved to 43% from 40% a year ago. Operating income increased $15,000 due to the improvement in gross profit margin and the reduction in operating expenses. Operating expenses decreased $23,000 from the first quarter of 2008 due to the reduction of personnel and occupancy costs.

We paid $77,000 in interest on our bank debt in the first quarter of 2009, compared to $81,000 in the first quarter of 2008. We recorded $29,000 in interest income on our cash balances during the quarter compared to $41,000 a year ago. The reduction in interest income is the result of the lower rates earned on invested cash. We recorded $28,000 in income for currency fluctuations in the first quarter of 2009. Comparatively, in the first quarter of 2008, we recorded $15,000 in income for currency fluctuations.

Capital Resources, Liquidity and Financial Condition

On our consolidated balance sheet, total assets increased from $40.9 million at year-end 2008 to $42.5 million at March 31, 2009. Total cash, including certificates of deposit, and other current assets accounted for the majority of the increase. Total stockholders' equity increased from $31.2 million at December 31, 2008 to $31.9 million at March 31, 2009, the increase being attributable to earnings in the first quarter of this year. Our current ratio fell from 5.7 at December 31, 2008 to 5.1 at March 31, 2008 due to the increase in trade accounts payable during that time period.

Our investment in inventory decreased by $400,000 at March 31, 2009 from year-end 2008, due to our continued management of inventory relative to our consolidated sales. Inventory turnover increased to an annualized rate of 3.38 times during the first quarter of 2009, from 3.15 times for the first quarter of 2008. Inventory turnover was 3.18 times for all of 2008. We compute our inventory turns as sales divided by average inventory. At the end of the first quarter, our total inventory on hand was approximately 5% under our internal targets for optimal inventory levels. We will continue to monitor the relationship between our sales and inventory in order to optimize our investment in inventory.

Trade accounts receivable was $1.5 million at March 31, 2009, up $357,000 from $1.2 million at year-end 2008. The average days to collect accounts for the first quarter of 2009 were 43 days, down from the first quarter of 2008 of 59 days. The improvement in our average days to collect is the result of a tightened credit policy and an increase in our collection efforts with open account customers in order to minimize the risk of uncollectible accounts in the current economic environment.

Accounts payable increased to $2.3 million at March 31, 2009 compared to $1.1 million at year-end 2008. We intentionally slowed down our payments to our suppliers as we were paying well ahead of terms in some cases. All of our accounts with trade suppliers are paid within agreed upon terms. Accrued expenses were virtually unchanged from December 31, 2008 to March 31, 2009.

During the first quarter of 2009, cash flow provided by operating activities was $1.2 million. The net income generated for the quarter contributed a portion of the cash flow, in addition to the increase in accounts payable. Cash flow used in investing activities totaled $3.2 million consisting primarily of net purchases of certificates of deposit with our excess cash. Cash flow used by financing activities totaled $92,000, consisting of payments on our capital lease of $65,000 and payments on our bank debt of $50,000, offset by proceeds from stock option exercises totaling $23,000.

We expect to fund our operating and liquidity needs as well as our store growth from a combination of current cash balances and internally generated funds.