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| TLF > SEC Filings for TLF > Form 10-Q on 11-Aug-2009 | All Recent SEC Filings |
11-Aug-2009
Quarterly Report
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 August 1, 2009, we were operating 75 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
Three Months Ended June 30, 2009 and 2008
The following tables present selected financial data of each of our four
segments for the quarters ended June 30, 2009 and 2008.
Quarter Ended June 30, Quarter Ended June 30,
2009 2008
Sales Operating Sales Operating
Income Income
Wholesale $6,112,421 $513,527 $7,218,197 $524,619
Leathercraft
Retail 6,626,225 646,307 6,235,427 571,869
Leathercraft
International 307,852 (12,064) 193,822 (7,456)
Leathercraft
Other 168,442 (5,374) 200,518 2,486
Total Operations $13,214,940 $1,142,398 $13,847,964 $1,091,518
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Consolidated net sales for the quarter ended June 30, 2009 decreased $633,000 or 5%, compared to the same period in 2008. Retail and International Leathercraft contributed $391,000 and $114,000 of additional sales, offset by a sales decrease of $1.1 million and $32,000 in Wholesale Leathercraft and Other, respectively. Operating income on a consolidated basis for the quarter ended June 30, 2009 was up 5% or $51,000 over the second quarter of 2008.
The following table shows in comparative form our consolidated net income for
the second quarters of 2009 and 2008:
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 June 30, 2009 and 2008:
Quarter ended
Customer Group 06/30/09 06/30/08
RETAIL (end users, consumers, individuals) 27% 25%
INSTITUTION (prisons, prisoners, hospitals, 8% 10%
schools, youth organizations, etc.)
WHOLESALE (resellers & distributors, saddle 43% 41%
& tack shops, authorized dealers, etc.)
MANUFACTURERS 8% 9%
NATIONAL ACCOUNTS 14% 15%
100% 100%
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Net sales were down 15% for the second quarter of 2009 as follows:
Quarter Quarter $ change % change
Ended 06/30/09 Ended 06/30/08
Same store sales (30) $5,327,001 $6,069,076 $(742,075) (12.2%)
National account group 785,420 1,149,121 (363,701) (31.7%)
$6,112,421 $7,218,197 $(1,105,776) (15.3%)
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Our same store sales declined 12% in the second quarter of 2009, as compared with the same period in 2008. Compared to the second quarter of 2008, sales decreased in all customer categories, which we attribute to general economic conditions. Sales to our national account customers were down 32% for the quarter, compared to the same quarter last year. The sales decline was the result of some one-time sales of discontinued merchandise in last year's second quarter that did not occur in this year's second quarter.
Operating income for Wholesale Leathercraft during the quarter ended June 30, 2009 declined by $11,000 from the comparative 2008 quarter, a decrease of 2%. Operating expenses as a percentage of sales were 48.9%, down $387,000 from the second quarter of 2008. Advertising expenses decreased $178,000 as we continue to produce more electronic advertising programs which save printing and postage costs. Employee benefits decreased $90,000. Professional fees and outside services decreased $78,000 and $65,000, respectively, due to the elimination of various consulting services. These reductions in operating expenses were partially offset by increases in property insurance of $15,000 and property taxes of $30,000.
Retail Leathercraft
Our Retail Leathercraft operation consists of 75 Tandy Leather retail stores at
June 30, 2009, compared to 72 stores at June 30, 2008. Net sales were up
approximately 6% for the second 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
06/30/09 06/30/08 (Decr)
Same (existing) store sales 72 $6,501,086 $6,235,427 $265,659 4.3%
New store sales 3 125,139 - 125,139 N/A
Total sales 75 $6,626,225 $6,235,427 $390,798 6.3%
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The following table presents sales mix by customer categories for the quarters ended June 30, 2009 and 2008 for our Retail Leathercraft operation:
Quarter Ended
Customer Group 06/30/09 06/30/08
RETAIL (end users, consumers, individuals) 60% 60%
INSTITUTION (prisons, prisoners, hospitals, 11% 11%
schools, youth organizations, etc.)
WHOLESALE (resellers & distributors, saddle 28% 28%
& tack shops, authorized dealers, etc.)
NATIONAL ACCOUNTS - -
MANUFACTURERS 1% 1%
100% 100%
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Sales to our Retail, Institution, and Wholesale customer groups in the second quarter of 2009 increased compared to the second quarter of 2008, while sales to our Manufacturer customer group declined. These sales trends are consistent throughout the company - that is, our retail business appears to be holding fairly steady while our wholesale business has declined. We believe the weak economy is the primary reason for these sales trends. The retail stores averaged approximately $29,000 in sales per month for the second quarter of 2009.
Operating income in the second quarter of 2009 increased $74,000 from the comparative 2008 quarter to 9.8% of sales, compared to 9.2% of sales in the second quarter of 2008. Our gross margin slipped from 62.5% to 60.8% due to aggressive pricing of product in order to motivate sales. Operating expenses as a percentage of sales decreased from 53.3% to 51.0% as sales grew at a faster rate than that of expenses during the quarter.
International Leathercraft
Sales totaled $308,000 for the second quarter of 2009, compared to $194,000 in the second quarter of 2008. Gross profit margin fell from 57.9% in last year's second quarter to 47.6% in the current quarter. The decline is due primarily to the fluctuation in inventory value between the U.S. dollar and the British pound. Operating expenses totaled $159,000, with the largest contributors being employee compensation, advertising, shipping to customers, and rent.
Other (Roberts, Cushman)
Sales decreased $32,000 or 16.0% for the second quarter of 2009. Gross profit margin declined to 39.1% compared to 49.7% in the comparable quarter in 2008 due to the write-off of selected inventory. Operating income decreased $8,000 due to the reduction in sales and gross profit, offset somewhat by the reduction of various operating expenses.
Other Expenses
We paid $84,000 in interest expense in the second quarter of 2009 on our bank debt and capital lease, which are both related to the building purchase, compared to $88,000 in interest expense in the second quarter last year. We earned $32,000 in interest income during the second quarter of 2009, equal to that of last year's second quarter interest income earned of $32,000. We recorded $78,000 in income during the second quarter of 2009 related to currency fluctuations from our Canadian and UK operations. Comparatively, in the second quarter of 2008, we recorded income of $6,000 for currency fluctuations.
Six Months Ended June 30, 2009 and 2008
The following table presents selected financial data of each of our four
segments for the six months ended June 30, 2009 and 2008:
Six Months Ended June 30, Six Months Ended June 30,
2009 2008
Sales Operating Sales Operating
Income Income
Wholesale $12,399,123 $879,774 $13,956,408 $648,574
Leathercraft
Retail 13,229,746 1,196,475 12,506,201 1,186,321
Leathercraft
International 600,724 69,054 235,559 (48,917)
Leathercraft
Other 346,337 34,404 409,956 26,923
Total Operations $26,575,930 $2,179,707 $27,108,124 $1,812,901
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Consolidated net sales for the six months ended June 30, 2009 were down 2%, decreasing $532,000, compared to the same period in 2008. Retail and International Leathercraft contributed additional sales of $723,000 and $365,000, respectively, offset by a combined sales decrease of $1.6 million from Wholesale Leathercraft and Other. Operating income on a consolidated basis for the six months ended June 30, 2009 increased 20.2% or $367,000 compared to the first half of 2008.
The following table shows in comparative form our consolidated net income for the first half of 2009 and 2008:
2009 2008 % change Net income $1,459,168 $1,239,748 17.7%
Wholesale Leathercraft
Net sales decreased 11.2%, or $1.6 million, for the first half of 2009 as
follows:
Six Months Six Months $ Change % Change
Ended 06/30/09 Ended
06/30/08
Same store sales $10,741,998 $12,061,028 (1,319,030) (10.9%)
(29)
National account 1,657,125 1,895,380 (238,255) (12.6%)
group
$12,399,123 $13,956,408 (1,557,285) (11.2%)
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The following table presents the combined sales mix by customer categories for the six months ended June 30, 2009 and 2008:
Six Months Ended
Customer Group 06/30/09 06/30/08
RETAIL (end users, consumers, individuals) 30% 27%
INSTITUTION (prisons, prisoners, hospitals, 7% 8%
schools, youth organizations, etc.)
WHOLESALE (resellers & distributors, saddle 41% 44%
& tack shops, authorized dealers, etc.)
MANUFACTURERS 7% 9%
NATIONAL ACCOUNTS 15% 12%
100% 100%
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Operating income for Wholesale Leathercraft for the first half of 2009 increased by $231,000 from the comparative 2008 period, an improvement of 35.6%. Compared to the first six months of 2008, operating expenses decreased $781,000 for the first half of 2009, but were flat as a percentage of sales at 49.9% due to the decrease in sales.
Retail Leathercraft
Net sales were up approximately 6% for the first half of 2009 over the same
period last year.
# Stores Six Months Six Months $ Incr (Decr) % Incr
Ended Ended (Decr)
06/30/09 06/30/08
Same (existing) store 72 $12,969,259 $12,506,201 $463,058 3.7%
sales
New store sales 3 260,487 - 260,487 N/A
Total sales 75 $13,229,746 $12,506,201 $723,545 5.8%
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The following table presents sales mix by customer categories for the six months ended June 30, 2009 and 2008 for our Retail Leathercraft operation:
Six Months Ended
Customer Group 06/30/09 06/30/08
RETAIL (end users, consumers, individuals) 63% 62%
INSTITUTION (prisons, prisoners, hospitals, 9% 9%
schools, youth organizations, etc.)
WHOLESALE (resellers & distributors, saddle 27% 28%
& tack shops, authorized dealers, etc.)
NATIONAL ACCOUNTS - -
MANUFACTURERS 1% 1%
100% 100%
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The retail stores averaged approximately $29,000 in sales per month for the first half of 2009.
Operating income for the first six months of 2009 increased $10,000 from the comparative 2008 period but decreased as a percentage of sales, from 9.5% in the first half of 2008 to 9.0% in the first half of 2009. Gross margin declined from 62.4% to 60.3% due to aggressive pricing of product in order to maintain sales as we are competing for consumer spending. Operating expenses as a percentage of sales declined from 52.9% during the first half of 2008 to 51.3% during the first half of 2009.
Sales totaled $601,000 for the first six months of 2009, an increase of 155% from sales of $236,000 from the first six months of 2008. These sales are generated from our one store located in the UK, which opened in February 2008. Gross profit margin was 61.4% for the first half of 2008, an improvement over the 2008 comparable period's gross profit margin of 60.3%. 2009 year-to-date operating expenses totaled $300,000 compared to 2008 year-to-date operating expenses of $191,000, an increase of $109,000. Advertising, rent, and shipping costs to customers accounted for the majority of the increase over the prior year. Operating income in 2009 totaled $69,000 compared to an operating loss of $49,000 last year.
Other (Roberts, Cushman)
Sales decreased $64,000 in the first six months of 2009 compared to the same period in 2008. Gross profit margins decreased by $42,000 while operating margin increased by $7,000. Operating expenses decreased by $49,000 in the first half of 2009 compared to 2008.
Other Expenses
We paid $161,000 in interest expense in the first six months of 2009 on our debt related to our building purchase compared to $170,000 in interest expense in the first half of 2008. We earned $61,000 in interest income in the six months ended June 30, 2009, down from last year's interest income of $73,000, due to a drop in interest rates earned on our cash investments. We recorded $107,000 in income during the six months ended June 30, 2009 for currency fluctuations from our Canadian and UK operations. Comparatively, in the first half of 2008, we recorded income of $21,000 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 $41.8 million at June 30, 2009. The increase in short-term investments and accounts receivable, offset partially by the decrease in inventory, accounted for the increase. Total stockholders' equity increased from $31.3 million at December 31, 2008 to $32.8 million at June 30, 2009. Most of the increase was attributable to earnings in the first half of this year. Our current ratio improved from 5.7 at December 31, 2008 to 6.3 at June 30, 2009.
Our investment in inventory decreased by $222,000 at June 30, 2009 from year-end 2008. We continue to closely manage our inventory levels to follow our sales trends. Inventory turnover decreased slightly to an annualized rate of 3.34 times during the first half of 2009, from 3.66 times for the first half 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 second quarter of 2009, our total inventory on hand was 2% below our internal targets for optimal inventory levels. We plan to increase our inventory slightly in our central warehouse during the remainder of the year in order to maintain a sufficient inventory to support the stores' needs.
Trade accounts receivable was $1.7 million at June 30, 2009, down $478,000 from $1.2 million at year-end 2008. The average days to collect accounts for the first half of 2009 were 43.4 days, down considerably from 59.2 days for the first half of 2008. We have tightened our credit policy given the current economic environment and are closely monitoring our customers with open accounts to ensure collectability of the accounts.
Accounts payable increased $366,000 to $1.5 million at the end of the June 2009, due to an intentional slowdown of payments to vendors, taking full advantage of the payment terms. Accrued expenses and other liabilities decreased $202,000, the majority of which is a reduction in manager bonus payable, partially offset by an increase in inventory in transit to us at June 30, 2009 compared to December 31, 2008.
During the first half of 2009, cash flow provided by operating activities was $1.5 million. Net income accounted for the majority of the cash provided. Cash flow used in investing activities totaled $3.0 million, consisting of $2.7 million in net certificate of deposit purchases and $442,000 in fixed asset purchases, $130,000 of which was parking lot repaving at our building. The remaining fixed asset purchases consisted primarily of computer equipment. Cash flow used by financing activities totaled $737,000, consisting of payments on our capital lease of $594,000, payments on our building debt of $101,000, and purchases of treasury stock of $65,000, offset partially by proceeds from employee stock option exercises totaling $23,000.
We expect to fund our operating and liquidity needs as well as our current expansion of Tandy Leather's retail store chain from a combination of current cash balances and internally generated funds.
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