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TLF > SEC Filings for TLF > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for TANDY LEATHER FACTORY INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for TANDY LEATHER FACTORY INC


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 NASDAQ Global Market under the symbol "TLF." We operate our business in three 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, and International Leathercraft, which operates combination retail/wholesale stores outside of North America under the trade name, Tandy Leather Factory. See Note 8 to the Consolidated Financial Statements for additional information concerning our segments, as well as our foreign operations.

Our Wholesale Leathercraft segment operates 29 company-owned wholesale stores in 19 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, whose customers are only national craft chains.

Our Retail Leathercraft segment operates company-owned Tandy Leather Company retail stores in 37 states and six Canadian provinces. Tandy Leather Company, one of the oldest and one of the best-known suppliers of leather and related supplies used in the leathercraft industry, has been a primary leathercraft resource for decades. Tandy Leather Company's products include quality tools, leather, accessories, kits and teaching materials. In 2002, we began expanding Tandy Leather Company's industry presence by opening retail stores. As of August 1, 2013, we were operating 78 Tandy Leather Company retail stores located throughout the United States and Canada.

Our International Leathercraft segment operates 3 company-owned stores, all located outside of North America. These stores operate as combination retail / wholesale stores and consist of one store in Northampton, United Kingdom, one store in Sydney, Australia, and one store in Jerez, Spain. We expect to open additional stores outside of North America in the future, although specific locations and opening dates have not yet been determined.

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, 2012.

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, 2012 for additional information concerning these and other uncertainties that could negatively impact the Company.

Our business may be negatively impacted by general economic conditions and the current global financial crisis.

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also small businesses and other retailers. Specialty retail, and retail in general, is heavily influenced by general economic cycles. Purchases of non-essential products tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income declines. During periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain our earnings from operations as a percentage of net sales. The United States and global economies have suffered from economic uncertainty for the past several years. Consumer spending in the United States appears to have stabilized recently, but could deteriorate in the future. As a result, our operating results may be adversely and materially affected by downward trends or uncertainty in the United States or global economies.

Our profitability may decline as a result of increasing pressure on margins.

Our industry is subject to significant pricing pressure caused by many factors, including fluctuations in the cost of the leather and metal products that we purchase and changes in consumer spending patterns and acceptance of our products. These factors may prohibit us from passing cost increases on to customers which could cause our gross margin to decline. If our product costs increase and our sale prices do not, our future operating results could be adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs.

We may be unsuccessful in implementing our planned international expansion, which could impair the value of our brand, harm our business and negatively affect our results of operation.

We plan to grow our net sales and net earnings from our International segment by opening store in various international markets. As we expand outside of North America, we may incur significant costs relating to starting up, maintaining and expanding foreign operations. Costs may include, but are not limited to, obtaining locations for stores, hiring personnel, and travel expenses. We may be unable to open and operate new stores successfully and our growth may be limited, unless we are able to identify desirable sites for store locations; negotiate acceptable lease terms; hire, train and retain competent store personnel; manage inventory effectively to meet the needs and demands of customers on a timely basis; manage foreign currency risk effectively; and achieve acceptable operating margins from the new stores. We cannot be sure that we can successfully open new stores or that our new stores will be profitable.

As we continue to increase our international operations, we face the possibility of greater losses from a number of risks inherent in doing business in international markets and from a number of factors which are beyond our control, such as political instability or acts of terrorism, which disrupt trade with the countries in which our suppliers or customers are located; local business practices that do not conform to legal or ethical guidelines; restrictions or regulations relating to imports or exports; additional or increased customs duties, tariffs, taxes and other charges on imports; significant fluctuations in the value of the dollar against foreign currencies; social, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell our products in these markets; and restrictions on the transfer of funds between the United States and foreign jurisdictions.

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.


Table of Contents
Results of Operations

Three Months Ended June 30, 2013 and 2012

The following tables present selected financial data of each of our three
segments for the quarters ended June 30, 2012 and 2011.

                        Quarter Ended June 30, 2013      Quarter Ended June 30, 2012
                          Sales      Operating Income      Sales      Operating Income
Wholesale Leathercraft  $6,728,586           $883,533    $6,282,990         $1,103,311
Retail Leathercraft     11,242,080          1,377,105     9,863,139          1,309,503
Int'l Leathercraft       1,002,347             85,426       758,125             51,958
Total Operations       $18,973,013         $2,346,064   $16,904,254         $2,464,772

Consolidated net sales for the quarter ended June 30, 2013 increased $2.1 million, or 12.2%, compared to the same period in 2012. All three segments contributed to the sales increase with gains ranging from 7% to 32%. Operating income on a consolidated basis for the quarter ended June 30, 2013 declined 4.8%, or $119,000, from the second quarter of 2012.

The following table shows in comparative form our consolidated net income for the second quarters of 2013 and 2012:

2013 2012 % change Net income $1,629,353 $1,539,638 5.8%

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

Wholesale Leathercraft

Our Wholesale Leathercraft segment consists of 29 wholesale stores and our
National Account sales group. The National Account sales group's customers
consist of only national craft chains. The following table presents the combined
sales mix by customer categories for the quarters ended June 30, 2013 and 2012:

                                                          Quarter Ended
         Customer Group                                06/30/13   06/30/12
          RETAIL (end users, consumers, individuals)        38%        33%
          INSTITUTION (prisons, prisoners, hospitals,        5%         8%
         schools, youth organizations, etc.)
          WHOLESALE (resellers & distributors, saddle       45%        44%
         & tack shops, authorized dealers, etc.)
          MANUFACTURERS                                      6%         9%
          NATIONAL ACCOUNTS                                  6%         6%
                                                           100%       100%

Net sales increased 7.1%, or $446,000, for the second quarter of 2013 as follows:

                            # Stores Qtr Ended     Qtr Ended    $ Change % Change
                                      06/30/13      06/30/12
     Same store sales          29     6,347,666    $6,070,345   $277,321     4.6%
     National account group             380,920       212,645    168,275    79.1%
     Total sales                     $6,728,586    $6,282,990   $445,596     7.1%

Our same store sales increased 4.6% in the second quarter of 2013, as compared with the same period in 2012. Compared to the second quarter of 2012, we achieved sales dollar increases in our retail customer category, as well as to our National Account customers, which were offset somewhat by decreases in our institution, wholesale and manufacturing customer categories. We continue to see strength from our retail customer group, while our other customer groups appear to be less stable. Sales to summer camps and youth programs, which are part of our institution customer group, declined compared to last year's second quarter due to a decrease in participation and funding of these programs. Sales to inmates and prisons, also part of our institution customer group, declined due to reduced funding as well. Our wholesale customers appear to have stabilized somewhat, but with the uncertainty surrounding the domestic economy overall, we are not confident that this stabilization will continue. Sales to our National Account customers were up 79% for the quarter, compared to the same quarter last year, due to the timing of orders from one customer. As discussed in our previous filings, we expect sales to our National Accounts customers to continue to decline year over year due to our decision to eliminate certain products from our line that these customers were buying due to unacceptable gross profit margins. Therefore, it is likely we will experience further sales declines to our National Account group if the product we stock is not what these customers want to purchase. Our primary focus is on sales through our stores, rather than National Accounts, as we believe our stores represent the greatest potential for continued and consistent sales growth.

Operating income for Wholesale Leathercraft during the quarter ended June 30, 2013 decreased $220,000, or 20%, from the comparative 2012 quarter. Our gross profit margin increased from 68.0% to 69.1% as our sales to retail customers increased. Those sales bring higher margins than sales to wholesale customers. Operating expenses as a percentage of sales were 56%, up $594,000 from the second quarter of 2012. Significant expense increases occurred in employee compensation and benefits ($243,000), advertising and marketing ($210,000), legal fees ($138,000), repairs and maintenance ($50,000), supplies ($50,000), commercial insurance ($43,000), outside services ($46,000), and loss on disposal of assets ($61,000). The expense increases were partially offset by $300,000 related to the settlement of litigation. (See Note 6 to the consolidated financial statements included in Item 1 of this Report for additional information regarding such litigation.) The increase in employee compensation and benefits is due to an increase in employee count that is attributable to an increase in the size of certain stores. Our advertising and marketing expenses are higher than last year due to an increase in the number of mailing pieces we have produced this year compared to last year and the associated postage to mail those pieces. The increase in legal fees is attributable to one time fees incurred for new trademark filings and the adoption of a stockholder rights plan. The increase in supplies, repairs and maintenance, and loss on disposal of assets are one-time expenses associated with the move and opening of our flagship store into its new facility this quarter.


Table of Contents
Retail Leathercraft

Our Retail Leathercraft segment consists of 78 and 77 Tandy Leather Company
retail stores at June 30, 2013 and 2012, respectively. Net sales increased 14%
for the second quarter of 2013 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     $ Change  % Change
                                  06/30/13      06/30/12
       Same store sales    77    $11,118,834   $9,863,139   $1,255,695    12.7%
       New store sales     1         123,246            -      123,246      N/A
       Total sales               $11,242,080   $9,863,139   $1,378,941    14.0%

The following table presents sales mix by customer categories for the quarters ended June 30, 2013 and 2012 for our Retail Leathercraft operation:

                                                          Quarter Ended
         Customer Group                                06/30/13   06/30/12
          RETAIL (end users, consumers, individuals)        57%        58%
          INSTITUTION (prisons, prisoners, hospitals,        5%         6%
         schools, youth organizations, etc.)
          WHOLESALE (resellers & distributors, saddle       35%        34%
         & tack shops, authorized dealers, etc.)
          NATIONAL ACCOUNTS                                   -          -
          MANUFACTURERS                                      3%         2%
                                                           100%       100%

The retail stores averaged approximately $48,000 in sales per month for the second quarter of 2013.

Sales to each customer group increased solidly over the second quarter of 2012, with the exception of our institution customer group, whose decline was minimal (2%). Our gross profit margin decreased from 62.3% to 59.3% due to the increase in sales to non-retail customers compared to last year. Sales to our customer groups other than Retail bring lower margins. Operating income increased $68,000, or 5.2%, from the comparative 2012 quarter. Operating income as a percentage of sales declined from 13.3% in the second quarter of 2012 to 12.3% in the second quarter of 2013 due to the decrease in gross profit margin. Operating expenses as a percentage of sales decreased from 49.0% to 47.1% as expenses grew at a slower rate than that of sales during the quarter. Operating expenses increased $458,000 over the second quarter of 2012. Compared to last year's second quarter, employee compensation and benefits increased $140,000 due to an increase in employee count attributable to an increase in the size of certain stores, advertising and marketing expenses increased $96,000, due to special advertising related to store relocations, credit card fees and freight out (shipping to customers) increased $58,000 as a result of the increase in sales, property insurance increased $20,000 due to the additional fixtures in the larger stores, rent and utilities expense increased $52,000 as we continue to move stores into larger locations, and supplies were up $13,000.

International Leathercraft

International Leathercraft consists of all stores located outside of North
America. As of June 30, 2013 and 2012, the segment contained three stores, with
one each located in United Kingdom, Australia, and Spain. Net sales increased
32.2% for the second quarter of 2012 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 06/30/13   Qtr Ended 06/30/12   $ Change % Change
 Same store sales    3             $1,002,347             $758,125   $244,222    32.2%
 New store sales     -                      -                    -          -      N/A
 Total sales                       $1,002,347             $758,125   $244,222    32.2%

Gross profit margin as a percentage of sales decreased from 68.7% in the second quarter of 2012 to 60.0% in the second quarter of 2013. We determine selling prices taking into consideration the currency conversion between the U.S. dollar and the local currency, as well as local market conditions. Further, as these stores expand their customer bases, they sell more leather, which brings lower margins than tools and supplies. Operating expenses totaled $516,000 in the second quarter of 2013, up $47,000 from $469,000 in the second quarter of 2012. Compared to last year's second quarter, advertising and marketing expenses were up $20,000, freight out (shipping to customers) increased $19,000, and credit card fees were up $5,000. Advertising and marketing expenses were this segment's largest expense in the quarter, followed by employee compensation, freight out, legal and professional fees, and rent.

Other Expenses

We paid $52,000 in interest expense in the second quarter of 2013 on our bank debt, which is related to our building purchase, compared to $58,000 in interest expense in the second quarter last year. We earned $800 in interest income during the second quarter of 2013, down from last year's second quarter interest income earned of $1,000. We recorded income of $38,000 during the second quarter of 2013 related to currency fluctuations from our international operations. Comparatively, in the second quarter of 2012, we recorded income of $30,000 for currency fluctuations.

Six Months Ended June 30, 2013 and 2012

The following table presents selected financial data of each of our three
segments for the six months ended June 30, 2013 and 2012:

                       Six Months Ended June 30,       Six Months Ended June 30,
                                  2013                            2012
                          Sales        Operating          Sales        Operating
                                         Income                          Income
     Wholesale          $13,458,320    $1,896,498       $13,435,407    $2,336,163
     Leathercraft
     Retail              22,801,941     2,891,944        20,145,953     2,668,228
     Leathercraft
     International        1,950,579       178,482         1,499,972        14,556
     Leathercraft
     Total Operations   $38,210,840    $4,966,924       $35,081,332    $5,018,947

Consolidated net sales for the six months ended June 30, 2013 were up 9% compared to the same period in 2012, increasing $3.1 million. All three reporting segments contributed to the sales increase. Retail Leathercraft contributed the largest sales increase of $2.7 million, followed by International Leathercraft reporting an increase of $451,000 and Wholesale Leathercraft reporting an increase of $23,000. The increase in inventory at the stores, coupled with the increase in additional advertising efforts, contributed to the sales increase. Operating income on a consolidated basis for the six months ended June 30, 2013 was down 1.0% compared to the first half of 2012, decreasing $52,000.

The following table shows in comparative form our consolidated net income for the first half of 2013 and 2012:

2013 2012 % change Net income $3,215,674 $3,113,744 3.3%


Table of Contents

Wholesale Leathercraft

Net sales increased 0.2%, or $23,000, for the first half of 2013 as follows:

                           # Stores Six Months    Six Months    $ Change  % Change
                                       Ended         Ended
                                     06/30/13      06/30/12
    Same store sales          29    $12,791,987   $12,411,129    $380,858     3.1%
    National account group              666,333     1,024,278   (357,945)  (34.9)%
    Total sales                     $13,458,320   $13,435,407     $22,913     0.2%

The following table presents the combined sales mix by customer categories for the six months ended June 30, 2013 and 2012:

                                                        Six Months Ended
         Customer Group                                06/30/13   06/30/12
          RETAIL (end users, consumers, individuals)        39%        33%
          INSTITUTION (prisons, prisoners, hospitals,        4%         6%
         schools, youth organizations, etc.)
          WHOLESALE (resellers & distributors, saddle       44%        44%
         & tack shops, authorized dealers, etc.)
          MANUFACTURERS                                      6%         7%
          NATIONAL ACCOUNTS                                  7%        10%
                                                           100%       100%

Operating income for Wholesale Leathercraft for the first half of 2013 decreased by $440,000 from the comparative 2012 period, a 19% decline. Compared to the first six months of 2012, operating expenses increased $449,000 for the first half of 2013, increasing as a percentage of sales from 48.1% to 51.4%.

Retail Leathercraft

Net sales were up 13.2% for the first half of 2013 over the same period last
year.

                           # Stores Six Months  Six Months   $ Change  % Change
                                       Ended       Ended
                                     06/30/13    06/30/12
     Same (existing) store    77    $22,558,976 $20,145,953 $2,413,023    12.0%
     sales
     New store sales          1         242,965           -    242,965      N/A
     Total sales                    $22,801,941 $20,145,953 $2,655,988    13.2%

The following table presents sales mix by customer categories for the six months ended June 30, 2013 and 2012 for our Retail Leathercraft operation:

                                                        Six Months Ended
         Customer Group                                06/30/13   06/30/12
          RETAIL (end users, consumers, individuals)        60%        60%
          INSTITUTION (prisons, prisoners, hospitals,        4%         5%
         schools, youth organizations, etc.)
          WHOLESALE (resellers & distributors, saddle       34%        32%
         & tack shops, authorized dealers, etc.)
          NATIONAL ACCOUNTS                                   -          -
          MANUFACTURERS                                      2%         3%
                                                           100%       100%

The retail stores averaged approximately $49,000 in sales per month for the first half of 2013.

Operating income for the first six months of 2013 increased $224,000 from the comparative 2012, but declined slightly as a percentage of sales from 13.2% in the first half of 2013 to 12.7% in the first half of 2012 due to the decline in gross profit margin percentage. Gross margin decreased from 62.1% to 60.7% due to the customer mix. The ratio of retail sales, which brings a higher margin, to non-retail sales, which brings a lower margin, can affect gross profit margin positively or negatively. During the first six months of 2013, non-retail sales have increased faster than that of retail sales, resulting in a decline in gross profit margin. Operating expenses as a percentage of sales were 48.0% for the first half of 2013, a slight improvement over 48.9% for the first half of 2012, as sales grew slightly faster than expenses.

International Leathercraft

International Leathercraft consists of all stores located outside of North
America. As of June 30, 2013 and 2012, the segment contained three stores with
one each located in United Kingdom, Australia, and Spain. Net sales increased
30.0% for the first half of 2013 over the same period last year. A store is
categorized as "new" until it is operating for the full comparable period in the
prior year.

                         # Stores Six Months    Six Months   $ Change % Change
                                    Ended         Ended
                                   06/30/13      06/30/12
        Same store sales    3     $1,950,579    $1,499,972   $450,607    30.0%
        New store sales     -              -             -          -        -
        Total sales               $1,950,579    $1,499,972   $450,607    30.0%

Gross profit margin as a percentage of sales decreased from 65.7% in the first half of 2012 to 61.8% in the first half of 2013. Selling prices are determined based on the currency conversion between the U.S. dollar and the local currency. In addition, gross profit margin is affected by sales mix - the ratio of higher margin products (tools, supplies, etc.) to lower margin products (leather). Operating expenses totaled $1.0 million in the first half of 2013, up $57,000 from $970,000 in the first half of 2012. Freight out (shipping to . . .

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