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

Show all filings for TANDY LEATHER FACTORY INC

Form 10-Q for TANDY LEATHER FACTORY INC


14-Nov-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 7 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.


Table of Contents
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 continuing financial uncertainty around the world.

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.

Results of Operations

Three Months Ended September 30, 2013 and 2012

The following tables present selected financial data of each of our three
segments for the quarters ended September 30, 2013 and 2012.

                       Quarter Ended September 30,      Quarter Ended September 30,
                                  2013                             2012
                           Sales        Operating           Sales        Operating
                                          Income                           Income
Wholesale Leathercraft    $6,476,676      $956,721         $6,242,602    $(297,897)
Retail Leathercraft       11,128,646     1,351,062          9,947,911       987,704
Int'l Leathercraft           919,282        97,570            810,215      (44,951)
Total Operations         $18,524,604    $2,405,353        $17,000,728      $644,856

Consolidated net sales for the quarter ended September 30, 2013 increased $1.5 million, or 9%, compared to the same period in 2012. All three segments contributed to the sales increase with gains ranging from 4% to 13%. Operating income on a consolidated basis for the quarter ended September 30, 2013 increased 273%, or $1.8 million, compared to the third quarter of 2012. The primary reason for the significant increase in operating income was the one-time charge of $994,000 related to the settlement of litigation that was recorded in the third quarter of 2012, but was not repeated in the third quarter of 2013. (See Note 6 to the consolidated financial statements included in Item 1 of this Report for additional information.)

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

2013 2012 % change Net income $1,561,832 $280,770 456%

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 September 30, 2013 and
2012:

                                                 Quarter Ended
Customer Group                                09/30/13   09/30/12
 RETAIL (end users, consumers, individuals)        38%        33%
 INSTITUTION (prisons, prisoners, hospitals,        5%         6%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       43%        44%
& tack shops, authorized dealers, etc.)
 MANUFACTURERS                                      7%         8%
 NATIONAL ACCOUNTS                                  7%         9%
                                                  100%       100%

Net sales increased 3.8%, or $234,000, for the third quarter of 2013 as follows:

                         #    Qtr Ended    Qtr Ended       $        %
                       Stores  09/30/13     09/30/12     Change  Change
Same store sales         29   $6,105,137   $5,821,208   $283,929    4.9%
National account group           371,539      421,394   (49,855) (11.8)%
Total sales                   $6,476,676   $6,242,602   $234,074    3.8%


Table of Contents

Our same store sales increased 4.9% in the third quarter of 2013, as compared with the same period in 2012. Compared to the third quarter of 2012, we achieved sales dollar increases in our retail and wholesale customer categories, which were offset somewhat by minimal decreases in our institution, manufacturing, and national account 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, as well as inmates and prisons, which are all included in our institution customer group, declined compared to last year's third quarter due to a reduction in funding of programs. Sales to our National Account customers were down 12% for the quarter, compared to the same quarter last year. 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 stop supplying certain products with unacceptable gross profit margins that these customers were previously buying. Therefore, it is likely we will experience further sales declines to our National Account group if the products we stock are 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 September 30, 2013 increased $1.2 million, or 421%, from the comparative 2012 quarter. Our gross profit margin increased from 65.9% to 67.3% 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 53%, down $1.0 million from the third quarter of 2012. The primary reason for the operating expense decrease was the one-time charge of $994,000 related to the settlement of litigation that was recorded in the third quarter of 2012, but was not repeated in the third quarter of 2013. (See Note 6 to the consolidated financial statements included in Item 1 of this Report for additional information.) Significant expense increases occurred in employee compensation ($274,000), legal and professional fees ($178,000), which were offset by decreases in bad debts ($87,000), dues and subscriptions ($23,000), health insurance costs ($116,000), rents ($49,000), and supplies ($65,000). The increase in employee compensation is due to an increase in employee count that is attributable to an increase in the size of certain stores. The increase in legal fees is attributable to one time fees incurred for new trademark filings.

Retail Leathercraft

Our Retail Leathercraft segment consists of 78 and 77 Tandy Leather Company
retail stores at September 30, 2013 and 2012, respectively. Net sales increased
12% for the third 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.

                   #     Qtr Ended    Qtr Ended        $        %
                 Stores  09/30/13      09/30/12      Change   Change
Same store sales   77   $11,004,898   $9,947,911   $1,056,987  10.6%
New store sales    1        123,748            -      123,748    N/A
Total sales             $11,128,646   $9,947,911   $1,180,735  11.9%

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

                                                 Quarter Ended
Customer Group                                09/30/13   09/30/12
 RETAIL (end users, consumers, individuals)        57%        60%
 INSTITUTION (prisons, prisoners, hospitals,        4%         5%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       36%        33%
& tack shops, authorized dealers, etc.)
 NATIONAL ACCOUNTS                                   -          -
 MANUFACTURERS                                      3%         2%
                                                  100%       100%

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

Sales to each customer group increased solidly over the third quarter of 2012, with the exception of our institution customer group. Sales to summer camps and youth programs, which are part of our institution customer group, declined compared to last year's third quarter due to a decrease in participation and funding of these programs. Our gross profit margin increased from 58.8% to 60.7% due to the strength in sales to our retail customers. Sales to our retail customer group bring higher margins compared to our other customer groups as our retail selling prices are higher than our other selling prices. Operating income increased $363,000, or 37%, from the comparative 2012 quarter. Operating income as a percentage of sales improved from 9.9% in the third quarter of 2012 to 12.1% in the third quarter of 2013 due to the increase in gross profit margin, partially offset by the increase in operating expenses. Operating expenses as a percentage of sales decreased from 48.9% to 48.5% as expenses grew at a slightly slower rate than that of sales during the quarter. Operating expenses increased $541,000 over the third quarter of 2012. Compared to last year's third quarter, manager bonuses increased $160,000 due to an increase in store profit. Advertising and marketing expenses increased $87,000, due to special advertising related to store relocations, credit card fees and freight out (shipping to customers) increased $62,000 as a result of the increase in sales, rent and utilities expense increased $43,000 as we continue to move stores into larger locations, and supplies expense was up $12,000.

International Leathercraft

International Leathercraft consists of all stores located outside of North
America. As of September 30, 2013 and 2012, the segment contained three stores,
with one each located in United Kingdom, Australia, and Spain. Net sales
increased 13.5% for the third 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.

                   #    Qtr Ended   Qtr Ended      $       %
                 Stores 09/30/13    09/30/12     Change  Change
Same store sales   3     $919,282    $810,215   $109,067  13.5%
New store sales    -            -           -          -    N/A
Total sales              $919,282    $810,215   $109,067  13.5%

Gross profit margin as a percentage of sales increased from 55.0% in the third quarter of 2012 to 64.2% in the third 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, the mix of products sold has a direct impact on gross margins. A larger ratio of non-leather items sold to leather sold will raise margins as non-leather items bring higher margins. Similarly, a larger ratio of leather sold to non-leather items sold will lower margins as leather brings lower margins. Operating expenses totaled $492,000 in the third quarter of 2013, up $2,000 from $490,000 in the third quarter of 2012. Compared to last year's third quarter, advertising and marketing expenses were up $27,000 and employee compensation was down $15,000. 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 $51,000 in interest expense in the third quarter of 2013 on our bank debt, which is related to our building purchase, compared to $59,000 in interest expense in the third quarter last year. We recorded other income, consisting of gas royalties and miscellaneous non-operating income, of $33,000 in the current quarter compared to $17,000 in last year's comparable quarter. We recorded an expense of $20,000 during the third quarter of 2013 related to currency fluctuations from our international operations. Comparatively, in the third quarter of 2012, we recorded an expense of $18,000 for currency fluctuations.

Nine Months Ended September 30, 2013 and 2012

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

                      Nine Months Ended              Nine Months Ended
                     September 30, 2013             September 30, 2012
                                 Operating                      Operating
                     Sales         Income           Sales         Income
Wholesale         $19,934,996    $2,853,219      $19,678,009    $2,038,267
Leathercraft
Retail             33,930,587     4,243,006       30,093,864     3,655,932
Leathercraft
International       2,869,861       276,052        2,310,188      (30,395)
Leathercraft
Total Operations  $56,735,444    $7,372,277      $52,082,061    $5,663,804


Table of Contents
Consolidated net sales for the nine months ended September 30, 2013 were up 9% compared to the same period in 2012, increasing $4.7 million. All three reporting segments contributed to the sales increase. Retail Leathercraft contributed the largest sales increase of $3.8 million, followed by International Leathercraft reporting an increase of $560,000 and Wholesale Leathercraft reporting an increase of $257,000. The increase in inventory at the stores, coupled with targeted advertising efforts, contributed to the sales increase. Operating income on a consolidated basis for the nine months ended September 30, 2013 increased 30%, or $1.7 million, compared to the first three quarters of 2012.

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

2013 2012 % change Net income $4,777,506 $3,394,514 40.7%

Wholesale Leathercraft

Net sales increased 1.3%, or $257,000, for the first nine months of 2013 as
follows:

                         #    Nine Months   Nine Months       $        %
                       Stores    Ended         Ended       Change   Change
                               09/30/13      09/30/12
Same store sales         29   $18,897,124   $18,232,337    $664,787    3.7%
National account group          1,037,872     1,445,672   (407,800) (28.2)%
Total sales                   $19,934,996   $19,678,009    $256,987    1.3%

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

                                               Nine Months Ended
Customer Group                                09/30/13   09/30/12
 RETAIL (end users, consumers, individuals)        38%        34%
 INSTITUTION (prisons, prisoners, hospitals,        4%         5%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       44%        43%
& tack shops, authorized dealers, etc.)
 MANUFACTURERS                                      7%         8%
 NATIONAL ACCOUNTS                                  7%        10%
                                                  100%       100%

Operating income for Wholesale Leathercraft for the first nine months of 2013 increased by $815,000 from the comparative 2012 period, a 40% improvement. Compared to the first nine months of 2012, operating expenses decreased $558,000 for the first nine months of 2013, decreasing as a percentage of sales from 55.3% to 51.8%. The primary reason for the operating expense decrease was the one-time charge of $994,000 related to the settlement of litigation that was recorded in the third quarter of 2012, but was not repeated in the third quarter of 2013. (See Note 6 to the consolidated financial statements included in Item 1 of this Report for additional information.)

Retail Leathercraft
Net sales were up 12.8% for the first nine months of 2013 over the same period
last year.

                          Nine Months Ended   Nine Months Ended       $        %
                 # Stores     09/30/13            09/30/12          Change   Change
Same store sales    77          $33,563,875         $30,093,864   $3,470,011  11.5%
New store sales     1               366,712                   -      366,712    N/A
Total sales                     $33,930,587         $30,093,864   $3,836,723  12.8%

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

                                               Nine Months Ended
Customer Group                                09/30/13   09/30/12
 RETAIL (end users, consumers, individuals)        57%        59%
 INSTITUTION (prisons, prisoners, hospitals,        4%         5%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       36%        33%
& tack shops, authorized dealers, etc.)
 NATIONAL ACCOUNTS                                   -          -
 MANUFACTURERS                                      3%         3%
                                                  100%       100%

The retail stores averaged approximately $48,000 in sales per store per month for the first three quarters of 2013.

Operating income for the first nine months of 2013 increased $587,000, or 16%, from the comparative 2012, and increased slightly as a percentage of sales from 12.2% in the first nine months of 2012 to 12.5% in the first nine months of 2013 due to sales growing faster than expenses. Gross margin decreased slightly from 61.0% 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 effect gross profit margin positively or negatively. During the first nine months of 2013, non-retail sales increased faster than retail sales, resulting in a slight decline in gross profit margin. Operating expenses as a percentage of sales were 48.2% for the first nine months of 2013, a slight improvement over 48.9% for the first nine months of 2012.

International Leathercraft

International Leathercraft consists of all stores located outside of North
America. As of September 30, 2013 and 2012, the segment contained three stores
with one each located in United Kingdom, Australia, and Spain. Net sales
increased 24.2% for the first three quarters 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.

                   #    Nine Months Ended   Nine Months Ended      $       %
                 Stores     09/30/13            09/30/12         Change  Change
Same store sales   3           $2,869,861          $2,310,188   $559,673  24.2%
New store sales    -                    -                   -          -      -
Total sales                    $2,869,861          $2,310,188   $559,673  24.2%

Gross profit margin as a percentage of sales increased from 61.9% in the first nine months of 2012 to 62.6% in the first nine months 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 $1.5 million in the first nine months of 2013, up $60,000 from $1.4 million in the first nine months of 2012. Freight out . . .

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