TANDY LEATHER FACTORY, INC. Our Business
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, a hub for the local leathercrafting community and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders
generated from our four websites: tandyleather.com, tandyleather.ca,
tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut
leather pieces and most of the do-it-yourself kits that are sold in our stores
and on our websites. We also offer production services to our business
customers such as cutting ("clicking"), splitting, and some assembly. We
maintain our principal offices at
Currently, the Company operates a total of 106 retail stores. There are 95
stores in
New management joined the Company in
Key initiatives in 2020 and 2021 included:
? Accelerating implementation of our new web platform which supported a
significantly improved consumer experience (look-and-feel, searchability,
relevant content including video, and product and pricing information)
integration of inventory, shipping and other systems, and substantial reduction
in the time, manual effort and need for outside resources to make additions and
changes;
? Accelerating centralization of our web fulfillment activities to our
warehouse which provided significant improvement in fulfillment rates and
shipping times, and supported early product testing, an increase in product
breadth by offering online-only items that required limited inventory
investment, and other inventory efficiencies;
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Table of Contents ? Shifting marketing resources from print and in-store activities to digital,
with increased investments in SEO, SEM, email, digital advertising, social
media, SMS/MMS, and affiliate links;
? Accelerating the retail employee training program in the areas of product
knowledge, leathercrafting knowledge and selling tools while stores were
closed;
? Continuing to drive the Commercial Program, through a dedicated team focused on
the Company's largest customers with a business model that meets these
customers' unique needs including dedicated sales representatives, clear and
competitive volume-based pricing, personalized service and sourcing, shipping
directly to customers from our distribution center, and improved product
consistency, quality and availability;
? Continuing to improve the quality and assortment of the product offering to
better appeal to more advanced leather-crafters and business customers; and
? Continuing to build the organization, processes, infrastructure, tools and
systems to efficiently execute these strategies.
Delisting of Company Stock
Nasdaq suspended trading in the Company's shares as of
COVID-19 and Outlook
In late 2019, COVID-19 was detected in
In response, we took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees, comprising two-thirds of the Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms with our key product vendors.
Due to our size, we were not eligible for the Paycheck Protection Program
administered through the
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Nine stores were permanently closed during 2020 as leases expired or early
terminations were negotiated, including at locations where we believe we can
retain a majority of customers through geographically proximate stores and/or
our enhanced website platform. After these permanent closures, Tandy operates
106 stores, including ten in
On
While we previously fulfilled our web orders out of our retail stores, during
the second quarter of 2020, we built a centralized web fulfillment capability in
our
As part of the Company's accounting policy for long-lived asset impairments, we believed the COVID-19 impact on the Company's results of operations, cash flows and financial position and the ongoing uncertainty the virus had created around future operating results represented a triggering event starting in the first quarter of 2020 and continued throughout the remainder of 2020.
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 Form 10-K for the year ended
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via two methods: (1) at the store counter and (2) shipment of product generally via web sales. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when control passes to the customer. Shipping terms are normally free on board ("FOB") shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly.
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Inventory. Inventory is stated at the lower of cost (first-in, first-out) or
net realizable value. Finished goods held for sale includes the cost of
merchandise purchases, the costs to bring the merchandise to our
Leases. We lease certain real estate for our retail store locations under
long-term lease agreements. Starting in 2019, with the adoption of Accounting
Standards Update ("ASU") 2016-02, Leases (Topic 842), once we have determined an
arrangement is a lease, at inception we recognize a lease asset and lease
liability at commencement date based on the present value of the lease payments
over the lease term. For our operating leases, the present value of our lease
payments may include: (1) rental payments adjusted for inflation or market
rates, and (2) lease terms with options to renew the lease when it is reasonably
certain we will exercise such an option. The exercise of lease renewal options
is generally at our discretion. Payments based on a change in an index or market
rate are not considered in the determination of lease payments for purposes of
measuring the related lease liability. We discount lease payments using our
incremental borrowing rate based on information available as of the measurement
date. Rent expense is recorded in operating expenses. The net excess of rent
expense over the actual cash paid has been recorded as accrued expenses and
other liabilities in the accompanying consolidated balance sheets. For finance
leases, our right-of-use assets are amortized on a straight-line basis over the
earlier of the useful life of the right-of-use asset or the end of the lease
term with rent expense recorded to operating expenses. We adjust the lease
liability to reflect lease payments made during the period and interest incurred
on the lease liability using the effective interest method. The incurred
interest expense is recorded in interest expense on the consolidated statements
of operations and comprehensive income (loss). As of
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Table of Contents Impairment of Long-Lived Assets. We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use ("ROU") lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group's major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method.
Stock-based Compensation. The Company's stock-based compensation primarily relates to restricted stock unit ("RSU") awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company's stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards. Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more likely than not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.
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Table of Contents Results of Operations
Three Months Ended
The following table presents selected financial data:
(in thousands) Three Months Ended March 31,
2021 2020 $ Change % Change
Sales $ 21,394 $ 17,145 $ 4,249 24.8 %
Gross profit 12,186 9,866 2,320 23.5 %
Gross margin percentage 57.0 % 57.5 % (0.5 %)
Operating expenses 11,221 11,096 125 1.1 %
Impairment expenses - 1,069 (1,069 ) (100.0 %)
Income (loss) from operations $ 965 $ (2,299 ) $ 3,264 (142.0 %)
Net Sales
Consolidated sales for the quarter ended
Our store footprint consisted of 106 stores at
Gross Profit
Our gross margin percentage for the quarter ended
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Operating expenses
(in thousands) Three Months Ended March 31,
2021 2020
Operating expenses $ 11,221 $ 11,096
Non-routine items related to restatement (707 ) (668 )
Non-routine items related to CFO transition - (192 )
Adjusted operating expenses $ 10,514 $ 10,236
Operating expenses % of sales 52.4 % 64.7 %
Adjusted Operating expenses % of sales 49.1 % 59.7 %
Operating expenses increased
Income Taxes
Our effective tax rate for the three months ended
Capital Resources, Liquidity and Financial Condition
We require cash principally for day-to-day operations, to purchase inventory and
to finance capital investments. We expect to fund our operating and liquidity
needs primarily from a combination of current cash balances and cash generated
from operating activities. Any excess cash will be invested as determined by
our Board of Directors in accordance with its approved investment policy. Our
cash balances as of
Lines of Credit
On
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Table of Contents Debt Agreements
During the second quarter of 2020, the Company borrowed
Share Repurchase Program
In
On
On
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