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PART I
The following discussion, as well as other portions of this Form 10-K, contains forward-looking statements that reflect our plans, estimates and beliefs. Any such forward-looking statements
(including, but not limited to, statements to the effect that Tandy Leather Factory, Inc. (“TLF”) or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” “intends,” and other similar expressions) that are not statements of
historical fact should be considered forward-looking statements and should be read in conjunction with our Consolidated Financial Statements and related notes contained elsewhere in this report. These forward-looking statements are made based upon
management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and should be read carefully because they involve risks and uncertainties. We assume no obligation to update or otherwise revise
these forward-looking statements, except as required by law. Specific examples of forward-looking statements include, but are not limited to, statements regarding our forecasts of financial performance, share repurchases, store openings or store
closings, capital expenditures and working capital requirements. Our actual results could materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this Form 10-K and particularly in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unless the context otherwise
indicates, references in this Form 10-K to “TLF,” “we,” “our,” “us,” the “Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries.
General
Tandy Leather Factory, Inc. (“TLF,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) is one of the world’s largest specialty retailers of
leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of
quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.
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, and a
hub for the local leathercrafting community, and our 100-year plus 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 global websites, and through direct account representatives in our commercial division. We produce 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”) and splitting and some assembly. We maintain our
principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
The Company’s common shares currently trade on the Nasdaq Capital Market Group under the symbol “TLF.”
Retail Fleet
The Company currently operates a total of 102 retail stores. There are 91 stores in the United States (“U.S.”), 10 stores in Canada and one store in Spain.
All Tandy locations, other than our corporate headquarters (which includes our flagship store, corporate offices, distribution center, and production facility) are leased.
Business Strategy
Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been, and continue to be, our competitive advantage: where our consumers learn the craft in classes, open table, and
from the expertise of our store staff, where they can touch, feel, and test the product, and where they can connect and commune with others passionate about leather. Our websites provide inspiration, detailed product descriptions and
specifications, educational information and videos, and a convenient place to also purchase product – especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web
customers, leatherworking evolves from a passion to a trade. Our commercial division is tailored to the needs of those customers who build businesses around leather. With dedicated direct account representatives, a direct-from-our-warehouse
shipping model, volume-based competitive pricing, customized product development, assembly and pre-assembly services, we are building long-term, strategic relationships with our largest customers.
With COVID-19 and restatement related impacts behind us, and with initiatives to improve our brand proposition and to build the foundation for a modern and efficient retail business taking hold, we believe we have
made significant progress toward building a durable, profitable business model. Our cost of sales and operating expenses have stabilized, and we believe we have the structure, and the operating nimbleness, that can deliver operating profit and
free cash flow even in the face of economic headwinds. Going forward, our strategy is to continue to manage our cost base and use of cash and focus on strengthening our sales by leveraging our competitive advantage of our retail stores. Improving
our employee product knowledge, customer service level and community engagement as well as expanding workshop space in stores with machines are the highest priorities. We need to continue to give customers good reasons to visit stores, and an
excellent return on their time investment when they do.
COVID-19 and Economic Conditions
At the time of filing this Form 10-K, the American and world economies have largely recovered from effects of the COVID-19 pandemic but continue to be affected by a combination of factors arising
from the continuing war in Ukraine, the more recent and worsening crisis in the Israel and the Middle East, and continued tensions between the U.S. and China. While inflation appears to be cooling, food, housing and transportation prices remain
significantly higher than prior to the pandemic – that is not likely to change in the near term and could be further impacted by the global environment. The weakening labor market may relieve pressure on our ability to hire qualified employees,
but recent wage gains are not likely to be reversed. Higher unemployment together with continued high interest rates may further dampen consumer demand and affect the Company’s future financial performance.
Customers
Our customers fall into two broad categories: those who shop in retail stores and on our website (“Retail Customers”) and those whom we serve through our commercial division (“Commercial Customers”). Retail
Customers range from hobbyists to institutions (schools, camps, and other groups) to small businesses. Affinity groups like Military and First Responders and smaller and larger businesses who purchase in our retail stores receive special pricing
or general discounts. To be served through our commercial division, customers generally need to spend more than $20,000.
Merchandise
We carry a wide assortment of products organized into a number of categories including leather, hand tools, hardware, kits, liquids, machines, and other supplies. We operate a production facility in Fort Worth,
Texas, where we produce kits, thread lace, belt strips and straps, and Craftaid® tooling templates, and provide some custom production services for commercial and business customers. The factory produces approximately 10% of our products. We
distribute product under the Tandy LeatherTM, Eco-FloTM, CraftoolTM, CraftoolProTM and Dr. Jackson’sTM brands, along with our premium TandyPro® line of products. We develop and invest in new
products through the ideas and referrals of customers and store personnel as well as the analysis of trends in the market and sales performance at retail. In addition, we have been focused on broadening our assortment through strategic
partnerships with key brands to drive category growth and better meet the needs of our customers.
Operations
Information regarding net sales, gross profit, operating income, and total assets is included within Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and within Item 8,
Financial Statements and Supplementary Data.
Our stores offer a broad selection of products combined with leathercraft expertise in a one-stop shop. Not only can customers purchase leather, related accessories and supplies necessary to complete their projects
from a single source, but many of our store associates are also leathercrafters themselves and can provide suggestions and advice on our customers’ projects. Customers value the expertise and high level of customer service from our store
associates, the convenience of taking their purchases immediately, as well as the ability to touch, feel and choose their individual pieces of leather, an organic product in which each piece is unique. We also offer open workbenches where
customers can work on projects together with the leathercrafting community, and test new tools and techniques.
Most of our stores range in size from 1,300 square feet to 9,000 square feet, with the average at approximately 3,500 square feet. Our Fort Worth flagship store is approximately 22,000 square feet. Stores are
located in light industrial warehouse spaces or older strip shopping centers in proximity to major freeways or well-known crossroads. We believe that many of our customers view our stores as a destination: customers interested in leathercrafting
seek us out, reducing the value of paying high rents for high foot-traffic locations.
Historically, we generate slightly more sales in the fourth quarter of each year due to the holiday shopping season (approximately 28-30% of annual sales), while the other three quarters average approximately 22-24%
of annual sales each quarter.
Distribution
Our stores receive the majority of their inventory from our central distribution center located in Fort Worth, Texas, in weekly or, increasingly, bi-monthly shipments, using third-party transportation providers.
Occasionally, merchandise is shipped to stores directly from the vendor. We now fulfill all of our U.S. and many of our international web orders from our Fort Worth distribution center. Canada web orders are fulfilled out of our 10 Canada stores,
and European web orders are fulfilled out of our Spain store. We have a global customer service team that handles web order inquiries and phone orders. Our goal is to optimize the tradeoff between the sales and market share we realize from having
a broad product line against the safety stock required to support those items. We generally maintain higher inventories of imported or long-lead-time items to ensure a continuous supply. Increased product assortment and some supply chain
disruptions over the past several years have put upward pressure on inventory, offset by better sell-throughs, test-and-learn buying, and strategic partnerships with vendors. We have been executing a number of strategic initiatives to test
smaller quantities of new items online, buying into them only when we are certain of their success, to tailor product assortments to the needs of local customers in each store, and to ship directly from vendors to customers. We carry about 6,500
stock-keeping units (SKUs) in our current product line and continue to refine both the line, the lead times and safety stock levels required to meet customer demand, online vs. in-store assortment, and overall total inventory levels needed to grow
sales and market share.
Competition
Our competitors include smaller, independently-owned brick-and-mortar retailers, internet-based retailers including those selling on platforms like Amazon and
eBay, national craft chains like Michaels Stores, Inc. and Hobby Lobby Stores, Inc., some wholesale-focused distributors, and two mid-sized competitors – Weaver Leather and Springfield Leather – who have one store and an online business.
Virtually all of these competitors carry a more limited line of leathercraft products compared to Tandy. We are competitive on convenience, price, availability of merchandise, customer service, depth of our product line, and delivery time.
Tandy Leather is the only multi-store chain specializing in leathercraft, which we believe provides a competitive advantage over internet-based retailers, the large general craft retailers, and the mid-sized competitors. We also believe that
our large size relative to most competitors gives us an advantage in sourcing as well as deep product and leathercrafting expertise among our employees.
Suppliers
We purchase merchandise and raw materials from nearly 150 suppliers from the United States and approximately 20 foreign countries. In general, our 10 largest suppliers account for approximately 55% of our inventory
purchases, and we had one supplier in 2023 who represented more than 10% of our purchases.
Because leather is sold internationally, market conditions abroad are likely to affect the price of leather in the U.S. Aside from increasing purchases when we anticipate price increases (or possibly delaying
purchases if we foresee price declines), we do not attempt to hedge our inventory costs.
Our supply chain and vendor relationships remain strong. We are focused on continuing to align our product and sourcing strategies to elevate the overall quality, consistency, and agility to meet the diverse needs
of our existing consumers and attract new ones to the brand. The most acute supply chain shocks resulting from the pandemic have mostly moderated, with increases in lead times, product costs and ocean freight costs flattening and even declining in
some areas. However, trucking costs and reliability remain volatile and tight labor markets and rising wages continue to pressure costs across all areas.
Compliance with Environmental Laws
Our compliance with federal, state and local environmental protection laws has not had, and is not expected to have, a material effect on our capital expenditures, earnings, or competitive position.
Employees
As of December 31, 2023, we employed 515 people, 389 of whom were employed on a full-time basis. We are not a party to any collective bargaining agreements. Overall, we believe that relations with employees are
good.
Intellectual Property
The Company owns all the material trademark rights used in connection with the production, marketing, distribution and sale of all Tandy-branded products. In addition, we license a limited number of our trademarks
and copyrights used in connection with the production, marketing and distribution of certain categories of goods and limited edition co-branded projects. Major trademarks include federal trade name registrations for “Tandy Leather Factory,” “Tandy
Leather Company,” and “Tandy.” The Company is not dependent on any one particular trademark or design patent, although it believes that the “Tandy” and “Tandy Leather” names are important for its business. In addition, Tandy owns several patents
for specific belt buckles and leather-working equipment. Tandy polices its trademarks and trade dress and where appropriate pursues infringers. The Company expects that its material trademarks will remain in full force and effect for as long as
we continue to use and renew them.
Foreign Sales
Information regarding our sales from the United States and abroad and our long-lived assets is found in Note 2, Significant Accounting Policies: Revenue Recognition and Note
3, Balance Sheet Components, of the Notes to the Consolidated Financial Statements. For a description of some of the risks related to our foreign operations, see Item 1A, Risk
Factors.
Available Information
We file reports with the SEC. These reports include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these filings. These reports are available on
the Securities and Exchange Commission’s website at www.sec.gov.
Our corporate website is located at www.tandyleather.com. We make copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments thereto
filed with or furnished to the SEC available to investors on or through our website free of charge as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Our SEC filings can be found on the Investor
Relations page of our website through the “SEC Filings” link. In addition, certain other corporate governance documents are available on our website through the “Corporate Governance” link. No information contained on any of our websites is
intended to be included as part of, or incorporated by reference into, this Form 10-K.
Information about our Executive Officers
The following table sets forth information concerning our executive officers as of December 31, 2023:
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Name
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Age
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Executive
Since
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Position
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Janet Carr
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62
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2018
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Chief Executive Officer
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Janet Carr has served as our Chief Executive Officer and as a member of our Board of Directors since October 2018. Prior to her current role, Ms. Carr served as the Senior
Vice-President of Global Business Development for Caleres Inc. (formerly Brown Shoe Company Inc.) from 2016 to 2017. While there, she was responsible for international wholesale and retail for all of their brands. Prior to Caleres, Ms. Carr was
the President of the Handbag Division of Nine West Group Inc. from 2013 to 2014, where she was responsible for all aspects of design, development and sales in both wholesale and retail. Ms. Carr has deep experience in strategy and consumer
insights in various roles at a number of prominent retailers, including Tapestry, Inc. (formerly Coach, Inc.), Gap Inc. and Safeway.
Risks Related to our Business and Business Strategy
The successful execution of our multi-year transformation and operational efficiency initiatives is key to the long-term growth of our business.
The Company continues to implement a large number of initiatives to transform the Company’s business, improve sales long term and improve operational efficiency. These include the realignment of the Company’s retail
division management structure, the closing of underperforming stores, the formation of a new division focused on serving commercial customers, pricing and marketing initiatives, systems improvements, and other changes. The Company believes that
long-term growth will be realized through these transformational efforts over time, however there is no assurance that such efforts will be successful. Actual costs incurred and the timeline of these initiatives may differ from our expectations.
If these initiatives are unsuccessful, our business, financial condition and results of operation could be materially adversely affected.
Our business is subject to the risks inherent in global sourcing activities.
As a Company engaged in sourcing on a global scale, we are subject to the risks inherent in such activities, including, but not limited to:
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unavailability of, or significant fluctuations in the cost of, raw materials;
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disruptions or delays in shipments;
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loss or impairment of key assembly or distribution sites, which also could result in a former manufacturer beginning to produce similar products that compete with ours;
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inability to engage new independent manufacturers that meet the Company’s cost-effective sourcing model;
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product quality issues;
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compliance by us and our independent manufacturers and suppliers with labor laws and other foreign governmental regulations;
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imposition of additional duties, taxes, and other charges on imports or exports;
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embargoes against products originating in countries from which we source;
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increases in the cost of labor, fuel (including volatility in the price of oil), travel and transportation;
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compliance by our independent manufacturers and suppliers with our Code of Business Conduct and Ethics and our Animal Welfare Policy;
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unforeseen public health crises, such as pandemic (e.g., the COVID-19 pandemic) and epidemic diseases;
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natural disasters or other extreme weather events, whether as a result of climate change or otherwise; and
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acts of war or terrorism and other external factors over which we have no control.
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Increases in the price of leather and other items we sell or a reduction in availability of those products could increase our cost of goods and decrease our profitability.
The prices we pay our suppliers for our products are dependent in part on the market price for leather, metals, and other products. The cost of these items may fluctuate substantially, depending on a variety of
factors, including demand, supply conditions, transportation and fuel costs, government regulation, economic climates, war or other political considerations, and other unpredictable factors. Leather prices worldwide have been relatively stable for
the past several years although the outlook for future prices is uncertain. Increases in these costs, together with other factors, would make it difficult for us to sustain the gross margin level we have achieved in recent years and result in a
decrease in our profitability unless we are able to pass higher prices on to our customers or reduce costs in other areas. Changes in consumers’ product preferences or lack of acceptance of our products whose costs have increased may prohibit us
from passing those 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. Accordingly, such increases in costs could adversely affect our business and our results of operations.
Further, involvement by the United States in war and other military operations abroad could disrupt international trade and affect our inventory sources. Finally, livestock diseases, such as mad cow, could reduce
the availability of hides and leathers or increase their cost. The occurrence of any of these events could adversely affect our business and our results of operations.
We are subject to risks associated with leasing retail space under long-term and non-cancelable leases. We may be unable to renew leases on acceptable terms. If we close a leased retail space, we
might remain obligated under the applicable lease.
We lease the majority of our retail store locations under long-term, non-cancelable leases, which have initial or renewed terms typically ranging from three years to ten years and may include lease renewal options.
We believe that most of the lease agreements we will enter into in the future will likely be long-term and non-cancelable. Generally, our leases are “net” leases, which require us to pay our proportionate share of the cost of insurance, taxes,
maintenance, and utilities. We generally cannot cancel these leases at our option. If we determine that it is no longer economical to operate a retail store subject to a lease and decide to close it, as we have done in the past and will do in the
future, we would generally remain obligated under the applicable lease for, among other things, payment of the base rent, common charges, and other net payments for the balance of the lease term. In some instances, we may be unable to close an
underperforming retail store without a significant financial penalty due to continuous operation clauses in our lease agreements. In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable
terms or at all, which could cause us to close retail stores in desirable locations. Our inability to secure desirable retail space or favorable lease terms could impact our ability to grow. Likewise, our obligation to continue making lease
payments in respect of leases for closed retail spaces could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to sustain our financial performance or our past growth, which could have a material adverse effect on our future operating results.
In 2020, we experienced declines in sales and operating income primarily resulting from the COVID-19 pandemic. In 2023, we also experienced declines primarily resulting the longer-term economic effects of COVID-19
(higher food, housing and transportation costs, higher interest rates, lower government subsidies) and the added economic impact of the war in Ukraine and now the Middle East. Many other specialty retailers have experienced declining sales and
losses due to the overall challenging retail environment. Our sales and profits may continue to be negatively affected in the future. We anticipate that our financial performance will depend on a number of factors, including consumer preferences,
the strength and protection of our brand, the introduction of new products, and the success of our business strategy.
Competition, including internet-based competition, could negatively impact our business.
The retail industry is competitive, which could result in the reduction of our prices and loss of our market share. We must remain competitive in the areas of quality, price, breadth of selection, customer service,
and convenience. We compete with smaller retailers focused on leather and leather crafting, some of whom have been able to offer competitive products at lower prices than ours. We also compete with larger specialty retailers (e.g., Michaels
Stores, Inc. and Hobby Lobby Stores, Inc.) that dedicate a small portion of their selling space to products that compete with ours but are larger and have greater financial resources than we do. The Company also faces competition from
internet-based retailers, in addition to traditional store-based retailers. This could result in increased price competition since our customers can more readily search and compare products from internet-based retailers who do not need to support
a physical store fleet and may be able to undercut our prices for products. The growth of internet retailers has also significantly reduced traffic to many shopping centers and physical stores, which, if not countered by an increase in our own
online retailing, could have a material adverse effect on our in-store or overall sales.
Declines in foot traffic in our retail store locations could negatively impact our sales and profits.
The success of our retail stores is affected by (1) the location of the store within its community or shopping center; (2) surrounding tenants or vacancies; (3) increased competition in areas where shopping centers
are located; (4) the amount spent on advertising and promotion to attract consumers to the stores; and (5) a shift towards online shopping resulting in a decrease in retail store traffic. Many of our stores are located in light industrial areas,
where foot traffic tends to be lower than in traditional retail shopping areas. Furthermore, our initiatives to service our larger customers through a dedicated Commercial Program rather than primarily through local stores may also lead to a
decline in the traffic to our store locations. Declines in consumer traffic could have a negative impact on our net sales and could materially adversely affect our financial condition and results of operations. Furthermore, declines in traffic
could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.
Our business could be harmed if we are unable to maintain our brand image.
Tandy Leather is one of the most recognized brand names in our industry. Our success to date has been due in large part to the strength of that brand. If we are unable to provide quality products and exceptional
customer service to our customers, including education, which Tandy Leather has traditionally been known for, our brand name may be impaired which could adversely affect our operating results.
Changes in customer demand could materially adversely affect our sales, results of operations and cash flow.
Our success depends on our ability to anticipate and respond in a timely manner to changing customer demands and preferences for leather and leathercraft-related items. If we misjudge the market, we might
significantly overstock unpopular products and be forced to take significant inventory markdowns, or experience shortages of key items, either of which could have a material adverse impact on our operating results and cash flow. In addition,
adverse weather conditions, economic or political instability and consumer confidence volatility could have material adverse impacts on our sales and operating results.
Our success depends, in part, on attracting, developing and retaining qualified employees, including key personnel.
The ability to successfully execute our goals is heavily dependent on attracting, developing and retaining qualified employees, including our senior management team. Competition in our industry to attract and retain
these employees is intense and is influenced by our ability to offer competitive compensation and benefits, employee morale, our reputation, recruitment by other employers, perceived internal opportunities, non-competition and non-solicitation
agreements and macro unemployment rates.
We depend on the guidance of our senior management team and other key employees who have significant experience and expertise in our industry and our operations. The unexpected loss of one or more of our key
personnel or any negative public perception with respect to these individuals could have a material adverse effect on our business, results of operations and financial condition. We do not maintain key-person or similar life insurance policies on
any of senior management team or other key personnel.
Disruptions in the operation of our Fort Worth distribution center or assembly facility due to disease, including COVID-19, natural disaster, fire, or other crises, could have an adverse effect on our ability to
supply our retail stores, fulfill web orders and/or manufacture product, resulting in possible decreases in sales and margin.
We are dependent on a limited number of distribution and sourcing centers, primarily the center located at our Fort Worth, Texas headquarters. Our ability to meet the needs of our customers and our retail stores and
e-commerce sites depends on the proper operation of these centers. If any of these centers were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of
deliveries to our retail and wholesale customers. While we have business continuity and contingency plans for our sourcing and distribution center sites, significant disruption of assembly or distribution for any of the above reasons could
interrupt product supply, result in a substantial loss of inventory, increase our costs, disrupt deliveries to our customers and our retail stores, and, if not remedied in a timely manner, could have a material adverse impact on our business.
Risks Related to Cash Flow and Capitalization
If our cash from operations falls short and we are unable to raise additional working capital, we might be unable to fully fund our operations or to otherwise execute our business plan.
Historically, the Company has funded its business primarily with cash from operations and has utilized only small lines of working capital for seasonal expenditures. In 2023, we obtained a line of credit facility
through JP Morgan Chase Bank to provide working capital as needed; as of the date of this report, we have not borrowed any amounts under this facility. However, should (1) our costs and expenses prove to be greater than we currently anticipate, or
(2) seasonal fluctuations in sales or inventory purchases result in needing additional capital, and (3) we are unable to borrow sufficient short- or long-term capital, the depletion of our working capital would be accelerated and could leave us
unable to make required payments. We may also seek capital through the private issuance of debt or equity securities. We cannot guarantee that we will be able to secure all of the additional cash or working capital we might require to continue our
operations.
Risks Related to Technology, Data Security and Privacy
Failure to protect the integrity and security of personal information of our customers and employees could result in substantial costs, expose us to litigation and damage our reputation.
We receive and maintain certain personal, financial, and other information about our customers, employees, and vendors. In addition, our vendors receive and maintain certain personal, financial, and other
information about our employees and customers. The use and transmission of this information is regulated by evolving and increasingly demanding laws and regulations across various jurisdictions. If our security and information systems are
compromised as a result of data corruption or loss, cyber-attack or a network security incident or if our employees or vendors fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used
inappropriately, it could result in liabilities and penalties and could damage our reputation, cause us to incur substantial costs and result in a loss of customer confidence, which could materially affect our results of operations and financial
condition. Additionally, we could be subject to litigation and government enforcement actions because of any such failure.
Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries where we operate. For example, the General Data Protection
Regulation (“GDPR”), which was adopted by the European Union effective May 2018, requires companies to meet new requirements regarding the handling of personal data. In addition, the State of California enacted the California Consumer Privacy Act
(the “CCPA”), which became effective January 2020 and requires companies that process information on California residents to, among other things, provide new disclosures and options to consumers about data collection, use and sharing practices.
Moreover, each of the GDPR and the CCPA confer a private right-of-action on certain individuals and associations. Our failure to adhere to or successfully implement appropriate processes to adhere to the
requirements of GDPR, CCPA and other evolving laws and regulations in this area could result in financial penalties, legal liability and could damage our reputation, which could have a material adverse effect on our business, financial condition
and results of operations.
A cybersecurity incident and other technology disruptions could negatively affect our business and our relationships with customers.
We use technology in substantially all aspects of our business operations. The widespread use of technology, including mobile devices, cloud computing, and the internet, gives rise to cybersecurity risks, including
security breaches, espionage, system disruption, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including
information relating to customers and suppliers, private information about employees, and financial and strategic information about us and our business partners. The Company has implemented measures to prevent cybersecurity breaches and incidents,
as described in Item 1C below. However, we cannot guarantee that these preventative measures and incident response efforts will be entirely effective. If we fail to effectively assess and identify cybersecurity risks associated with the use of
technology in our business operations, we may become increasingly vulnerable to such risks. The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our
information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive
disadvantage.
Unreliable or inefficient information technology or the failure to successfully implement or invest in technology initiatives in the future could adversely impact operating results.
We rely heavily on information technology systems in the conduct of our business, some of which are managed, and/or hosted by third parties, including, for example, point-of-sale processing in our stores, management
of our supply chain, and various other processes and procedures. These systems are subject to damage, interruption or failure due to theft, fire, power outages, telecommunications failure, computer viruses, security breaches, malicious
cyber-attacks or other catastrophic events. Certain technology systems may also be unreliable or inefficient, and technology vendors may limit or terminate product support and maintenance, which could impact the reliability of critical systems
operations. If our information technology systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them and may experience loss of critical data and interruptions or delays in our ability to manage
inventories or process transactions, which could result in lost sales, customer or employee dissatisfaction, or negative publicity that could negatively impact our reputation, results of operations and financial condition.
Moreover, our failure to adequately invest in new technology or adapt to technological developments and industry trends, particularly with respect to digital commerce capabilities, could result in a loss of customers
and related market share. If our digital commerce platforms do not meet customers’ expectations in terms of security, speed, attractiveness or ease of use, customers may be less inclined to return to such digital commerce platforms, which could
negatively impact our business.
Risks Related to the Macroeconomic Environment
Our business may be negatively impacted by general economic conditions in the United States and abroad.
Our performance is subject to global 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. Specifically, at the time of filing this Form 10-K, the American and world economies have been acutely affected by a combination of factors resulting from both the COVID-19
pandemic and the war resulting from the invasion of Ukraine by Russian military forces. The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S. in more than 40 years, fuel prices at
or near record highs, an extremely tight labor market with rising wages and competition to attract qualified workers, rising real estate prices and increases in interest rates.
Purchases of non-essential, discretionary products tend to decline in periods (such as the current one) of recession or uncertainty regarding future economic prospects, as disposable income declines. During these
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, maintain our earnings from operations as a percentage of net sales, or generate sufficient cash flows to fund our operational and liquidity needs. As a result, our operating results may be adversely
and materially affected by continued downward trends or uncertainty in the United States or global economies.
Foreign currency fluctuations could adversely impact our financial condition and results of operations.
We generally purchase our products in U.S. dollars. However, we source a large portion of our products from countries other than the United States. The cost of these products may be affected by changes in the value
of the applicable currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated sales that occur in other countries (currently Canada and the European Union). This revenue, when
translated into U.S. dollars for consolidated reporting purposes, could be materially affected by fluctuations in the U.S. dollar, negatively impacting our results of operations and our ability to generate revenue growth.
We face risks related to the effect of economic uncertainty.
During events of economic downturn and slow recovery, our growth prospects, results of operations, cash flows and financial condition could be adversely impacted. Our stores offer leather and leathercraft-related
items, which are viewed as discretionary items. Pressure on discretionary income brought on by economic downturns and slow recoveries, including housing market declines, rising energy prices and weak labor markets, may cause consumers to reduce
the amount they spend on discretionary items. The inherent uncertainty related to predicting economic conditions makes it difficult for us to accurately forecast future demand trends, which could cause us to purchase excess inventories, resulting
in increases in our inventory carrying cost, or limit our ability to satisfy customer demand and potentially lose market share.
While the impact of the COVID-19 pandemic has mostly receded, there are residual effects such as higher consumer prices and interest rates. Furthermore, another serious outbreak of coronavirus or other deadly
disease could also have a material adverse effect on our business and liquidity.
The COVID-19 pandemic had an unprecedented and lasting impact on the U.S. economy, some of which continues to today. The possibility of another outbreak of a coronavirus variant or other deadly disease that would
have material adverse effect on the economy, our supply chain partners, our employees and our customers is now all too real. While we are better prepared to handle a future pandemic, it could impact our ability to keep our stores open, to obtain
merchandise or payment terms from our vendors, to transport merchandise to and from our warehouse, to operate our warehouse, factory and other facilities that require on-site activities, and thus materially adversely affect our revenues, earnings,
liquidity and cash flows.
Risks Related to Legal, Regulatory and Compliance
If the United States maintains current tariffs on products manufactured in China, or if additional tariffs or trade restrictions are implemented by other countries or by the U.S., the cost of our
products manufactured in China or other countries and imported into the U.S. or other countries could increase. This could in turn adversely affect the profitability for these products and have an adverse effect on our business, financial
condition and results of operations.
In addition, the violation of labor, environmental or other laws by an independent manufacturer or supplier, or divergence of an independent manufacturer’s or supplier’s labor practices from those generally accepted
as ethical or appropriate in the U.S., could interrupt or otherwise disrupt the shipment of our products, harm our trademarks or damage our reputation. The occurrence of any of these events could materially adversely affect our business, financial
condition and results of operations.
Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce our trademark and other proprietary intellectual property rights
could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis. Despite any precautions we may take to protect our intellectual
property, policing unauthorized use of our intellectual property is difficult, expensive, and time consuming, and we may be unable to adequately protect our intellectual property or determine the extent of any unauthorized use. Our efforts to
establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation or counterfeiting of our products by others, which may not only erode sales of our products but may also cause
significant damage to our brand name. Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use of our intellectual property by others. Even if we are successful in these actions, the costs
we incur could have a material adverse effect on us.
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
Cybersecurity Risk Management and Strategy
The Company recognizes the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard its information systems and protect the confidentiality, integrity, and
availability of its data. The Company’s information security program is managed by its Vice President, Operations and Technology, whose team is responsible for leading Company-wide cybersecurity strategy, policy, standards, architecture, and
processes.
We design and assess our program based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF and AI Risk Management Framework). This does not mean that we meet any particular
technical standards, specifications, or requirements, but only that we use the NIST CSF as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business.
Information about cybersecurity risks and our risk management processes is collected, analyzed and considered as part of our overall enterprise risk management program.
Key components of our cybersecurity risk management program
The Company’s cybersecurity program includes:
|
• |
Advanced security infrastructure with state-of-the-art firewalls and intrusion detection systems.
|
|
• |
Regular cybersecurity training for employees.
|
|
• |
Strict data access controls and authentication protocols.
|
|
• |
Continuous monitoring of our networks and systems for signs of unauthorized activity.
|
|
• |
Partnerships with leading cybersecurity software and hardware providers for real-time systems monitoring and threat intelligence.
|
In the event of a cybersecurity incident, the Company’s response plan includes:
|
• |
Immediate containment and assessment of the incident.
|
|
• |
Notification to relevant stakeholders, including officers, board members, investors and customers where appropriate, in compliance with legal and regulatory requirements.
|
|
• |
Cooperation with law enforcement and regulatory bodies as needed.
|
|
• |
Post-incident analysis and measures to prevent future occurrences.
|
At this time, we have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy,
results of operations, or financial condition. We face certain ongoing risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or
financial condition. See “Risk Factors”.
Cybersecurity Governance
The Company’s Board of Directors oversees management’s cybersecurity strategy. Management provides a full briefing on various cybersecurity risk
matters including risk assessments, mitigation strategies, areas of emerging risk and other areas of importance at least annually. In the event of a cybersecurity incident determined to be significant, management will notify the Board.
The Company remains vigilant in its efforts to protect its systems, data, and stakeholders from cybersecurity threats and believes that its
proactive and comprehensive approach positions it well to manage these risks effectively.
We lease our store locations, with the exception of our flagship store located in Fort Worth, Texas. The majority of our stores have initial lease terms of at least five years. The leases are generally renewable,
with increases in lease rental rates in some cases. We believe that all of our properties are adequately covered by insurance. We own the 22,000 square foot building that houses our flagship store. Further, we own our corporate headquarters,
which includes our central distribution center and production facility, sales, marketing, administrative, and executive offices. The facility consists of 191,000 square feet located on approximately 30 acres.
The following table summarizes the locations of our leased premises as of the date of this filing:
|
U. S. Locations:
|
|
Alabama
|
1
|
|
Missouri
|
3
|
|
Alaska
|
1
|
|
Montana
|
1
|
|
Arizona
|
3
|
|
Nebraska
|
1
|
|
Arkansas
|
1
|
|
Nevada
|
2
|
|
California
|
7
|
|
New Jersey
|
1
|
|
Colorado
|
4
|
|
New Mexico
|
2
|
|
Connecticut
|
1
|
|
New York
|
2
|
|
Florida
|
4
|
|
North Carolina
|
2
|
|
Georgia
|
2
|
|
Ohio
|
3
|
|
Idaho
|
1
|
|
Oklahoma
|
2
|
|
Illinois
|
1
|
|
Oregon
|
2
|
|
Indiana
|
1
|
|
Pennsylvania
|
3
|
|
Iowa
|
1
|
|
South Dakota
|
1
|
|
Kansas
|
1
|
|
Tennessee
|
3
|
|
Kentucky
|
1
|
|
Texas
|
16
|
|
Louisiana
|
2
|
|
Utah
|
4
|
|
Maryland
|
1
|
|
Washington
|
3
|
|
Massachusetts
|
1
|
|
Wisconsin
|
1
|
|
Michigan
|
2
|
|
Wyoming
|
1
|
|
Minnesota
|
2
|
|
|
|
| |
|
|
|
|
|
Canadian Locations:
|
|
Alberta
|
3
|
|
Ontario
|
3
|
|
British Columbia
|
1
|
|
Saskatchewan
|
1
|
|
Manitoba
|
1
|
|
|
|
|
Nova Scotia
|
1
|
|
|
|
| |
|
|
|
|
|
International Locations:
|
|
Spain
|
1
|
|
|
|
The broader economic impact of the pandemic and the war in Ukraine and the Middle East have put pressure on store profitability with dampened demand, higher wages and staffing challenges, rising retail rents, and
increases in other retail store operating costs. We regularly review recent and future projected store 4-wall cash flow taking these forecasted costs as well as projected consumer demand, other nearby stores and a number of other factors into
consideration when making decisions to close or open stores in a given location. In 2022, we closed four store locations that met a number of the criteria for closure, three of which were at the end of the lease, and one of which we paid a
negotiated early lease termination. We also opened one new location at Fort Liberty, NC. In 2023, we closed two locations that met a number of the criteria for closure including the Fort Liberty location, which was not meeting its sales targets,
and we opened one new location in Queens NY.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
We are periodically involved in various litigation that arises in the ordinary course of business and operations. There are no such matters pending that we expect to have a material impact on our financial position
or operating results. See discussion of Legal Proceedings in Note 8, Commitments and Contingencies of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock trades on the Nasdaq Capital Market under the symbol “TLF.”
There were approximately 278 stockholders of record on February 29, 2024.
We did not sell any shares of our equity securities during our fiscal year ended December 31, 2023 that were not registered under the Securities Act.
Our Board of Directors did not authorize any dividends during the fiscal years ended December 31, 2023 or 2022. Our Board of Directors may consider future cash dividends after giving consideration to our
profitability, cash flow, capital requirements, current and forecasted liquidity, as well as financial and other business conditions existing at the time. This policy is subject to change based on future industry and market conditions, as well as
other factors.
We did not repurchase any shares of our common stocks during the fourth quarter of fiscal year 2023.
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
We are a smaller reporting company as defined in Item 10(f)(1) of SEC Regulation S-K and are not required to provide information under this item.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This discussion is intended to assist in understanding our financial performance and should be read in conjunction with our consolidated financial statements and the notes accompanying those consolidated financial
statements included elsewhere in this Form 10-K, including the information under the caption “Summary of Critical Accounting Policies.” In addition to historical financial information, the following management’s discussion and analysis may contain
forward-looking statements. These statements reflect our expectations or estimates based on the information we have today but are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties, and other
factors, many of which are beyond our control, and which may cause actual results to differ materially from the statements contained here. You are cautioned not to put undue reliance on these forward-looking statements. The Company assumes no
obligation to update or otherwise revise these forward-looking statements, except as required by law. More discussion of risks can be found under Item 1A, Risk Factors.
Summary
The Business and Strategy
Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, and organized in 2005 as a Delaware corporation, the
Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for
leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.
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, and 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 global websites, and through direct account representatives in our commercial division. We produce 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”) and splitting and some assembly. We maintain our principal
offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
Currently, the Company operates a total of 102 retail stores. There are 91 stores in the United States (“U.S,”), 10 stores in Canada and one store in Spain.
Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn the craft in classes, open table, and from
the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather. Our websites provide inspiration, detailed product descriptions and specifications,
educational information and videos, and a convenient place to also purchase product – especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web customers,
leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the needs of those customers who build businesses around leather. With dedicated direct account representatives, a direct-from-our-warehouse shipping model,
volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers.
With COVID-19 and restatement related impacts behind us, and with initiatives to improve our brand proposition and to build the foundation for a modern and efficient retail business taking hold, we believe we have
made significant progress toward building a durable, profitable business model. Our cost of sales and operating expenses have stabilized, and we believe we have the structure, and the operating nimbleness, that can deliver operating profit and
free cash flow even in the face of economic headwinds. Going forward, our strategy is to continue to manage our cost base and use of cash and focus on strengthening our sales by leveraging our competitive advantage of our retail stores. Improving
our employee product knowledge, customer service level and community engagement as well as expanding workshop space in stores with machines are the highest priorities. We need to continue to give customers good reasons to visit stores, and an
excellent return on their time investment when they do.
Results of Operations
The following table presents selected financial data:
|
(in thousands)
|
|
2023
|
|
|
2022
|
|
|
$ Change
|
|
|
% Change
|
|
|
Sales
|
|
$
|
76,229
|
|
|
$
|
80,335
|
|
|
$
|
(4,106
|
)
|
|
|
(5.1
|
)%
|
|
Gross profit
|
|
|
45,163
|
|
|
|
46,497
|
|
|
|
(1,334
|
)
|
|
|
(2.9
|
)%
|
|
Gross margin percentage
|
|
|
59.2
|
%
|
|
|
57.9
|
%
|
|
|
-
|
|
|
|
1.3
|
%
|
|
Operating expenses
|
|
|
40,753
|
|
|
|
45,109
|
|
|
|
(4,356
|
)
|
|
|
(9.7
|
)%
|
|
Income from operations
|
|
$
|
4,410
|
|
|
$
|
1,388
|
|
|
$
|
3,022
|
|
|
|
217.7
|
%
|
Net Sales
Consolidated net sales decreased by $4.1 million, or 5.1%, from 2022 to 2023. About $1.3 million of the decline came from stores that were open in 2022 but closed in 2023. We
believe the rest of the decrease in sales was due to continued weaker consumer demand as a result of inflation and ongoing uncertainty related to global political, economic and public health concerns.
Our store footprint consisted of 102 stores at December 31, 2023 and 103 stores at December 31, 2022.
Since January 1, 2023, we closed two stores and opened one store. We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and
longer-term projection for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the store and location, and the size and potential of the trade area including proximity to other existing
stores, among other variables. We use similar factors to determine whether to open new stores.
Gross Profit
Gross profit decreased by $1.3 million, or 2.9%, from 2022 to 2023. Our gross margin percentage for the year ended December 31, 2023 increased to 59.2% versus 57.9% in the same period in 2022, due to reduction in
freight and warehouse overhead, relatively stronger full-priced selling throughout the year and product and customer mix shifts.
Operating Expenses
|
(in thousands)
|
|
2023
|
|
|
2022
|
|
|
Operating expenses
|
|
$
|
40,753
|
|
|
$
|
45,109
|
|
|
Non-routine items related to restatement
|
|
|
-
|
|
|
|
(246
|
)
|
|
Adjusted operating expenses
|
|
$
|
40,753
|
|
|
$
|
44,863
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses % of sales
|
|
|
53.5
|
%
|
|
|
56.2
|
%
|
|
Adjusted operating expenses % of sales
|
|
|
53.5
|
%
|
|
|
55.8
|
%
|
Operating expenses declined by $4.3 million in 2023 as compared to the prior year. The primary drivers of the decrease were reduced contract labor of approximately $1.2 million, primarily in accounting and
warehouse, as we hired permanent, full-time staff and retail employment costs of $1.5 million resulting from retail labor initiatives. Other savings initiatives included reduced insurance and other taxes of $0.6 million, reduced outside services of
$0.4 million, and lower occupancy, supplies and other expenses combined for another $1.0 million in savings, partially offset by increased bonus compensation of $0.5 million.
Other Income
Other income consists primarily of interest income and foreign currency gain. For the year ended December 31, 2023, we recognized other income of $0.1 million. During the year ended December 31, 2022, we recognized
other income of less than $0.1 million related to interest earned on our short term investment.
Provision for Income Taxes
Our effective tax rate was 17.1% and 12.9% for the years ended December 31, 2023 and 2022, respectively. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax
expense, expenses that are nondeductible for tax purposes, and the release of valuation allowance associated with our deferred tax assets.
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 balance as of December 31, 2023 totaled $12.2 million.
On January 3, 2023, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. Under the Credit Agreement, the bank will provide the
Company a credit facility of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement. As security for the credit facility, the Company has pledged as collateral certain of
its assets, including the Company’s cash in deposit accounts, inventory and equipment. As of the date of this filing, no funds had been borrowed under this facility.
Spain Loan
During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the
continuation of employment and to attenuate the economic effects of the COVID-19 virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program. During the second quarter of 2022, we repaid this loan in full.
Share Repurchase Program
On August 8, 2022, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock on the open market on or prior to August 31, 2024. As of December
31, 2022 and December 31, 2023, $5.0 million remained available for repurchase under this new program.
On April 11, 2022, we entered into an agreement with two institutional shareholders of the Company, to repurchase 359,500 shares of our common stock, par value $0.0024 in a private transaction.
The purchase price was $5.00 per share for a total of $1.8 million. The closing of the repurchases took place on April 22, 2022, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 4.2% of our
outstanding common stock.
The direct share repurchases described above were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the open-market plan that was approved by
the Board of Directors at the time. In July 2022, the Company repurchased 600 shares of stock under the open market plan.
Cash Flows
|
(amounts in thousands)
|
|
2023
|
|
|
2022
|
|
|
Net cash provided by operating activities
|
|
$
|
4,537
|
|
|
$
|
1,154
|
|
|
Net cash used in investing activities
|
|
|
(576
|
)
|
|
|
(625
|
)
|
|
Net cash used in financing activities
|
|
|
(26
|
)
|
|
|
(2,171
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
249
|
|
|
|
(538
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
4,184
|
|
|
$
|
(2,180
|
)
|
For 2023, we generated $4.5 million of cash from operations driven by net income of $3.8 million, the add-back of non-cash expenses of $4.5 million, including depreciation, amortization, loss on disposal of fixed
assets, stock based compensation, and deferred taxes, an increase in accrued expenses and other liabilities of $0.5 million, a decrease in inventory of $0.2 million and a decrease in accounts receivable of $0.1 million; offset by a decrease in
operating lease liabilities payments of $3.6 million, a decrease in accounts payable of $0.8 million, and an increase in prepaid expenses of $0.2 million. We invested $0.6 million in capital expenditures for the purchase of store fixtures and
systems implementations. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $4.2 million.
For 2022, we generated $1.1 million of cash from operations driven by net income of $1.2 million, the add-back of non-cash expenses of $5.5 million, including depreciation, amortization, and stock-based compensation,
a decrease in income taxes, net of $0.9 million due to collecting $1.4 million of refunds from NOL carryback claims that partially offset current year installment payments and recording the current year income tax provision, and a decrease in
accounts receivable of $0.2 million among other changes, offset by the increase of inventory of $0.3 million (including currency effects), a decrease in accounts payable and accrued expenses of $3.3 million and a decrease in operating lease
liabilities of $3.4 million. We invested $0.6 million in capital expenditures for the purchase of store fixtures and systems implementations. We used cash in financing activities to repurchase 360,100 shares of Tandy common stock in purchases
totaling $1.8 million at an average price of $5.00 per share, and to repay the loan from Spain in the amount of $0.4 million. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $2.2
million.
We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations through 2024, considering the current effects of the inflationary pressure on our business and cash
flow and our current business performance. In addition, we anticipate that this cash flow and our current cash reserves will enable us to meet our contractual obligations and commercial commitments throughout 2024. There can be no assurance,
however, that the current global economic conditions would not result in further restrictions on our business operations in a manner that would more materially impact our cash flow.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during 2023 or 2022, and we do not currently have any such arrangements.
Summary of Critical Accounting Policies
The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires the use of estimates that affect the reported value of
assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s
conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Actual results may differ from these estimates, and estimates are subject to change due to
modifications in the underlying conditions or assumptions. The policies discussed below require estimates that contain a significant degree of judgement. The use of estimates is pervasive throughout the Consolidated Financial Statements, but the
accounting policies and estimates considered most critical are as follows.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via
web sales, and (3) sales of product directly to commercial customers through our commercial account representatives. 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. For (2) and (3) above, our performance obligation is met when merchandise is shipped to a customer, 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. Under our sales returns policy, merchandise may be
returned, under most circumstances, up to 60 days after date of purchase. As merchandise is returned, the company records the sales return against the sales return allowance.
We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card.
In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year.
Inventory. Inventory is stated at the lower of first-in, first-out (“FIFO”) cost or net realizable value, and FIFO layers are maintained at the location level. Finished goods
held for sale includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include
depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Assembled inventory including raw materials and work-in-process is valued on a FIFO basis using full absorption accounting which includes material,
labor, and other applicable assembly overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory.
We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product
line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower
of FIFO cost or net realizable value.
Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate
valuations that differ from the recorded asset.
The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations. Goods shipped to us are recorded as inventory owned by us when
the risk of loss shifts to us from the supplier. Inventory is physically counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting
system to reflect actual count results.
Leases. We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both 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. We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes. The depreciable life of related
leasehold improvements is based on the shorter of the useful life or 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.
We recognize rent expense related to our operating leases on a straight-line basis over the lease term. Rent expense is recorded in operating expenses.
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 remaining asset balance in our finance lease is only residual value and
only an insignificant interest expense of less than $100 dollars was incurred and is recorded on the consolidated statements of operations and comprehensive income.
None of our lease agreements contain material residual value guarantees or material restrictive covenants. As of December 31, 2023, we have no sublease agreements and no lease agreements in which we are named as a
lessor. We do not have any contingent rental payment agreements. On September 8, 2022, we entered into a concession agreement for our store on the Fort Liberty (formerly Fort Bragg) military base in which the concession payment is based on a
sliding scale percentage of sales. At the end of November, 2023, we closed that store.
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 relates primarily 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. The total 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 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.
