TLF - Tandy Leather Factory

[Foreign Tuffett]

Yeah, April 30th for cash balance. I misread press release. So now that I've learned to read, that does make the company's financial position look somewhat better.

 

As writser mentions, some inventory probably converted to cash last year as as sales declined and several stores were closed. An important point.

 

 

2019 results seem* to indicate that something is wrong with the core store base. The store base is what gives TLF its unsurpassed scale that has allowed it to dominate the leatherworking niche. Dating back to the merger in 2000, the company has (or had) a long history of solid, consistent profitability, but if the store base can't return to health.....then TLF will become just another online leather retailer, albeit one with a nice HQ complex.

 

All this said, as I sit here today my original thesis ("traded down on what I believe are temporary issues that do not affect the value of the underlying business") from last year looks quite broken.

 

 

* I say "seem" because without the full financials I am just guesstimating same store sales trends

 

 

 

 

[writser]

The latest conference call was extensive. I'm not sure if the transcript is available for free somewhere, but I recommend reading it if you are interested in TLF. A few quotes and notes for my own benefit:

 

One silver lining to the virus shutdown of our stores has been a jump-start to our online business. At only about 11% of our business in the past, web sales have been underperforming, something we saw as a big, longer-term growth opportunity. The overnight tripling of our web business has given us the opportunity to quickly build out our Fort Worth web fulfillment capability, even without the systems and tools that are coming over the next couple of months that will give us huge efficiencies. Our new web platform, the last and biggest phase of which will launch later this week, along with our new warehouse management system, will allow us to both drive sales and fulfill them centrally much sooner than we had planned.

 

Sales in 2019 overall declined 10% on a fiscal calendar over the prior year. About 3,000 -- I'm sorry, $3 million of the sales decline was a result of specific strategic actions, namely in 2019, we closed 5 stores: Escondido, California; Fort Wayne, Indiana; Irving, Texas; Australia and the U.K. We stopped selling on Amazon, eBay and walmart.com; all unprofitable businesses. We made leather craft library of patterns and videos free. We believe we're going to drive more sales selling leather crafting supplies and more goodwill by making patterns and videos free. And we ended wholesale clubs as part of our new pricing strategy.

The remaining decline in sales came from a reduction in promotional activity associated with our new pricing strategy, out of stock and transition of commercial customers to a new model. These were clearly missteps and part of the start-up bumps of a new team. We underestimated the extent of manager wheeling and dealing and the importance of it to our business customers.

So, sales down to ~$75m from $83m or $8m. $3m of which was 'planned'. Still pretty bad.

 

Regarding the duration of the restatements:

Because of our antiquated systems, correct calculation of inventory at FIFO has required going back to thousands of paper invoices and reconstructing FIFO layers for 10 periods. This has been a labor-intensive and extremely time-consuming process, which is why it's taking us so many months to complete the work. There's no question that the restatement has been a sync for management attention and resources for much of the last year and this year, and COVID-19 has also complicated the effort. However, much of the heavy lifting is now done, and we will be entering the audit phase in the coming weeks.

 

Regarding 2020:

For Q1 of 2020, our sales, on a retail calendar, declined by nearly 18%. Driven by some hangover of our 2019 challenges, our plan was to be down 5.6%, plus the effects of COVID-19, with all our stores closed to the public just as we entered our big sale of the quarter. Most of the sale inventory was trapped behind closed doors, especially in California, where most of our stores closed early, even before the sales started. We did have stores ship some product back to the warehouse as they closed, though it was not economical to do that with some items like machines and leather. And we kept 13 stores with the higher inventory levels working behind the scenes, where we could, to tap into their stock to fill web orders. As I mentioned earlier, we sent a truck to all the stores within driving distance of Fort Worth to find and bring key inventory back to our warehouse.

 

It was virtually impossible to do anything more sophisticated than guess at what our sales might be with all our stores closed. That said, we modeled sales down 70% for both April and May for the purpose of cash flow planning, and were surprised and pleased with the relatively better level of decline and the trajectory, with May down only 40% to last year; April, down 60%, driven in part by our May Memorial Day sale. With stores reopening, we're watching carefully to see how the stores perform over time and how our web sales hold up.

 

So in addition to furloughing most store employees in early April, we're taking aggressive action where we can to conserve cash and protect our liquidity. We cut about $3 million in other SG&A expenses, mostly marketing and corporate employee costs for the remainder of this year, 2020. We paused on most product purchases and negotiated exits, abatements and deferrals on rent. We also permanently closed 8 stores, with leases expiring in the next 18 months, for an annualized SG&A savings of about $1.6 million. Note that leases are our only long-term liability. And beyond the actions I just mentioned, we're also taking the opportunity to negotiate reductions in future rents on renewals for strong cash flow stores.

 

Regarding the cash balance:

We're aggressively managing our cash and plan to end the year with $10 million in the bank, and our 30-plus acre home office campus unencumbered by debt.

 

And some stuff from the Q&A:

The second question about a sale leaseback. It is definitely something that we have looked at and we'll continue to look at. It does not feel like the ideal time right at this moment to do a transaction like that. We have had some real estate experts, look at our property and give us some ideas of what they think it's worth.

[..]

The question about the value of our property here. It is -- we have had it evaluated. And I have to say, like, take this with a grain of salt, because it's not worth anything until someone writes you a check for it. But it is purported to be worth somewhere in the neighborhood of $10 million to $12 million. It's over 30 acres, and it contains our warehouse, our factory building, our offices and our flagship, plus a lot of other property.

 

The biggest WTF of the call, regarding the costs of the restatement:

Good questions. Again, don't hold me to this number, but I want to be transparent with the restatement costs. We're estimating them to be in the neighborhood between $4 million and $6 million across the entire period of it. And again, at some point, we will be able to provide more detail on that, but that's the rough estimate of where it's coming in. It's been very costly.

[..]

[regarding how much has been spent already]

I'm looking to my financial guru over here. I'm going to say roughly $3 million have already been spent with the rest to go.

Wow.

 

And the award for the worst question goes to:

Okay. The next question comes from [Jane Triumph]. And she asks, do we expect the stock price to improve?

 

So, I ended up basically pasting the entire conference call here. Maybe a bit too much for the topic. Still, maybe some of you have no way to see the transcript and find it useful.

 

I thought the call was surprisingly good and informative. Does that mean I like the stock? Not sure. But it seems that even after this crisis the company has a solid profile with an expected $10m in cash and unencumbered real estate worth $10m and no debt. Probably not many retailers out there in 2020 with a more conservative balance sheet.

 

Of course the key question (and hard question) remains whether the business of being a brick & mortar leatherworking retailer is any good and/or whether they can pivot to online. This question I have no simple answer to but I think you are being offered decent odds at the current price.

[misterkrusty]

I thank you for this.  What do you think they meant by "We underestimated the extent of manager wheeling and dealing and the importance of it to our business customers."?

 

Sounds like the drop in sales (ex store closures) is a fixable problem and not due to a shrinking market or loss of market share, yes?

 

I'm not surprised at the cost of the restatement.  In fact, I was worried it would be even more expensive.  Restatements are surprisingly costly.

 

[Foreign Tuffett]

I thank you for this.  What do you think they meant by "We underestimated the extent of manager wheeling and dealing and the importance of it to our business customers."?

 

Sounds like the drop in sales (ex store closures) is a fixable problem and not due to a shrinking market or loss of market share, yes?

 

I'm not surprised at the cost of the restatement.  In fact, I was worried it would be even more expensive.  Restatements are surprisingly costly.

 

My take on that question: Historically, TLF store managers had some amount of discretion surrounding giving special discounts to B2B accounts. The new CEO's policies did away with that discretion, and attempted to migrate B2B accounts away from store managers in favor of an expanded inside sales team.

 

Some B2B customers probably very unhappy about having their special pricing taken away, while also feeling aggrieved about dealing with stranger over the phone/internet instead of the local store manager who, in many cases, they had a years-long history of trusted dealings with (Hypothetical example: "I like Joe. Joe always takes care of my bulk leather needs.").

[valuedontlie]

So at $3.75 this is a $34m market cap with ~$10m expected cash on hand and perhaps $60-70m in sales (impacted)?

[writser]

So at $3.75 this is a $34m market cap with ~$10m expected cash on hand and perhaps $60-70m in sales (impacted)?

 

Yep. And ~$10m in unencumbered real estate. And a niche retailer operating with the gross margins of Tiffany's and room for growth online :P . Something like that is the bull case.