Item 1. Business
ITEM 1.
BUSINESS
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 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 also manufacture leather
lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly. We maintain
our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
The Company’s common shares currently trade on the Nasdaq Capital Market under the symbol “TLF.”
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Retail Fleet
The Company currently operates a total of 103 retail stores. There are 92 stores in the United States (“U.S.”), ten 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 manufacturing 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, bulk and volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers.
In 2019, with the arrival of a new management team, we began the process of assessing and reinvigorating the business. We focused in three broad strategic initiative areas: 1) improving our brand proposition, 2)
rebuilding our foundation: the talent, processes, tools and systems needed to modernize and efficiently operate the business, and 3) creating a vision and road map for long-term growth. We had significant achievements in all of these areas
including significantly improving the product quality, breadth of assortment and value, dramatically improving the website and web operations, rebuilding the team, people policies and culture, and replacing all of the key systems, among many
other accomplishments.
We made this steady progress to transform and reinvigorate our business even in the face of two very significant obstacles. In 2019, as part of the assessment of the business, we discovered errors in accounting
that required a restatement of our financials. This work was costly and time-consuming, but we successfully completed the restatement in 2021 along with implementation of new accounting systems, redesign of processes and controls, and a
significant upgrade in the team. In 2020, while making progress against our transformation and still working through our restatement, we temporarily closed all of our retail stores as a result of the COVID-19 pandemic.
With COVID-19-related impacts and the restatement behind us and with many of our initiatives taking hold, we are now focused on improving our financial
sustainability and profitability. In the short term, we are managing operating expenses and gross margin to deliver cash from operations and operating income even in the face of possible continued economic headwinds. We will also continue to
selectively invest in profitable sales growth where it makes sense, but rebuilding a durable, profitable business model is the highest priority.
COVID-19 and Economic Conditions
At the time of filing this Form 10-K, the American and world economies continue to be acutely affected by a combination of factors arising 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, highly volatile fuel prices, an extremely
tight labor market with rising wages and competition to attract qualified workers, supply chain disruption, rising rent and other occupancy costs and increases in interest rates. Purchases of non-essential, discretionary products tend to decline
in periods of uncertainty regarding future economic prospects, such as the current one, as disposable income declines. The Company believes that these events have continued to dampen its sales through December 2022. The future remains
uncertain, and continued increased labor, freight, product, and other costs as well as weakening customer demand could have a negative impact on the Company’s future financial performance.
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Customers
Our customers fall into 2 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 per year and receive pricing based on their purchasing levels.
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 manufacturing facility in Fort Worth,
Texas, where we manufacture kits, thread lace, belt strips and straps, and Craftaid®s, and provide some custom manufacturing processes 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, take classes, commune 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.
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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. Our inventory levels have grown as we have
increased our product assortment to improve conversion and retention of customers and to mitigate out-of-stocks, especially during the supply chain disruptions over the last 2 years. In the face of overall supply chain challenges, we have
opportunistically taken advantage of some vendor offers on key items, accounting for some increase in inventory. And we have also 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 are typically 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., and some wholesale-focused distributors. 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 and the large
general craft retailers. 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 over 130 vendors from the United States and approximately 20 foreign countries. In general, our 10 largest vendors account for approximately 30% of our inventory
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 continue to pressure costs across all areas.
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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, 2022, we employed 605 people, 494 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 of 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 attendant 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, 2022:
Name
Age
Executive Since
Position
Janet Carr
61
2018
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.
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