New CEO Janet Carr got a proper chance to address investors on the 4Q18 earnings call on March 7th. A key theme throughout the call is that FCF, instead of top line growth, will be a priority driving decisions going forward. Consistent with this focus, the retail stores will be operated to maximize cash flow, likely leading to 4-6 store closures in 2019 in addition to the 3 closures announced in February. No store openings are planned so Capex will likely be at a lower level than we have seen in recent years ($1mm ’18, ~$1.7mm in both ’17 and ’16). Tighter Inventory management continues to be a priority. Even after falling $3.5mm throughout 2018, we are still looking at ~$34mm of Inventory. It was loosely mentioned on the call that 3.0x Inventory Turnover is an aspiration, given 2018 sales that would imply a further $7mm improvement in Inventory.
Outside of the FCF focus, TLF is also re-focusing on Commercial Wholesale customers. This is really a no-brainer, and will be a good growth component in a time when the retail segment is being right sized. Tandy’s main benefit is how large they are in their niche of leather crafting. Given this, they have the ability to compete most effectively in what is a more commoditized segment of the business.
The focus on FCF should be music to investors’ ears. FCF yield was >10% in 2018, a year full of one-off expenses. Now we look to 2019 and despite it being a reset year, I expect the focus on FCF to drive a year over year improvement. The company continues to buy back shares: 243,387 in 2018 for $1.6mm. Subsequent to year end, the company fully repaid the $9mm outstanding on the revolver while also having repurchased 53,626 additional shares for $300k. 853,780 shares remain on the current buyback authorization that expires in August. At today’s (3/18/19) closing price, to complete the authorization would cost $5.5mm for a company that has ~$15mm on the balance sheet and no debt.
I had initiated a small position in February and will be adding to it in the coming weeks. I really am encouraged by management’s focus on cash flow over top-line growth and as I stated above the focus on the Wholesale business is a no-brainer. TLF remains a Cash Flow machine, and sooner than later the rest of the market will take notice.
I own shares of Tandy Leather Factory (TLF). This article is opinion only and not a recommendation to buy or sell.
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