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.
4 thoughts on “Tandy Leather Factory: Adding More Gas to this FCF Machine”
What do you make of the news about investigation of inventory handling? Also opex seems to be expanding at quite a rate…
Appreciate the comment.
I don’t have a strong opinion either way on the delayed 10-Q. While the asset value provides a cushion in a sense, I personally didn’t see it as a huge part of my thesis that they should revert to trading at a certain P/B.
For the Opex, 2017s increase was largely driven by the more aggressive new store rollout which I think is a sticking point that lost the former CEO their job. A lot of the increase in 2018 was non-recurring in my view and undoing some of these mistakes. I think the Operating Expenses increased ~$2mm. Of that: $0.9mm was towards the mgmt turnover, $0.2mm was for store closures, and $0.3mm was around 4 underperforming stores which I’m guessing are on the list of 4-6 store closures slated for 2019.
There also has been some experimentation around store hours, they used to not be open Sundays, and changes to store manager compensation to attract and keep talented people. I think some of these changes as well as the focus on store cash generation and improving inventory turns (maybe a catalyst for the current delay) will be long term positives.
Thanks for the reply!
I want to like it more (I have a small position) but can’t shake the feeling it’s a melting ice cube (if I’m using the lingo correctly) and that numbers will continue to decline. Quite something to see how low it dropped around 1999 and 2008…
Do you post all of your ideas here? I’m looking for places to stimulate my thinking and to shortlist ideas for more consideration.
Have a great day…