Today, shares of Tandy Leather Factory Inc. (AMEX: TLF) took a 30% dive (to close at $4.25) as the company pre-announced the results from a less-than-appetizing third quarter. Since I have a bit of familiarity with the company, I thought I’d provide a few insights.
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Company Overview
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Tandy Leather Factory (TLF), based in Fort Worth, TX, is an international marketer, wholesale distributor, and retailer of a broad line of leather and related products, including leather, leatherworking tools, buckles and adornments for belts, leather dyes and finishes, shoe repair supplies, saddle and tack hardware, and do-it-yourself kits. The company operates in three segments: Wholesale, Retail, and Roberts, Cushman (Other). The Leather Factory (Wholesale) segment sells primarily to wholesale customers through outlet stores located in the United States and Canada. The Tandy Leather segment sells primarily to retail customers through retail stores located in the United States. The Roberts, Cushman segment manufactures decorative hat trims sold directly to hat manufacturers and distributors.
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To make a long story short, the story behind Tandy basically is that it is in the process of shifting from a more wholesale-oriented operation to a more retail-oriented operation. Tandy had previously been a much larger company until the previous management decided to close all the retail stores and try and make this an internet-based business. That didn’t work and the current management was able to take over in 2002 and start opening retail stores again, of which there are now about 70. I believe Tandy had previously had about 300+ locations and had generated enough cash flow to help Charles Tandy launch such businesses as RadioShack and Pier 1. The current plan is to open about 100-120 retail stores this time around.
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Recent Developments
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Sales have slowed and inventory is up. Although sales are still a bit above last year, the infrastructure for growth has continued and so margins have slightly compressed. Although the company and management are experiencing a few growing pains this year, they have shown great prudence in the past and certainly have the ability to right the ship.
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One of the big questions management gets asked is, “how big can you get?” Being the straight shooters they seem to be, they basically say that they don’t know but hint that it is quite a bit bigger than they are now. Wouldn’t it be nice if you could buy this business (which also has good returns on capital) without paying for that growth?
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Another one of the overhanging questions about the company revolves around capital allocation. What will they do with the cash the business generates? Until the purchase, last quarter, of the real estate that will be their new base of operations, the company had built up over $6 million of cash on the balance sheet. Although that has been lessened with the purchase of the property (which was probably a good purchase since 1) they’d been looking for a while and 2) management has historically been good at not wasting money), a time will come again when they may have much more cash than they will even conservatively need. I would love to see TLF take an approach similar to K-Swiss and Timberland and just let cash build until their shares are significantly undervalued and then buy back a bunch of stock (that strategy has worked very well for those companies), but Tandy has yet to decide on any definitive approach in that regard. At any rate, reinvestment and capital allocation are the key questions when/if the business gets back on track.
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What could shares of TLF be worth?
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To get an estimate of what TLF is worth, I used a Discounted Cash Flow plus Excess Capital model that produced the following figures (book value and assets based on end of second quarter balance sheet):
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Book Value: $28,291,889
Goodwill and Other Intang.: $416,530
Capital Assets (PP&E): $1,997,605
Working Capital for Ops.: $1,151,280
Capital Used in Ops.: $3,565,415
Inventory Adjustment (25% cut): $5,044,897
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Company Overview
-
Tandy Leather Factory (TLF), based in Fort Worth, TX, is an international marketer, wholesale distributor, and retailer of a broad line of leather and related products, including leather, leatherworking tools, buckles and adornments for belts, leather dyes and finishes, shoe repair supplies, saddle and tack hardware, and do-it-yourself kits. The company operates in three segments: Wholesale, Retail, and Roberts, Cushman (Other). The Leather Factory (Wholesale) segment sells primarily to wholesale customers through outlet stores located in the United States and Canada. The Tandy Leather segment sells primarily to retail customers through retail stores located in the United States. The Roberts, Cushman segment manufactures decorative hat trims sold directly to hat manufacturers and distributors.
-
To make a long story short, the story behind Tandy basically is that it is in the process of shifting from a more wholesale-oriented operation to a more retail-oriented operation. Tandy had previously been a much larger company until the previous management decided to close all the retail stores and try and make this an internet-based business. That didn’t work and the current management was able to take over in 2002 and start opening retail stores again, of which there are now about 70. I believe Tandy had previously had about 300+ locations and had generated enough cash flow to help Charles Tandy launch such businesses as RadioShack and Pier 1. The current plan is to open about 100-120 retail stores this time around.
-
Recent Developments
-
Sales have slowed and inventory is up. Although sales are still a bit above last year, the infrastructure for growth has continued and so margins have slightly compressed. Although the company and management are experiencing a few growing pains this year, they have shown great prudence in the past and certainly have the ability to right the ship.
-
One of the big questions management gets asked is, “how big can you get?” Being the straight shooters they seem to be, they basically say that they don’t know but hint that it is quite a bit bigger than they are now. Wouldn’t it be nice if you could buy this business (which also has good returns on capital) without paying for that growth?
-
Another one of the overhanging questions about the company revolves around capital allocation. What will they do with the cash the business generates? Until the purchase, last quarter, of the real estate that will be their new base of operations, the company had built up over $6 million of cash on the balance sheet. Although that has been lessened with the purchase of the property (which was probably a good purchase since 1) they’d been looking for a while and 2) management has historically been good at not wasting money), a time will come again when they may have much more cash than they will even conservatively need. I would love to see TLF take an approach similar to K-Swiss and Timberland and just let cash build until their shares are significantly undervalued and then buy back a bunch of stock (that strategy has worked very well for those companies), but Tandy has yet to decide on any definitive approach in that regard. At any rate, reinvestment and capital allocation are the key questions when/if the business gets back on track.
-
What could shares of TLF be worth?
-
To get an estimate of what TLF is worth, I used a Discounted Cash Flow plus Excess Capital model that produced the following figures (book value and assets based on end of second quarter balance sheet):
-
Book Value: $28,291,889
Goodwill and Other Intang.: $416,530
Capital Assets (PP&E): $1,997,605
Working Capital for Ops.: $1,151,280
Capital Used in Ops.: $3,565,415
Inventory Adjustment (25% cut): $5,044,897
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Excess Capital: $19,681,577
Per Share: $1.77
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Year__Sales__ _ __Net Income_Owners' Earnings
2008__$57,564,000__$3,583,897__$2,933,897
2009__$59,115,840__$4,170,448__$3,502,925
2010__$60,760,790__$4,299,987__$3,613,890
2011__$62,213,830__$4,414,414__$3,711,909
2012__$63,739,521__$4,534,563__$3,814,830
2013__$65,341,497__$4,660,718__$3,922,896
2014__$66,687,157__$4,766,689__$4,013,672
2015__$68,086,644__$4,876,898__$4,108,079
2016__$69,542,109__$4,991,516__$4,206,262
2017__$70,677,373__$5,080,918__$4,282,845
2018__$71,846,694__$5,496,286__$4,685,009
2019__$73,051,095__$5,752,774__$4,927,897
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Using an 8-10% discount rate and a 12.5-14.3 terminal multiple, I get an intrinsic value somewhere between $5.72 and $6.70. Note, my sales growth is less than 3% every year (for a business that still has decent growth prospects and little to no competition) and I think my margins are fairly conservative for the way the business is developing. If management is able to have some success getting things in order (either on the cost or growth side), normalized earnings are probably somewhere closer to the $4-5 million range which could very easily make this business worth $8-10 per share, or more if they buy back their own stock when it is cheap.
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I know I didn’t get into too much detail on things, but it certainly may be a good place for you to start your own research. The company will hold a conference call Thursday afternoon.
Excess Capital: $19,681,577
Per Share: $1.77
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Year__Sales__ _ __Net Income_Owners' Earnings
2008__$57,564,000__$3,583,897__$2,933,897
2009__$59,115,840__$4,170,448__$3,502,925
2010__$60,760,790__$4,299,987__$3,613,890
2011__$62,213,830__$4,414,414__$3,711,909
2012__$63,739,521__$4,534,563__$3,814,830
2013__$65,341,497__$4,660,718__$3,922,896
2014__$66,687,157__$4,766,689__$4,013,672
2015__$68,086,644__$4,876,898__$4,108,079
2016__$69,542,109__$4,991,516__$4,206,262
2017__$70,677,373__$5,080,918__$4,282,845
2018__$71,846,694__$5,496,286__$4,685,009
2019__$73,051,095__$5,752,774__$4,927,897
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Using an 8-10% discount rate and a 12.5-14.3 terminal multiple, I get an intrinsic value somewhere between $5.72 and $6.70. Note, my sales growth is less than 3% every year (for a business that still has decent growth prospects and little to no competition) and I think my margins are fairly conservative for the way the business is developing. If management is able to have some success getting things in order (either on the cost or growth side), normalized earnings are probably somewhere closer to the $4-5 million range which could very easily make this business worth $8-10 per share, or more if they buy back their own stock when it is cheap.
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I know I didn’t get into too much detail on things, but it certainly may be a good place for you to start your own research. The company will hold a conference call Thursday afternoon.
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*This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.