Summary
- Tandy Leather is an absolute, historical and relatively cheap valuation anomaly. The only national brand in a highly fragmented industry.
- Two decades of reporting consistent profits, high double-digit return on invested capital and a compounding book value. The progress was stalled by accounting irregularities from inventory valuation and the Covid-19 pandemic.
- Amazon-resistant as the customers want to touch, smell and feel the product.
- Ownership of unencumbered real estate with a tax assessment value of around $8 million.
- Retained earnings per share increased 80.10% over the prior five years from December 2013 ($4.06) to the most recent quarter ($7.32). In contrast with these intrinsic value improvements, the market price declined 68.74% over the same time period.
- On Nov. 13, an 8K filing was published. Comments include the following: positive year-over-year growth in September and October, anticipating the completion of the audit, re-listing on the Nasdaq, significant progress on consumer-facing initiatives, systems improvements, new web platform, centralized eCommerce, digital marketing and other investments.
Tandy Leather Factory Inc. (TLFA, Financial) is an illiquid nano-cap specialty physical store retailer in the dying niche of leather crafting. The Fort Worth, Texas-based company sells leather, leather crafts and related supplies. It's in 42 states, seven Canadian provinces and 115 North American stores. Spain is the only remaining location outside North America.
Inventory errors impacting multiple years were uncovered during December 2018. This discovery forced the restatement of financials. Nasdaq delisted the stock in August 2020. Yet, Tandy's delisting caused selling and created an investment opportunity. The stock is oversold for a consistent, historically profitable and asset-rich company. A new CEO hired at the end of 2018 with a prudent capital allocating board now drives the Tandy opportunity.
Opportunity: Tandy's deeply discounted valuation is absolute, historical and relative
The liquidation value of existing tangible assets is enough evidence to invest. However, the opportunity is more significant. A talented new CEO, the return of safe retail store shopping, Amazon (AMZN, Financial) resistance and the material company ownership by the board will help move the valuation higher. Additionally, the current delisting eliminates around $1.5 million in annual costs. This change alone improves earnings before interest and taxes by double digits. Although, after the restatement, relisting is likely to occur on the Nasdaq.
Tangible asset breakup value, excluding the sale of its operations:
In August, the 8K reported limited financial data for the period ending July 31. The cash balance was $11.50 million, or $1.28 per share. The inventory balance reported for the year ended December 2018 was $30.57 million, or $3.85 per share. I reduced the value by 50% for this analysis.
It also had ownership of unencumbered real estate with a tax assessment value of $15,781,117 in 2018. But in 2020, the company reported $6,238,940. This is an unusually large tax value drop.
Total liabilities were $12.68 million, or $1.40 per share.
This simple analysis gives us an ultra-conservative fair market value for net tangible assets of $2.35 per share.
Tandy Leather has compounded intrinsic value for years. Yet, the enterprise value declined sharply. The table below shows the irrational market value disconnect.
The table shows 10 years of consistently profitable operations. The opportunity is obvious. The ROIC averages 14.36%, retained earnings per share increased 181.68% over the 10-year period from 2010. Tangible book value per share improved by 133%. Yet the enterprise value per share decreased 32.82% over the same period.
Additional factors impact a future higher stock price
Tandy Leather is illiquid and ignored with no analyst coverage. It is the only national retail brand in a highly fragmented industry. Further, CEO Janet Carr developed a strategic path with reported tangible progress before the Covid-19 pandemic and accounting irregularities.
The company is also Amazon-resistant as the customers want to touch, smell and feel the product. The stores offer a continuous flow of classes as well as hands-on help with projects and repairs from skilled staff.
It also has endless positive customer reviews on Yelp, who say the "level of service is unheard of these days," and "never met more kind and helpful employees in retail," as well as "people are fantastic."
In addition, management owns 42.20% of the shares outstanding. Board member and value investor Jeff Gramm of Bandera Partners own 32% of shares outstanding at an average price of $8.44. Board member James Pappas of JCP Investments holds 9.60% at an average price of $7.50.
June 2 management presentation
The presentation graph shows the vast opportunities for growth that exist for Tandy with hobbyists and businesses.
Risk
A Covid resurgence during winter 2020 weakens its financial position. Sales continue their slow decline as their niche shrink. Additionally, it will have difficulty in finding skilled labor and there will be higher associated payroll costs as well as growing costs to maintain a national retail storefront.
The legal, consulting, temporary chief financial officer, severance and accounting fees for the year-long financial restatement will cost millions. The actual amount is material and unknown.
Update
A news report was released after the market closed on Nov. 13.
Tandy must restate prior financial statements before full financial results are reported. Therefore, its not reporting regular financial results until the restatement is completed. But, limited financial results were reported on Friday.
Preliminary sales were approximately $15.8 million, a decrease of 3.1% compared to prior year's $16.3 million. As of Sept. 30, the company had $0.4 million in debt and $10.1 million in cash.
In a statement, Carr said:
"We were pleased with our third quarter sales performance following the shutdown of our entire store fleet from COVID-19 in Q2. In the third quarter, we were able to reopen substantially all of our remaining store fleet after the permanent closure of 8 stores. Strong web sales continued in Q3, even as stores have reopened. Total sales growith improved through the quarter with positive year-over-year growth in September and continuing through October. While the future remains hard to predict in the current economic climate and with COVID-19 case rates rising again, we have confidence in the overall trajectory of the business."
The financial restatement continues for the fiscal year 2018 10-K, the financial statement audits for fiscal year 2019 and the first three quarters of fiscal 2020. Tandy will apply to relist its common stock on Nasdaq following the filing of all of its outstanding reports with the Securities and Exchange Commission.
"We are looking forward to the completion of the audit of our restated financials, our re-listing on the Nasdaq, and a return to a regular, fulsome discussion of our financial results with investors," Carr said. "During this period, and despite the distraction and economic environment,we have made significant progress on our consumer-facing initiatives, implemented new comprehensive systems improvements, launched a new web platform and centralized eCommerce fulfillment capability and substantially increased digital marketing, and made other investments in building the foundation for our long-term growth."
Conclusion
Tandy Leather offers a large margin of safety and a deeply discounted extreme valuation in this overpriced market. Price alone would be enough due diligence. However, the opportunity is enhanced with the new CEO, Nasdaq relisting, investments in new systems and process improvements. Additionally, investors can wait for market recognition, mean reversion, continued profitability or certain longer-term favorable corporate action.
Disclosure: Long Tandy Leather.
Read more here:
- Mohawk Group: The Renaissance Technologies of CPG E-Commerce
- Internet-Proof Retailer Trading at a Distressed Price Creates Opportunity
- Tandy Leather Is an Amazon-Resistant Retailer
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