TANDY LEATHER FACTORY INC - FORM 10-Q - November 14, 2011

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number 1-12368
TANDY LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)

Delaware
75-2543540
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

1900 Southeast Loop 820, Fort Worth, Texas  76140
(Address of Principal Executive Offices) (Zip Code)

(817) 872-3200
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files). Yes [  ]  No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X] Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
Shares outstanding as of November 11, 2011
Common Stock, par value $0.0024 per share
10,156,442

 
 
 




TANDY LEATHER FACTORY, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011




 
PAGE NO.
   
PART I.  FINANCIAL INFORMATION
  
   
  1
   
    Consolidated Balance Sheets
  
     September 30, 2011 and December 31, 2010
   1
   
    Consolidated Statements of Income
  
     Three and nine months ended September 30, 2011 and 2010
   2
   
    Consolidated Statements of Cash Flows
  
Nine months ended September 30, 2011 and 2010
   3
   
    Consolidated Statements of Stockholders' Equity
  
     Nine months ended September 30, 2011 and 2010
   4
   
  5
   
 
  9
   
  13
   
  13
   
PART II.  OTHER INFORMATION
  
   
  13
   
  13
   
SIGNATURES
  
   


 
 
 

PART I  FINANCIAL INFORMATION


Tandy Leather Factory, Inc.
Consolidated Balance Sheets

 
September 30,  2011
(unaudited)
  
December 31,  2010
(audited)
ASSETS
      
CURRENT ASSETS:
      
 
Cash
$5,991,628
  
$4,293,746
 
Short-term investments, including certificates of deposit
336,000
  
1,621,593
 
Accounts receivable-trade, net of allowance for doubtful accounts
      
     
of $85,000 and $147,000 in 2011 and 2010, respectively
1,539,229
  
1,253,639
 
Inventory
20,551,287
  
20,236,028
 
Prepaid income taxes
4,765
  
-
 
Deferred income taxes
293,351
  
307,509
 
Other current assets
1,450,867
  
1,056,201
       
Total current assets
30,167,127
  
28,768,716
       
PROPERTY AND EQUIPMENT, at cost
14,955,482
  
14,390,662
Less accumulated depreciation and amortization
(4,475,331)
  
(4,106,121)
 
10,480,151
  
10,284,541
       
GOODWILL
984,344
  
990,368
OTHER INTANGIBLES, net of accumulated amortization of
      
 
$527,000 and $495,000 in 2011 and 2010, respectively
198,693
  
232,416
Other assets
342,169
  
319,533
 
$42,172,484
  
$40,595,574
       
LIABILITIES AND STOCKHOLDERS' EQUITY
      
CURRENT LIABILITIES:
      
 
Accounts payable-trade
$1,844,920
  
$1,247,821
 
Accrued expenses and other liabilities
3,425,716
  
4,893,236
 
Income taxes payable
-
  
554,380
 
Current maturities of long-term debt
202,500
  
202,500
       
Total current liabilities
5,473,136
  
6,897,937
       
DEFERRED INCOME TAXES
892,311
  
628,543
       
LONG-TERM DEBT, net of current maturities
3,155,625
  
3,307,500
       
COMMITMENTS AND CONTINGENCIES
      
       
STOCKHOLDERS' EQUITY:
      
 
Preferred stock, $0.10 par value; 20,000,000 shares authorized;
      
   
none issued or outstanding; attributes to be determined on issuance
-
  
-
 
Common stock, $0.0024 par value; 25,000,000 shares authorized;
      
   
11,150,065 shares issued at 2011 and 2010;
      
   
10,156,442 shares outstanding at 2011 and 2010
26,760
  
26,760
 
Paid-in capital
5,736,543
  
5,703,387
 
Retained earnings
29,485,373
  
26,429,335
 
Treasury stock at cost (993,623 shares at 2011 and 2010)
(2,894,068)
  
(2,894,068)
 
Accumulated other comprehensive income
296,804
  
496,180
       
Total stockholders' equity
32,651,412
  
29,761,594
 
$42,172,484
  
$40,595,574





The accompanying notes are an integral part of these consolidated financial statements.


Tandy Leather Factory, Inc.
Consolidated Statements of Income
(Unaudited)
For the Three and Nine Months Ended September 30, 2011 and 2010


 
THREE MONTHS
  
NINE MONTHS
 
2011
  
2010
  
2011
  
2010
NET SALES
$15,385,421
  
$13,640,193
  
$47,198,382
  
$42,579,553
               
COST OF SALES
6,147,143
  
5,457,668
  
18,590,002
  
16,705,466
               
          Gross profit
9,238,278
  
8,182,525
  
28,608,380
  
25,874,087
               
OPERATING EXPENSES
8,016,441
  
7,106,669
  
23,704,740
  
21,817,552
               
INCOME FROM CONTINUING OPERATIONS
1,221,837
  
1,075,856
  
4,903,640
  
4,056,535
               
OTHER INCOME (EXPENSE):
              
          Interest expense
(61,550)
  
(67,565)
  
(185,685)
  
(198,784)
          Other, net
176,374
  
77,887
  
81,775
  
161,095
               Total other income (expense)
114,824
  
10,322
  
(103,910)
  
(37,689)
               
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
1,336,661
  
1,086,178
  
4,799,730
  
4,018,846
               
PROVISION FOR INCOME TAXES
506,187
  
493,532
  
1,742,324
  
1,417,513
NET INCOME FROM CONTINUING OPERATIONS
830,474
  
592,646
  
3,057,406
  
2,601,333
               
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
(1,368)
  
1,259
  
(1,368)
  
1,795
               
NET INCOME
$829,106
  
$593,905
  
$3,056,038
  
$2,603,128
               
               
NET INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
              
Basic
$0.08
  
$0.06
  
$0.30
  
$0.26
Diluted
$0.08
  
$0.06
  
$0.30
  
$0.25
               
NET INCOME FROM DISCONTINUED OPERATIONS PER COMMON SHARE:
              
Basic
$0.00
  
$0.00
  
$0.00
  
$0.00
Diluted
$0.00
  
$0.00
  
$0.00
  
$0.00
               
NET INCOME PER COMMON SHARE:
              
Basic
$0.08
  
$0.06
  
$0.30
  
$0.26
Diluted
$0.08
  
$0.06
  
$0.30
  
$0.25
               
Weighted Average Number of Shares Outstanding:
              
  Basic
10,156,442
  
10,256,442
  
10,156,442
  
10,195,868
  Diluted
10,168,326
  
10,257,743
  
10,179,523
  
10,236,919



The accompanying notes are an integral part of these consolidated financial statements.



Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, 2011 and 2010

 
2011
  
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
      
 
Net income
$3,056,038
  
$2,603,128
 
(Loss) income from discontinued operations
         (1,368)
  
1,795
   
3,057,406
  
2,601,333
 
Adjustments to reconcile net income to net cash provided by operating activities:
      
   
Depreciation and amortization
      759,279
  
713,366
   
Loss on disposal or abandonment of assets
        81,579
  
11,584
   
Non-cash stock-based compensation
        33,156
  
22,790
   
Deferred income taxes
      273,161
  
      (59,006)
   
Other
     (178,795)
  
        53,382
   
Net changes in assets and liabilities, net of effect of business acquisitions:
      
     
Accounts receivable-trade, net
     (285,590)
  
    (246,414)
     
Inventory
     (315,259)
  
 (3,957,677)
     
Income taxes
     (554,681)
  
    (346,935)
     
Other current assets
     (394,666)
  
 (1,756,160)
     
Accounts payable-trade
      597,099
  
   1,382,177
     
Accrued expenses and other liabilities
  (1,467,520)
  
      838,883
 
Total adjustments
  (1,452,237)
  
 (3,344,010)
 
Net cash provided by (used in) continuing operating activities
   1,605,169
  
    (742,677)
 
Cash used in discontinued operations
         (1,067)
  
      (23,706)
 
                            Net cash provided by (used in) operating activities
   1,604,102
  
    (766,383)
       
CASH FLOWS FROM INVESTING ACTIVITIES:
      
 
Purchase of property and equipment
  (1,042,775)
  
    (963,222)
 
Purchase of certificates of deposit
  -
  
 (2,572,593)
 
Proceeds from maturities of certificates of deposit
   1,285,593
  
   5,943,000
 
Proceeds from sale of assets
        25,473
  
          6,560
 
Increase in other assets
       (22,636)
  
        (5,522)
       
Net cash provided by investing activities
245,655
  
2,408,223
       
CASH FLOWS FROM FINANCING ACTIVITIES:
      
 
Payment of dividends
                  -
  
 (7,690,832)
 
Payments on notes payable and long-term debt
     (151,875)
  
    (151,875)
 
Repurchase of common stock (treasury stock)
  -
  
        (8,419)
 
Proceeds from issuance of common stock
                  -
  
      170,266
       
Net cash used in financing activities
     (151,875)
  
 (7,680,860)
       
NET INCREASE (DECREASE) IN CASH
1,697,882
  
 (6,039,020)
       
CASH, beginning of period
4,293,746
  
7,891,962
       
CASH, end of period
$5,991,628
  
$1,852,942
       
       
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
          
Interest paid during the period
$185,685
  
  $198,784
  
Income tax paid during the period, net of (refunds)
1,940,659
  
1,808,619
  









The accompanying notes are an integral part of these consolidated financial statements.



Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
For the Nine Months Ended September 30, 2011 and 2010

 
 
Number of Shares
  
 
Par
Value
  
 
 
Paid-in Capital
  
 
Treasury
Stock
  
 
 
Retained Earnings
  
Accumulated Other Comprehensive
Income (Loss)
  
 
 
Total
  
 
Comprehensive
Income (Loss)
BALANCE, December 31, 2009
10,130,628
  
$26,453
  
$5,491,736
  
$(2,452,649)
  
$29,959,910
  
$334,205
  
$33,359,655
    
                               
Shares issued - stock options
128,114
  
307
  
169,959
  
-
  
-
  
-
  
170,266
    
Stock-based compensation
-
  
-
  
22,790
  
-
  
-
  
-
  
22,790
    
Purchase of treasury stock
(2,300)
  
-
  
-
  
(8,419)
  
-
  
-
  
(8,419)
    
Net  income
-
  
-
  
-
  
-
  
2,603,128
  
-
  
2,603,128
  
$2,603,128
Cash dividend
-
  
-
  
-
  
-
  
(7,690,832)
  
-
  
(7,690,832)
    
Translation adjustment
-
  
-
  
-
  
-
  
-
  
57,132
  
57,132
  
57,132
BALANCE, September 30, 2010
10,256,442
  
$26,760
  
$5,684,485
  
$(2,461,068)
  
$24,872,206
  
$391,337
  
$28,513,720
    

Comprehensive income for the nine months ended September 30, 2010
$2,660,260
 

 
 
 
Number of Shares
  
 
Par
Value
  
 
 
Paid-in Capital
  
 
Treasury
Stock
  
 
 
Retained Earnings
  
Accumulated Other Comprehensive
Income (Loss)
  
 
 
Total
  
 
Comprehensive
Income (Loss)
BALANCE, December 31, 2010
10,156,442
  
$26,760
  
$5,703,387
  
$(2,894,068)
  
$26,429,335
  
$496,180
  
$29,761,594
    
                               
Stock-based compensation
-
  
-
  
33,156
  
-
  
-
  
-
  
33,156
    
Net  income
-
  
-
  
-
  
-
  
3,056,038
  
-
  
3,056,038
  
$3,056,038
Translation adjustment
-
  
-
  
-
  
-
  
-
  
(199,376)
  
(199,376)
  
(199,376)
BALANCE, September 30, 2011
10,156,442
  
$26,760
  
$5,736,543
  
$(2,894,068)
  
$29,485,373
  
$296,804
  
$32,651,412
    
 
Comprehensive income for the nine months ended September 30, 2011
$2,856,662
 
 
 

 
The accompanying notes are an integral part of these consolidated financial statements.


TANDY LEATHER FACTORY, INC.

 
 
1.  BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management, the accompanying consolidated financial statements for Tandy Leather Factory, Inc. and its consolidated subsidiaries contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly its financial position as of September 30, 2011 and December 31, 2010, and its results of operations and cash flows for the three and/or nine-month periods ended September 30, 2011 and 2010.  Operating results for the three and nine-month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

Inventory.  Inventory is stated at the lower of cost or market and is accounted for on the “first in, first out” method.  Based on negotiations with vendors, title generally passes to us when merchandise is put on board.  Merchandise to which we have title but which have not yet received is recorded as inventory in transit.  In addition, the value of inventory is periodically reduced for slow-moving or obsolete inventory based on management's review of items on hand compared to their estimated future demand.

The components of inventory consist of the following:

 
As of
 
September 30, 2011
  
December 31, 2010
Inventory on hand:
      
Finished goods held for sale
$19,519,688
  
$17,847,002
Raw materials and work in process
641,799
  
518,422
Inventory in transit
389,800
  
1,870,604
 
$20,551,287
  
$20,236,028

Goodwill and Other Intangibles.  Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is required to be tested for impairment on an annual basis, absent indicators of impairment during the interim.  Application of the goodwill impairment test requires exercise of judgment, including the estimation of future cash flows, determination of appropriate discount rates and other important assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

A two-step process is used to test for goodwill impairment.  The first phase screens for impairment, while the second phase (if necessary) measures the impairment.  We have elected to perform the annual analysis during the fourth calendar quarter of each year.  As of December 31, 2010, management determined that the present value of the discounted estimated future cash flows of the stores associated with the goodwill is sufficient to support their respective goodwill balances.  No indicators of impairment were identified during the first nine months of 2011.

A summary of changes in our goodwill for the periods ended September 30, 2011 and 2010 is as follows:

 
Leather Factory
Tandy Leather
Total
Balance, December 31, 2009
$600,417
$383,406
$983,823
Acquisitions and adjustments
-
-
-
Foreign exchange gain/loss
2,383
-
2,383
Impairments
-
-
-
Balance, September 30, 2010
$602,800
$383,406
$986,206
 
 
Leather Factory
 
Tandy Leather
 
Total
Balance, December 31, 2010
$606,962
$383,406
$990,368
Acquisitions and adjustments
-
-
-
Foreign exchange gain/loss
(6,024)
-
(6,024)
Impairments
-
-
-
Balance, September 30, 2011
$600,938
$383,406
$984,344

Other intangibles consist of the following:

 
As of September 30, 2011
  
As of December 31, 2010
 
 
Gross
Accumulated
Amortization
 
Net
  
 
Gross
Accumulated
Amortization
 
Net
Trademarks, Copyrights
$544,369
$417,011
$127,358
  
$544,369
$391,531
$152,838
Non-Compete Agreements
181,755
110,420
71,335
  
183,134
103,556
79,578
 
$726,124
$527,431
$198,693
  
$727,503
$495,087
$232,416

We recorded amortization expense of $33,401 during the first nine months of 2011 compared to $45,255 in the same period of 2010.  All of our intangible assets are subject to amortization under U.S. GAAP.  Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years is as follows:

 
Wholesale Leathercraft
Retail Leathercraft
Total
2011
$13,826
$31,337
$45,163
2012
5,614
33,337
38,951
2013
-
33,337
33,337
2014
-
33,337
33,337
2015
-
28,635
28,635

Revenue Recognition.  Our sales generally occur via two methods:  (1) at the counter in our stores, and (2) shipment by common carrier.  Sales at the counter are recorded and title passes as transactions occur.  Otherwise, sales are recorded and title passes when the merchandise is shipped to the customer.  Our shipping terms are FOB shipping point.

We offer an unconditional satisfaction guarantee to our customers and accept all product returns.  Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.

Recent Accounting Pronouncements.  In April 2010, FASB issued ASU 2010-13 "Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades" (ASU 2010-13). Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. The adoption of the standard did not have a material impact on our consolidated results of operations and financial condition.

In December 2010, FASB issued ASU 2010-28 “Intangibles - Goodwill and Other (Topic 350)” (ASU 2010-28). Topic 350 is amended to clarify the requirement to test for impairment of goodwill. Topic 350 has required that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. The adoption of the standard did not have a material impact on our consolidated results of operations and financial condition.

In December 2010, FASB issued ASU 2010-29 “Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations” (ASU 2010-29). This standard update clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010. The adoption of the standard did not have a material impact on our consolidated financial statements.
 
In June 2011, FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” (ASU 2011-05).  This standard update requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity.  ASU 2011-05 is effective for the interim and annual periods beginning after December 15, 2011.  We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements as it only requires a change in the format of presentation.

In September 2011, FASB issued ASU 2011-08, “Intangibles-Goodwill and Other (Topic 350) – Testing Goodwill for Impairment”.  ASU 2011-08 provides companies with a new option to determine whether or not it is necessary to apply the traditional two-step quantitative goodwill impairment test in ASC 350, Intangibles – Goodwill and Other.  Under ASU 2011-08 companies are no longer required to calculate the fair value of a reporting unit unless it determines, on the basis of qualitative information, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  ASU 2011-08 is effective for periods ending after December 15, 2011; however, early adoption is permitted for periods ending after September 15, 2011.   We do not anticipate the adoption to have a material impact on our consolidated financial statements.

 2.           SHORT-TERM INVESTMENTS

All current fixed maturity securities are classified as “available for sale” and are reported at carrying value, which approximates fair value based on the discounted value of contractual cash flows. We have determined that our investment securities are available to support current operations and, accordingly, have classified such securities as current assets without regard to contractual maturities.  Investments at September 30, 2011 and December 31, 2010 consisted of certificates of deposit.  The contractual maturities of $336,000 in certificates of deposit held as of September 30, 2011 are all due within one year.

We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As a basis for considering such assumptions, accounting standards establish a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – include other inputs that are directly or indirectly observable in the marketplace.

Level 3 – unobservable inputs which are supported by little or no market activity.

Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.  We classify our certificates of deposit as level 2 assets and have maintained consistency in valuation techniques during the period ended September 30, 2011.

3.           NOTES PAYABLE AND LONG-TERM DEBT

On July 31, 2007, we entered into a Credit Agreement and Line of Credit Note with JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with a credit facility of up to $5,500,000 to facilitate our purchase of real estate consisting of a 195,000 square foot building situated on 30 acres of land located at 1900 SE Loop 820 in Fort Worth, Texas.  Proceeds in the amount of $4,050,000 were used to fund the purchase of the property.  On April 30, 2008, the principal balance was rolled into a 10-year term note with a 20-year amortization that accrues interest at a rate of 7.10% per annum.

At September 30, 2011 and December 31, 2010, the amount outstanding under the above agreements consisted of the following:

 
September 30,    2011
  
December 31, 2010
Credit Agreement with JPMorgan Chase Bank – collateralized by real estate; payable as follows:
      
Line of Credit Note dated July 31, 2007, converted to a 10-year term note on April 30, 2008; $16,875 monthly principal payments plus interest at 7.1% per annum; matures April 30, 2018
 
$  3,358,125
  
 
$3,510,000
Less - Current maturities
(202,500)
  
(202,500)
 
$3,155,625
  
$3,307,500

4.           STOCK-BASED COMPENSATION

 
We have one stock option plan which provides for annual stock option grants to non-employee directors with an exercise price equal to the fair market value of the shares at the date of grant.  Under this plan, 12,000 options were awarded to directors for each of the nine month periods ended September 30, 2011 and 2010.  These options vest and become exercisable six months from the option grant date.  We had two other stock option plans from 1995 which provided for stock option grants to officers, key employees and non-employee directors.  These plans expired in 2005.  The expiration of the plans has no effect on the options previously granted.  Options outstanding and exercisable were granted at a stock option price which was not less than the fair market value of our common stock as of closing on the date the option was granted and no option has a term in excess of ten years.  We recognized share based compensation expense of $7,126 and $4,402 for each of the quarters ended September 30, 2011 and 2010, respectively, and $33,156 and $22,790 for each of the nine month periods ended September 30, 2011 and 2010, respectively, as a component of operating expenses.
 
 
During the nine months ended September 30, 2011 and 2010, the stock option activity under our stock option plans was as follows:
 

 
Weighted Average Exercise Price
# of shares
Weighted Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value
Outstanding, January 1, 2010
$2.33
197,700
    
Granted
5.078
12,000
    
Cancelled
-
-
    
Exercised
1.647
136,700
    
Outstanding, September 30, 2010
$4.34
73,000
4.21
$154,275
Exercisable, September 30, 2010
$4.19
61,000
3.13
$131,485
         
Outstanding, January 1, 2011
$4.35
103,600
    
Granted
4.80
12,000
    
Cancelled
-
-
    
Exercised
-
-
    
Outstanding, September 30, 2011
$4.40
115,600
5.40
$206,332
Exercisable, September 30, 2011
$4.40
115,600
5.40
$206,332

Other information pertaining to option activity during the nine-month periods ended September 30, 2011 and 2010 are as follows:

 
September 30, 2011
September 30, 2010
Weighted average grant-date fair value of stock options granted
$1.19
$1.90
Total fair value of stock options vested
$52,057
22,790
Total intrinsic value of stock options exercised
N/A
$114,603

As of September 30, 2011 and 2010, there was no unrecognized compensation cost related to non-vested stock options.


5.         EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2011 and 2010:

 
Three Months Ended
  
Nine Months Ended
 
September 30,
  
September 30,
   
2011
  
2010
  
2011
  
2010
Numerator:
                
 
Net  income
$829,106
  
$593,905
  
$3,056,038
  
$2,603,128
 
Numerator for basic and diluted earnings per share
829,106
  
593,905
  
3,056,038
  
2,603,128
Denominator:
                
 
Weighted-average shares outstanding-basic
10,156,442
  
10,256,442
  
10,156,442
  
10,195,868
                 
Effect of dilutive securities:
                
 
Stock options
11,884
  
1,301
  
23,081
  
41,051
Dilutive potential common shares
  
11,884
  
1,301
  
23,081
  
41,051
 
Denominator for diluted earnings per share-weighted-average shares
10,168,326
  
10,257,743
  
10,179,523
  
10,236,919
                 
 
Basic earnings per share
$0.08
  
$0.06
  
$0.30
  
$0.26
 
Diluted earnings per share
$0.08
  
$0.06
  
$0.30
  
$0.25


The net effect of converting stock options and warrants to purchase 102,600 and 10,000 shares of common stock at exercise prices less than the average market prices has been included in the computations of diluted EPS for the quarter ended September 30, 2011 and 2010, respectively.

6.           CASH DIVIDEND
 
In May 2010, our Board of Directors authorized a $0.75 per share special one-time cash dividend that was paid to stockholders of record at the close of business on June 3, 2010. We released the funds used to pay for the special one-time cash dividend on July 1, 2010 and the dividend, totaling $7.7 million, was paid to stockholders on July 5, 2010. Our Board will determine future cash dividends after giving consideration to our then existing levels of profit and cash flow, capital requirements, current and forecasted liquidity, as well as financial and other business conditions existing at the time.

7.           SEGMENT INFORMATION

We identify our segments based on the activities of three distinct operations:

a.  
Wholesale Leathercraft, which consists of a chain of wholesale stores operating under the name, The Leather Factory, located in North America;

b.  
Retail Leathercraft, which consists of a chain of retail stores operating under the name, Tandy Leather Company, located in the North America; and

c.  
International Leathercraft, which sells to both wholesale and retail customers.  It carries the same products as North American stores.  As of September 30, 2011, this operation consisted of one store located in Northampton, UK.  A second store was opened in October 2011 in Sydney, Australia.
 
Our reportable operating segments have been determined as separately identifiable business units, and we measure segment earnings as operating earnings, defined as income before interest and income taxes.

 
Wholesale Leathercraft
Retail Leathercraft
Int’l Leathercraft
Discontinued  Operations
Total
For the quarter ended September 30, 2011
          
Net sales
$6,150,138
$8,744,446
$490,837
  
$15,385,421
Gross profit
3,733,345
5,178,788
326,145
  
9,238,278
Operating earnings
296,824
811,347
113,666
  
1,221,837
Interest (expense)
(61,550)
-
-
  
(61,550)
Other income (expense), net
175,715
(1,577)
2,236
  
176,374
Income before income taxes
410,989
809,770
115,902
  
1,336,661
           
     Depreciation and amortization
216,958
42,836
2,134
  
261,928
     Fixed asset additions
239,477
114,200
191,613
  
545,290
     Total assets
$32,903,869
$7,225,267
$2,043,348
-
$42,172,484
           
For the quarter ended September 30, 2010
          
Net sales
$6,012,932
$7,212,443
$414,818
  
$13,640,193
Gross profit
3,699,403
4,238,791
244,331
  
8,182,525
Operating earnings
510,256
518,718
46,882
  
1,075,856
Interest (expense)
(67,565)
-
-
  
(67,565)
Other income (expense), net
60,634
(356)
17,609
  
77,887
Income before income taxes
503,325
518,362
64,491
  
1,086,178
           
     Depreciation and amortization
204,097
33,294
4,565
  
241,956
     Fixed asset additions
205,409
22,985
-
  
228,394
     Total assets
$33,282,964
$6,328,371
$532,685
-
$40,144,020

 
Wholesale Leathercraft
Retail Leathercraft
Int’l Leathercraft
Discontinued Operations
Total
For the nine months ended September 30, 2011
          
Net sales
$19,341,919
$26,327,904
$1,528,559
  
$47,198,382
Gross profit
11,781,622
15,829,914
996,844
  
28,608,380
Operating earnings
1,709,226
2,857,986
336,428
  
4,903,640
Interest (expense)
(185,685)
-
-
  
(185,685)
Other income (expense), net
69,968
(7,613)
19,420
  
81,775
Income before income taxes
1,593,509
2,850,373
355,848
  
4,799,730
           
     Depreciation and amortization
636,050
115,597
7,632
  
759,279
     Fixed asset additions
520,805
328,857
193,113
  
1,042,775
     Total assets
$32,903,869
$7,225,267
$2,043,348
-
$42,172,484
           
For the nine months ended September 30, 2010
          
Net sales
$18,849,015
$22,535,418
$1,195,120
  
$42,579,553
Gross profit
11,491,749
13,649,194
733,144
  
25,874,087
Operating earnings
1,667,718
2,210,932
177,885
  
4,056,535
Interest expense
(198,784)
-
-
  
(198,784)
Other income (expense), net
157,590
(880)
4,385
  
161,095
Income before income taxes
1,626,524
2,210,052
182,270
  
4,018,846
           
     Depreciation and amortization
603,712
98,329
11,325
  
713,366
     Fixed asset additions
902,858
60,364
-
  
963,222
     Total assets
$33,282,964
$6,328,371
$532,685
-
$40,144,020

Net sales for geographic areas were as follows for the three and nine months ended September 30, 2011 and 2010:

Three months ended September 30,
2011
2010
United States
$13,078,107
$11,681,130
Canada
1,560,808
1,300,564
All other countries
746,506
658,499
 
$15,385,421
$13,640,193

Nine months ended September 30,
2011
2010
United States
$40,056,351
$36,865,020
Canada
4,832,078
4,022,287
All other countries
2,309,953
1,692,246
 
$47,198,382
$42,579,553

Geographic sales information is based on the location of the customer.  No single foreign country, except for Canada, accounted for any material amount of our consolidated net sales for the three or nine-month periods ended September 30, 2011 and 2010.  We do not have any significant long-lived assets outside of the United States.

8.  LITIGATION

On March 16, 2011, two former employees of the Company filed a lawsuit, entitled Mark Barnes and Jerry Mercante on behalf of themselves and all other similarly situated v. Tandy Leather Company, Inc., Tandy Leather Factory, and Does 1-50, in the US District Court for the District of Nevada.  The lawsuit was subsequently amended on May 9, 2011 to add another former employee, Donna Cavota, as a third named plaintiff.  The suit alleges that the Company violated requirements of the Fair Labor Standards Act (FLSA) as well as various state wage laws.  Plaintiffs seek to represent themselves and all similarly situated U.S. current and former store managers of the Company.   Plaintiffs seek reimbursement for an unspecified amount of unpaid overtime compensation, liquidated damages, attorney’s fees and costs.  On May 17, 2011, the district court in Nevada granted the Company’s request to transfer venue to the Northern District of Texas.  Trial is currently set for the week of May 29, 2012.  It is not possible at this time to predict whether the Company will incur any liability, or to estimate the ranges of damages, if any, which may be incurred in connection with the matter. The company intends to vigorously defend the lawsuit.

9.  STORE CLOSING

On October 15, 2010, we announced the closing of Mid-Continent Leather Sales, a wholesale store located in Coweta, Oklahoma, due to its unsatisfactory sales and earnings performance.  All related one-time expenses associated with the store closing were expensed in 2010 as part of operating expenses.  The store closing did not result in an impairment of goodwill.


Our Business

We are the world’s largest specialty retailer and wholesale distributor of leather and leathercraft related items.  We market our products to our growing list of customers through company-owned retail and wholesale stores.  We are a Delaware corporation, and our common stock trades on the NASDAQ Global Market under the symbol “TLF.”  We operate our business in three segments:  Wholesale Leathercraft, which operates wholesale stores in North America under the trade name, The Leather Factory, Retail Leathercraft, which operates retail stores in North America under the trade name, Tandy Leather Company, and International Leathercraft, which operates combination retail/wholesale stores outside of North America under the trade name, Tandy Leather Factory.  See Note 7 to the Consolidated Financial Statements for additional information concerning our segments, as well as our foreign operations.

Our Wholesale Leathercraft segment operates 29 company-owned wholesale stores in 19 states and three Canadian provinces.  These stores are engaged in the wholesale distribution of leather and related items, including leatherworking tools, buckles and belt adornments, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits, to retailers, manufacturers, and end users.  Our Wholesale Leathercraft segment also includes our National Account sales group, whose customers are only national craft chains.
 
 
Our Retail Leathercraft segment operates company-owned Tandy Leather Company retail stores in 35 states and six Canadian provinces.  Tandy Leather Company, the oldest and one of the best-known suppliers of leather and related supplies used in the leathercraft industry, has been a primary leathercraft resource for decades.  Tandy Leather Company’s products include quality tools, leather, accessories, kits and teaching materials.  In 2002, we began expanding Tandy Leather Company’s industry presence by opening retail stores.  As of November 1, 2011, we were operating 77 Tandy Leather Company retail stores located throughout the United States and Canada.

As of September 30, 2011, our International Leathercraft segment, which operates combination retail and wholesale stores outside of North America, consisted of one company-owned store in Northampton, United Kingdom.  A second store was opened in Sydney, Australia in October 2011.  We anticipate the opening of one to two stores in Spain in the fourth quarter of 2011, although opening dates have not been finalized yet.

Critical Accounting Policies

A description of our critical accounting policies appears in Item 7 “Management's Discussions and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Forward-Looking Statements

Certain statements contained in this report and other materials we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made or to be made by us, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements generally are accompanied by words such as “may,” “will,” “could,” “should,” “anticipate,” “believe,” “budgeted,” “expect,” “intend,” “plan,” “project,” “potential,” “estimate,” “continue,” or “future” variations thereof or other similar statements. There are certain important risks that could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of the important risks, including those described below, could cause actual results to differ materially from those suggested by the forward-looking statements.  Please refer also to our Annual Report on Form 10-K for fiscal year ended December 31, 2010 for additional information concerning these and other uncertainties that could negatively impact the Company.

Ø  
Our business may be negatively impacted by general economic conditions and the current global financial crisis.

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also small businesses and other retailers.  The United States and global economies have suffered from a prolonged recession for the past several years and as a result consumer spending has remained depressed, and may be subject to further deterioration for the foreseeable future.   Specialty retail, and retail in general, are heavily influenced by general economic cycles.  Purchases of non-essential products tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income declines.  During periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain our earnings from operations as a percentage of net sales.  As a result, our operating results may be adversely and materially affected by continued downward trends or uncertainly in the United States or global economies.

Ø  
Our profitability may decline as a result of increasing pressure on margins.

Our industry is subject to significant pricing pressure caused by many factors, including fluctuations in the cost of the leathers and metal products that we purchase and changes in consumer spending patterns and acceptance of our products.  These factors may prohibit us from passing cost increases on to customers which could cause our gross margin to decline.  If our product costs increase and our sale prices do not, our future operating results could be adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs.

Ø  
We may be unsuccessful in implementing our planned international expansion, which could impair the value of our brand, harm our business and negatively affect our results of operation.

We plan to grow our net sales and net earnings from our International segment by opening store in various international markets.  As we expand outside of North America, we may incur significant costs relating to starting up, maintaining and expanding foreign operations.  Costs may include, but are not limited to obtaining locations for stores, hiring personnel, and travel expenses.  We may be unable to open and operate new stores successfully and our growth may be limited, unless we are able to identify desirable sites for store locations, negotiate acceptable lease terms, hired, train and retain competent store personnel; manage inventory effectively to meet the needs and demands of customers on a timely basis, manage foreign currency risk effectively, and achieve acceptable operating margins from the new stores.  We cannot be sure that we can successfully open new stores or that our new stores will be profitable.

As we continue to increase our international operations, we face the possibility of greater losses from a number of risks inherent in doing business in international markets and from a number of factors which are beyond our control, such as political instability or acts of terrorism, which disrupt trade with the countries in which our suppliers or customers are located; local business practices that do not conform to legal or ethical guidelines; restrictions or regulations relating to imports or exports; additional or increased customs duties, tariffs, taxes and other charges on imports; significant fluctuations in the value of the dollar against foreign currencies; social, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell our products in these markets; and restrictions on the transfer of funds between the United States and foreign jurisdictions.

We assume no obligation to update or otherwise revise our forward-looking statements even if experience or future changes make it clear that any projected results, express or implied, will not be realized.

Results of Operations

Three Months Ended September 30, 2011 and 2010

The following tables present selected financial data of each of our three segments for the quarters ended September 30, 2011 and 2010.

 
Quarter Ended September 30, 2011
  
Quarter Ended September 30, 2010
 
Sales
  
Operating Income
  
Sales
  
Operating Income
Wholesale Leathercraft
$6,150,138
  
$296,824
  
$6,012,932
  
$510,256
Retail Leathercraft
8,744,446
  
811,347
  
7,212,443
  
518,718
Int’l Leathercraft
490,837
  
113,666
  
414,818
  
46,882
Total Operations
$15,385,421
  
$1,221,837
  
$13,640,193
  
$1,075,856

Consolidated net sales for the quarter ended September 30, 2011 increased $1.7 million, or 12.8%, compared to the same period in 2010.  All three segments achieved sales gains, ranging from 2% to 21%.  Operating income on a consolidated basis for the quarter ended September 30, 2011 increased 13.6%, or $146,000, from the third quarter of 2010.

The following table shows in comparative form our consolidated net income for the third quarters of 2011 and 2010:
 
2011
  
2010
% change
Net income
$829,106
  
$593,905
39.6%

All segments contributed to our consolidated net income.   Additional information appears below for each segment.

Wholesale Leathercraft

Our Wholesale Leathercraft operation consists of 29 wholesale stores and our National Account sales group.  The National Account sales group’s customers consist of only national craft chains.  The following table presents the combined sales mix by customer categories for the quarters ended September 30, 2011 and 2010:

 
Quarter Ended
Customer Group
09/30/11
  
09/30/10
  RETAIL (end users, consumers, individuals)
28%
  
25%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
5%
  
6%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
44%
  
43%
  MANUFACTURERS
7%
  
9%
  NATIONAL ACCOUNTS
16%
  
17%
 
100%
  
100%

Net sales increased 2.3%, or $137,000, for the third quarter of 2011 as follows:

 
# of Stores
Quarter Ended 09/30/11
  
Quarter Ended 09/30/10
  
$ Change
% Change
Same store sales
29
$5,361,239
  
$5,091,250
  
$269,989
5.3%
Closed store
     1
-
  
102,063
  
(102,063)
N/A
National account group
  
788,899
  
819,619
  
(30,720)
(3.7)%
Total sales
  
$6,150,138
  
$6,012,932
  
$137,206
2.3%


Our same store sales increased 5.3% in the third quarter of 2011, as compared with the same period in 2010.  Compared to the third quarter of 2010, we achieved sales increases in our retail and wholesale customer categories, which were offset somewhat by decreases in our institution, manufacturing and national account customer categories.  We believe our wholesale customers are beginning to experience some stability and growth in their businesses which has resulted in an increase in purchases.  However, with the continued economic uncertainty, it is too early to tell whether this trend will continue.  We have lowered our discounts to our manufacturer customer group in an attempt to protect gross margins, which has had a negative impact on our sales to this group.  Sales to our National Account customers were down 3.7% for the quarter, compared to the same quarter last year.  Our sales to these customers will depend on products we develop specifically for this group and the level of inventory we are willing to house in anticipation of orders.  Therefore, it is possible we will experience further sales declines to our National Account group if the product we stock is not what these customers want to purchase.   Our primary focus is on sales through our stores, rather than National Accounts, as we believe our stores represent the greatest potential for continued and consistent sales growth.

Operating income for Wholesale Leathercraft during the quarter ended September 30, 2011 decreased by $213,000 from the comparative 2010 quarter, a decrease of 41.8%.  Operating expenses as a percentage of sales were 55.9%, up $247,000 from the third quarter of 2010.  The increase in employee compensation and benefits, including health costs, of $328,000, offset by decreases in advertising and marketing expenses of $49,000 and bank fees of $20,000, accounted for the operating expense increase.

Retail Leathercraft

Our Retail Leathercraft operation consists of 77 Tandy Leather Company retail stores at September 30, 2011, versus 76 stores at September 30, 2010.  Net sales increased 21.2% for the third quarter of 2011 compared to the same quarter last year.  A store is categorized as “new” until it is operating for the full comparable period in the prior year.

 
# Stores
Quarter Ended 09/30/11
  
Quarter Ended 09/30/10
  
$ Change
% Change
Same store sales
76
$8,678,135
  
$7,212,443
  
$1,465,692
20.3%
New store sales
1
66,311
  
-
  
66,311
N/A
Total sales
  
$8,744,446
  
$7,212,443
  
$1,532,003
21.2%

The following table presents sales mix by customer categories for the quarters ended September 30, 2011 and 2010 for our Retail Leathercraft operation:

 
Quarter Ended
Customer Group
09/30/11
  
09/30/10
  RETAIL (end users, consumers, individuals)
59%
  
63%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
5%
  
4%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
33%
  
32%
  NATIONAL ACCOUNTS
-
  
-
  MANUFACTURERS
3%
  
1%
 
100%
  
100%

The retail stores averaged approximately $38,000 in sales per month for the third quarter of 2011.
 
Sales to each customer group increased compared to the third quarter of 2010 with the largest increases in sales to our Retail and Wholesale customer groups.  Operating income increased $293,000, or 56.4%, from the comparative 2010 quarter.  Operating income as a percentage of sales increased from 7.2% in the third quarter of 2010 to 9.3% in the third quarter of 2011.  Our gross profit margin improved slightly from 58.8% to 59.2%.  Operating expenses as a percentage of sales decreased from 51.6% to 50.0% as sales grew at a faster rate than that of expenses during the quarter.  Operating expenses increased $647,000 over the third quarter of 2010.  The new store opened in June 2011 accounted for additional operating expenses of $42,000.  Employee compensation and benefits increased $320,000. Advertising and marketing expenses increased $109,000.  Due to the increase in sales, shipping costs to customers and credit card fees increased $41,000 and $23,000, respectively.

International Leathercraft

Consisting of one store located in the UK at September 30, 2011, this division’s sales totaled $491,000 for the third quarter of 2011, compared to $415,000 in the third quarter of 2010, an improvement of 18%. Gross profit margin as a percentage of sales increased significantly from the third quarter of 2010, from 58.9% to 66.5%.  We determine UK selling prices taking into consideration the currency conversion between the U.S. dollar and the Great Britain pound.  Even so, our UK store generates higher profit margins than that of a comparable U.S. store due to a beneficial product mix, selling more higher margin tools and supplies and less lower margin leather.  Operating expenses totaled $212,000 in the third quarter of 2011, up from $197,000 in the third quarter of 2010.  Employee compensation is this division’s largest expense, followed by advertising expense, shipping costs to customers, and rent.

Other Income (Expenses)

We paid $62,000 in interest expense in the third quarter of 2011, compared to $67,000 in interest expense in the third quarter last year.  We earned $15,000 in interest income during the third quarter of 2011, up from last year’s third quarter interest income earned of $10,000.  We recorded income of $145,000 during the third quarter of 2011 related to currency fluctuations from our Canadian and UK operations.  Comparatively, in the third quarter of 2010, we recorded income of $6,000 for currency fluctuations.

Nine Months Ended September 30, 2011 and 2010

The following table presents selected financial data of each of our three segments for the nine months ended September 30, 2011 and 2010:

 
Nine Months Ended September 30, 2011
  
Nine Months Ended September 30, 2010
 
Sales
  
Operating Income
  
Sales
  
Operating Income
Wholesale Leathercraft
$19,341,919
  
$1,709,226
  
$18,849,015
  
$1,667,718
Retail Leathercraft
26,327,904
  
2,857,986
  
22,535,418
  
2,210,932
International Leathercraft
1,528,559
  
336,428
  
1,195,120
  
177,885
Total Operations
$47,198,382
  
$4,903,640
  
$42,579,553
  
$4,056,535

Consolidated net sales for the nine months ended September 30, 2011 were up 11% compared to the same period in 2010, increasing $4.6 million.  All three reporting segments contributed to the sales increase.  Retail Leathercraft contributed the largest sales increase of $3.8 million, followed by Wholesale Leathercraft reporting an increase of $493,000 and International Leathercraft reporting an increase of $333,000.  Operating income on a consolidated basis for the nine months ended September 30, 2011 was up 20.9% compared to the first nine months of 2010, increasing $847,000.

The following table shows in comparative form our consolidated net income for the nine months of 2011 and 2010:

 
2011
  
2010
% change
Net income
$3,056,038
  
$2,603,128
17.4%


Wholesale Leathercraft

Net sales increased 2.6%, or $493,000, for the first nine months of 2011 as follows:

 
# Stores
Nine Months Ended 09/30/11
  
Nine Months Ended 09/30/10
  
$ Change
% Change
Same store sales
29
$17,133,069
  
$16,270,557
  
$862,512
5.3%
Closed store
1
-
  
274,162
  
(274,162)
N/A
National account group
  
2,208,850
  
2,304,296
  
(95,446)
(0.4)%
Total sales
  
$19,341,919
  
$18,849,015
  
$492,904
2.6%

The following table presents the combined sales mix by customer categories for the nine months ended September 30, 2011 and 2010:

 
Nine Months Ended
Customer Group
09/30/11
  
09/30/10
  RETAIL (end users, consumers, individuals)
31%
  
28%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
6%
  
7%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
44%
  
42%
  MANUFACTURERS
7%
  
8%
  NATIONAL ACCOUNTS
12%
  
15%
 
100%
  
100%

Operating income for Wholesale Leathercraft for the first nine months of 2011 increased by $42,000 from the comparative 2010 period, an improvement of 2.5%.  Compared to the first nine months of 2010, operating expenses increased $248,000 for the first nine months of 2011, while remaining constant as a percentage of sales at 52.1%.

Retail Leathercraft

Net sales were up 16.8% for the first nine months of 2011 over the same period last year.
 
 
# of Stores
Nine Months Ended 09/30/11
Nine Months Ended 09/30/10
$ Change
% Change
Same (existing) store sales
75
$26,013,673
$22,391,758
$3,621,915
16.2%
New store sales
2
314,231
143,660
170,571
118.7%
Total sales
  
$26,327,904
$22,535,418
$3,792,486
16.8%

The following table presents sales mix by customer categories for the nine months ended September 30, 2011 and 2010 for our Retail Leathercraft operation:

 
Nine Months Ended
Customer Group
09/30/11
  
09/30/10
  RETAIL (end users, consumers, individuals)
60%
  
63%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
6%
  
6%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
31%
  
30%
  NATIONAL ACCOUNTS
-
  
-
  MANUFACTURERS
3%
  
1%
 
100%
  
100%

The retail stores averaged approximately $38,000 in sales per month for the first three quarters of 2011.

Operating income for the first nine months of 2011 increased $647,000 from the comparative 2010, improving as a percentage of sales from 9.8% in the first nine months of 2010 to 10.9% in same period of 2011.  Gross margin decreased slightly from 60.6% to 60.1%.  Operating expenses decreased as a percentage of sales from 50.8% during the first nine months of 2010 to 49.3% during the first nine months of 2011, indicating that sales grew faster than expenses.

International Leathercraft

Consisting of one store located in the UK, this division’s sales totaled $1,529,000 for the first nine months of 2011, compared to $1,195,000 in the first nine months of 2010, an increase of 27.9%.  Gross profit margin was 65.2% for the first nine months of this year, improving from 61.3% in the same period of 2010.  UK selling prices are determined based on the currency conversion between the U.S. dollar and the Great Britain pound.  Even so, the store generates higher profit margins than that of a comparable U.S. store as it sells a heavier mix of higher margin tools and supplies and less lower margin leather.  Operating expenses totaled $660,000 in the first three quarters of 2011, up from $555,000 in the first three quarters of 2010.  Employee compensation is this segment’s largest expense, followed by advertising expenses and shipping costs to customers.

Other Expenses

We paid $186,000 in interest on our bank debt in the first nine months of 2011, compared to $199,000 in the first nine months of 2010.  Due to the reduction in certificates of deposit held this year compared to last year,  we recorded $33,000 in interest income on our cash balances in the nine months ended September 30, 2011 compared to $67,000 a year ago.  We recorded income of $7,000 for currency fluctuations in the first nine months of 2011.  Comparatively, in the first nine months of 2010, we recorded an expense of $68,000 for currency fluctuations.

Capital Resources, Liquidity and Financial Condition

On our consolidated balance sheet, total assets were $42.2 million at September 30, 2011, up $1.6 million from $40.6 million at year-end 2010.  Total stockholders’ equity increased from $29.8 million at December 31, 2010 to $32.6 million at September 30, 2011, the increase being attributable to earnings in the first three quarters of this year.  Our current ratio increased from 4.2 at December 31, 2010 to 5.5 at September 30, 2011 due primarily to a decrease in accrued expenses and income taxes payable during the first nine months of 2011.

Our investment in inventory increased by $315,000 from year-end 2010 to September 30, 2011.  While total inventory only increased minimally from year end, we held approximately $1 million in extra inventory in anticipation of our new stores to be opened overseas.  Inventory turnover reached an annualized rate of 3.09 times during the first nine months of 2011, slightly more than 3.01 times for the same period in 2010.  Inventory turnover was 3.23 times for all of 2010.  We compute our inventory turns as sales divided by average inventory.  As of September 30, 2011, our total inventory on hand was approximately 11% over our internal targets for optimal inventory levels.  While sales remain strong and leather prices remain high, we will continue to buy large quantities of our stock leathers at special prices as those opportunities present themselves in order to relieve pressure on our gross margins.  These purchases, along with inventory held to support the new international stores opening, accounted for the excess inventory.

Trade accounts receivable was $1.5 million at September 30, 2011, up $286,000 from $1.2 million at year-end 2010.  The average days to collect accounts for the first nine months of 2011 were 49 days, up slightly from the same period in 2010 of 46 days.  We are monitoring our customer accounts very closely in order to minimize the risk of uncollectible accounts in the current economic environment.

Accounts payable increased to $1.8 million at September 30, 2011 compared to $1.2 million at year-end 2010, due to the increase of inventory purchases during the first nine months of 2011 in response to our sales increase.  Accrued expenses decreased $1.5 million from December 31, 2010 to September 30, 2011 primarily due to a reduction in inventory in transit compared to year-end 2010.

During the first nine months of 2011, cash flow provided by operating activities was $1.6 million.  Net income of $3.1 million was offset by a reduction in accrued liabilities of $1.5 million and accounted for the majority of the operating cash provided in the first nine months.  By comparison, during the first nine months of 2010, cash flow used by operating activities was $766,000.  Net income of $2.6 million and an increase in accounts payable of $1.4 million offset by the increase in inventory of $4.0 million and other current assets of $1.8 million, accounted for the majority of the operating cash used.

Cash flow provided by investing activities totaled $246,000 in the first three quarters of 2011, consisting primarily of maturities of certificates of deposit, offset by purchases of store fixtures and computer equipment.  In the first nine months of 2010, cash provided by investing activities totaled $2.4 million, consisting primarily of net maturities of certificates of deposit.

Cash flow used by financing activities totaled $152,000 in the first nine months of 2011, consisting of debt repayments.  In the first nine months of 2010, cash flow used by financial activities totaled $7.7 million, consisting primarily of a cash dividend paid of $7.7 million.  Proceeds received from issuance of common stock of $170,000, offset by debt repayments of $152,000, minimally reduced cash used in financing activities.

We expect to fund our operating and liquidity needs as well as our store growth from a combination of current cash balances and internally generated funds.


For disclosures about market risk and foreign currency exchange risk affecting us, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for fiscal year ended December 31, 2010.  We believe that our exposure to market risks has not changed significantly since December 31, 2010.  We expect that our exposure to foreign currency exchange risk will increase as our international presence increases.


Evaluation of Disclosure Controls and Procedures

Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the last day of the fiscal period covered by this report, September 30, 2011. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, 2011, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


On March 16, 2011, two former employees of the Company filed a lawsuit, entitled Mark Barnes and Jerry Mercante on behalf of themselves and all other similarly situated v. Tandy Leather Company, Inc., Tandy Leather Factory, and Does 1-50, in the US District Court for the District of Nevada.  The lawsuit was subsequently amended on May 9, 2011 to add another former employee, Donna Cavota, as a third named plaintiff.  The suit alleges that the Company violated requirements of the Fair Labor Standards Act (FLSA) as well as various state wage laws.  Plaintiffs seek to represent themselves and all similarly situated U.S. current and former store managers of the Company.   Plaintiffs seek reimbursement for an unspecified amount of unpaid overtime compensation, liquidated damages, attorney’s fees and costs.  On May 17, 2011, the district court in Nevada granted the Company’s request to transfer venue to the Northern District of Texas.  Trial is currently set for the week of May 29, 2012.



Exhibit
Number
 
 
Description
3.1
Certificate of Incorporation of The Leather Factory, Inc., and Certificate of Amendment to Certificate of Incorporation of The Leather Factory, Inc. filed as Exhibit 3.1 to Form 10-Q filed by Tandy Leather Factory, Inc. with the Securities and Exchange Commission on August 12, 2005 and incorporated by reference herein.
 
3.2
Bylaws of The Leather Factory, Inc., filed as Exhibit 3.5 to the Current Report on Form 8-K (Commission File No. 001-12368) filed by Tandy Leather Factory, Inc (f/k/a The Leather Factory, Inc.) with the Securities and Exchange Commission on July 14, 2004 and incorporated by reference herein.
 
*31.1
13a-14(a) or 15d-14(a) Certification by Jon Thompson, Chief Executive Officer and President.
 
*31.2
13a-14(a) or 15d-14(a) Certification by Shannon Greene, Chief Financial Officer and Treasurer.
 
*32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS^
XBRL Instance Document.
 
101.SCH^
XBRL Taxonomy Extension Schema Document.
 
101.CAL^
XBRL Taxonomy Extension Calculation Document.
 
101.DEF^
XBRL Taxonomy Extension Definition Document.
 
101.LAB^
XBRL Taxonomy Extension Labels Document.
 
101.PRE^
XBRL Taxonomy Extension Presentation Document.
____________
  
*Filed herewith.
 
  
^ XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
TANDY LEATHER FACTORY, INC.
 
(Registrant)
   
Date:  November 14, 2011
By:  /s/ Jon Thompson
 
Jon Thompson
 
Chief Executive Officer and President
   
Date:  November 14, 2011
By:  /s/ Shannon L. Greene
 
Shannon L. Greene
 
Chief Financial Officer and Treasurer (Chief Accounting Officer)


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