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Tandy Leather Factory (TLF): Intrinsic Value Discount

Tuesday, March 26, 2024 3:03

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Tandy Leather, symbol TLF, founded in 1919, is a consistently profitable leather crafting retail leader. Tandy sells leather and leather craft-related items primarily through retail stores, websites, or direct account representatives. Tandy has 101 stores in 40 states, six provinces in Canada, and one store in Spain. Several smaller, privately family owned competitors exist, including Double Eagle Leathersmith, Montana Leather Company, and Weaver Leather Supply.

The table above illustrates a few of Tandy’s unique values and attributes. Such as EV/OI = 8.8, P/NCAV = 1.13, and 85.50M cumulative EBIT over the prior 15 years and 121.28M for EBITDA. This is versus an enterprise value of 39M.

Opportunity:

Tandy Leather reported fourth-quarter and year-end 2023 results on 03/22/24. For the year ending 2023, Tandy shows continued profit growth and cash in a difficult retail environment with high inflation. Net income was $3.80 million, an increase of $1.20 million compared to the year ending 2022. Gross profit was relatively flat as margins improved from 57.90% in 2022 to 59.30% in 2023. Operating expenses declined 9.70% to a stable operating expense of 40 million. Cash grew to 12.20 million from 8 million in 2022. After adjusting for stock compensation, EBITDA was 6.50 million.

TLF is an intrinsically and relatively cheap investment based on consistent profitable FCF and growing margins. Deep value-based and long term owners provide a margin of safety and offer constructive activism. Bandera (Jeff Gramm) owns 34.40%, JCP Investment(James Pappas) 10.04%, and First Foundation (Eric Speron )10%. CEO Janet Carr owns 4.50%.

Over the past two years, investors have overlooked hidden value creation, including implementing new systems, shuttering unprofitable stores, and improving online distribution processes. Additionally, optionality exists as their fully owned corporate headquarters has been listed with a broker for sale. A +12 million net profit is a reasonable expectation if they sell. The sale of their headquarters will likely increase the price per share after a special or continued commitment to dividends.

On a relative valuation basis, only 33 industry specialty retailers reported positive EBITDA out of 47 USA-headquartered companies. The industry average EV/Revenue was 1.92 versus TLF’s .49. And an average EV/EBITDA was 52.46 versus TLF’s 5.15.

Positive Yelp reviews

The picture above is from a Yelp review (Carol I from San Antonio, TX): “Staff has always been friendly and helpful the couple of times I’ve stopped in.”.

“Great customer service, they even gave me a demonstration on how to use the splitter I bought.” Johnny G.San Antonio,

“Amazing customer service, …was patient and helped me to understand all the necessities in order start this project.” Ashley P. Austin, TX

“Definitely 5 stars. I have used this store 2 times once in person 1 time on the phone. The people here are GREAT!” Kenneth S.San Francisco, CA

Tandy operations have favorable unit economics and the resources to grow. Return on investment after opening a retail store in a few years with a cheap lease off the main strip and $200K in inventory.

Catalysts:

Sale of corporate headquarters now listed or secure a loan on the debt free headquarters worth ~ +15M to initiate a dividend.

Continued profitable cash accumulation with the market shift towards buying smaller profitable companies.

RE per share increased 12.30% from the year ending 2021 to MRQ versus an EV per share decline of -19.22%. Tandy generated 35.61 million in FCF in the last fifteen years and 22.40 million in the last ten years.

A tiny 40% of the shares outstanding are in the float.

Activist shareholders could force a sale, go private, or other strategic alternatives. Bandera (Jeff Gramm) owns 34% of the shares outstanding and is Chairman of the Board and a proven capital allocator with an average purchase price of 7.03. JCP (James Pappas) (Outside Director) owns 10.40% at an average price of $4.67/Share. FIRST FOUNDATION ADVISORS (Eric Speron) Average Price $4.69/Share. First Foundation (Eric Speron) Total Return Fund Average Price $4.82/share director of Compensation Committee. CEO (Inside Director) Janett Carr owns 4.40%.

Risks:

Continued inflation and weaker retail environment.

Conclusion:

Strong financials, debt-free, consistently profitable free cash flow, and a margin of safety. The company is undervalued based on its consistent FCF (free cash flow) and unlocked real estate value. Additionally, the CEO and board are incentivized with skin in the game with stock purchases above the current price.

Long TLF

Source: http://shadowstock.blogspot.com/2024/03/tandy-leather-factory-tlf-intrinsic.html

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