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Filing
Sept, 14, 2015
2015 Q2 Data
1.Basic Information
(1) History
The company was created by Wary Thompson(around 30%) and Ronald Morgan and Robin Morgon(around 30%) at 1980. In 1993, it reverse merged with National Transfer & Register Corp. From 1996 to 1998, the company had some loses and then recovered. From 2000 to 2005, the company expend and did pretty well. Before 2000, its sales around $25-$30m. 2005 grows to $50m. Revenue stays flat till 2009 at $55m. Then the company had steady grow from 2010 to 2014. At end of 2014 revenue is above $80m.
Since 2003, the original holder start to dispose their position. At 2006, Wary decreased his holding to only 2%. while Morgan family still hold 16%. At 2009, the Morgon family decrease their position and 2010, they seems totally disposed their position. Now Jon Thompson(seems Wary's son) is the CEO and hold 2% of the company.
(2) Business related:
The company sale leathers and tools for leather craft making individuals. Leathers account around 40% of sales. Hand tools 15%, rest 45%. It has around 30 wholesales stores, 80 retail stores. 85% sales in domestic, 15% international. 2/3 sales in from retail while wholesale counts 1/3. Wholesale gross margin is higher than retail margin.
A typical retail store is around 3000 sqf to 6000 sqf and has 3 to 4 employees. A managers base salary is around $25k/year at 2007, increased to $36k/year at 2014, plus 1/4 of the operation profit of the store made. Other employees are minimum wage workers.
It has a light factory and produce 15% of its product. Rest 85% is outsourced.
The company carries quite a lot inventory which is close 2 quarter sales. The reason is that its inventory is not fashion product and won't obsolete. Also, the company likes to buy leather at large quantity when price is cheap.
(3) Management.
Shannon Greene
(4) Debt and Credit facility.
The company has $2m debt and around $11m in cash.
(5) Insider holding, options, Insider trading info, share buy back.
Jon Thompson 2% of shares.
Bandera Partners LLC : A hedge fund, 27.6%
(6) Employee numbers.Bandera Partners LLC : A hedge fund, 27.6%
Around 600 employees at end of 2014
(7) Auditor
(8) Industry comparison.
(9) Major events.
2. Financial data.3. Valuation
Recent price is $7. Shares 10.3m. Market Cap around $77m. Tangible book value around $5/share. Cash $11m. Debt around $2m.
The company is quite profitable except some lose at 1996 and 1998. A typical store generates around $750k in annual revenue, cost of product is about $300k. Profit share cost $110k. Base salary for 3 employees might be $100k. Rest might has around $150k in corporate expense.
One interesting fact about the company is that during 2006 to 2010, the company opened 25 new stores. Operating expense grow from 46% to 51% while total revenue almost flat. Don't know why the sales in not picking up.
Since 2011 to 2014, the company only opened 8 new stores, but revenue grow a lot faster. The reason behind it is the moving store from 2000 sqf to 5000 sqf strategy seems worked. Operating income/store grow from $40k to over $100k. However, it is unknown whether they can keep the profitability.
The company's CapX in late 3 years is much higher than depreciation which reduced FCF by $1m compare to net income. It moved 30 stores to bigger location by end of 2014( 12 at 2012 and ?? at 2013). Each store move cost around $100k. At Q1 2015 conference, it plans to continue move 6 stores/year for the next 5 years. Also it launched a big flagship store(15k sqf showroom) at 2013. Based on conference call, the maintenance CapX should be around $1m to $1.2m. CapX for new store is around 150k each. 2016 CapX should around $1.5m to $1.7m. Roughly current depreciation should be able to match CapX.
The business is quite stable and well managed. However, in recent years its gross margin and net profit margin is much higher than average. In 2015, those are under pressure.
Assuming 80m sales, using 61% gross margin, 49% operation expense, it can get 12% gross profit. Assuming 35% tax rate. The net profit is $80m*12%*(1-35%)=$6.2m. Around 60c/share.
If assuming 80k/store pretax income. It would generate around $9m pretax income. After tax is also $6m.
4. Risk
(1) The main concern is the operating expense grows faster than revenue. On a store bases it has increased quite a lot since 2010 while expense/employee grows in a slower rate. the main reason it that it has moved to larger store and needs extra stuff pay higher rent. Still this is something to watch closely.
(2) The management is from the original family but holds very few shares. Don't know why the family dumped the shares.
(3)It is a retail business, although it is less cynical like finished goods retailer. Its profit still could be swinging.
5. Conclusion
It is a well managed company the manager seems pretty honest and straight forward. It sever a niche market and pretty stable. However, retail business could fluctuate quite some.
6.Links
http://gannonandhoangoninvesting.com/blog/2013/9/25/quans-avid-hog-watchlist-tandy-leather-factory-tlf
Apr. 12, 2016
Recent price $6.75.
(1) Full year 2015 net cash is $6m. Used $3.70m buy back 500k shares. Now shares outstanding 9.5m. Market Cap is: $62m. Net cash $7m. EV is only $55m. While whole year EBIT is $10.5m which make a EV/EBIT is just about 5.
(2)
http://gannonandhoangoninvesting.com/blog/2013/9/25/quans-avid-hog-watchlist-tandy-leather-factory-tlf
Apr. 12, 2016
Recent price $6.75.
(1) Full year 2015 net cash is $6m. Used $3.70m buy back 500k shares. Now shares outstanding 9.5m. Market Cap is: $62m. Net cash $7m. EV is only $55m. While whole year EBIT is $10.5m which make a EV/EBIT is just about 5.
(2)
