A Potentially Significant Special Dividend is in the Future for the Tandy Leather Factory Investors

A sell-leaseback transaction frees up gobs of cash, a portion of which the company is planning to return to the shareholders

Thesis in Brief

• Market Cap $40 million, Sales $75 million, Price/Sales = 0.6

• Price/Book = 0.7, Price/Earnings = 16.6

• Cash & Cash Equivalents = $10 million, Current Assets = $50 million

• Total Liabilities = $15 million, therefore NCAV = $50 - $15 = $35 million

• P/NCAV = 40/35 = 1.14

• 2023 earnings ~$4 million.

The just announced sale of headquarters building (including flagship store and distribution center) will generate $26.5 m in cash flow (gross) a portion of which will be used to pay a special dividend to the shareholder. The sale is expected to close in Jan 2025. The sales proceeds is 66% of the market cap. If they were to pay out the entire proceeds to the shareholders (they won’t!), it would be a 66% dividend yield for this year.

Of course there are closing costs and taxes on the gain to be paid, etc. The company plans to lease the sold headquarters building until Sep 2025, during this time it will work to find new property to lease and move into. You have to consider the increase in leasing costs and back that out of the cash flow and income statement.

I have done all these calculations below and come up with insights that I am sharing with you today. The data I provided above are the salient numbers and you can play around with different scenarios to see if the investment makes sense to you. You may want to consider their current business trends, market position, etc. before you make your decision.

This is not an investment advice.

A Brief History of One of the Most Important and Least Known Companies in America

If you think the name Tandy rings a bell, you are not mistaken.

Tandy Leather was started in 1919 to serve hobbyists and at one time owned, in addition to the Leathercrafting unit, Radioshack and Grid Computers. Tandy’s TRS-80 was one of the first PCs in the market, before IBM or Apple. At Grid, Jeff Hawkins designed the first tablet computer, before he went on to founding Palm Computers. Today, only the leathercrafting division remains. Leathercrafting is a very niche market, and Tandy is the largest player in the market.

Tandy Leather Factory, Inc., TLF 0.00%↑ , headquartered in Fort Worth, Texas, is a specialty retailer of a broad product line including leather, leatherworking tools, buckles and adornments for belts, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits. The Company distributes its products through its 100+ U.S. and Canadian stores and one store in Spain.

Yes, the Company is Profitable

Source: Stock Rover

2020 was a bad year for Tandy as Covid disrupted its business. The company lost money that year. The end of the lockdowns saw the company return to profitability. It is a niche industry. In 2023, the company had total sales of $76 million and a net income of $4 million for a net margin of 5.3%. As you can see, the margins are low, and the current inflationary period has added to its input costs while the revenues have not gone up as much. The profit in the first 3 quarters of 2024 is around $1 million, although we have not seen how the Q4 performs.

On a more anecdotal note, I dabble in leathercafting occasionally and my wife runs a business making handcrafted luxury leathergoods. We have abundant experience with local Tandy store in Michigan for sundry supplies. We are also very plugged into the demand for handcrafted leather goods and it is on the resurgence as the quiet luxury trend has taken root.

While the company does not sport high profitability numbers, it is the largest player in a steadily growing market, and it is profitable and as we have seen, has ample cash cushion to survive and thrive.

Strong Balance Sheet, Their Net Current Asset Value Goes Up 57% After Sale

We mentioned the Net Current Asset Value of $35 million that compares very well with the market capitalization of $40 million. Every time I discuss NCAV, I remind my readers that this only includes current assets. It does not include long term assets such as Plant, Property and Equipment.

A typical treatment of these long term assets in the liquidation analysis is to assume they are worthless.

Source: Sep 2024 Quarterly Report

In Tandy’s case, they have $31 million in Plant, Property and Equipment and about $19 million in accumulated depreciation, giving them a book value of PPE at $12 million. Please note that all their stores are leased - only their Headquarters property (including their flagship store in Fort Worth TX and their distribution center) is owned.

The company has entered into a sales agreement to sell this property for $26.5 m.

So instead of this being worth zero, it is now worth $26.5 m (minus closing costs and taxes).

This is a gain on sale of 26.5 - 12 = $14.5 m.

We will now adjust this for estimated expenses.

From their 2023 full year P&L, they made a provision of income taxes in the amount of $777,000 for an EBIT of $4,545,000, or 17.1%. Assuming a similar income tax on the gain on the sale of the property, they will owe an additional $14.5 *.17 = $2.48 m in income taxes.

So their gain after taxes is ~$12 million. Their cash proceeds is $26.5 - $2.5 = ~$24 m.

There would be other closing expenses. Broker’s fees, etc. In worse case scenario, it is reasonable to assume that they will end up with at least $20 million in cash proceeds after all expenses once the sales closes. $4 million in additional expenses drops their gain on sale after taxes to $8 million.

The NCAV now goes up by $20 million to $55 million (from $35 million).

Insight #1: If Tandy were to be valued at NCAV, their market cap will have to rise to $55 million from the current $40 million, a 37.5% increase in the stock price.

Their 2025 Profits Go Up Significantly

The $8 million in net additional gain will hit the books in 2025 as their PPE is market to the market for sale. To be sure, the effect on the profit and loss statement is merely accounting. However, there are other things that happen as well.

1. The company increases their lease expenses. I did some research and the office CAP rate in Fort Worth/Dallas area is around 8.3% average in 2024. CAP rates for other zoning is lower. So in worst case scenario, if the company maintains a similar commercial footprint, but leases it instead of owning it, they will have an additional annual lease expense of not more than 8.3% of $26.5 m, or $2.2 million

2. I am not sure of the moving costs - but they will be one off in 2025. I assume they will look for cheaper digs and the moving costs will be offset by cost savings. If not, we have sufficient conservativeness in our estimates to give us some leeway on these estimates.

3. The lease expenses are 100% taxable expenses. Therefore there will be a tax savings of about $0.37 million ($2.2 * 17%).

This gives us around $6 million in additional gains in 2025. ($8 m - $2.2 m +$0.37 m =$6.17 m). Please note that this is intended to be a back of the envelope calculation.

At $55 m market value (assuming the stock reaches NCAV), and assuming a net income of $2 m + additional $6 m = $8 million, we are looking at a P/E ratio of 6.875. And this is after a 37.5% increase in the stock price.

This of course is a one off phenomena in 2025 once the sale closes. On a continuing basis, there is just an additional lease expense of $2.2 m - $0.37 m = $1.83 m. If the company keeps or grows its current business, this additional expense will still see the company remain profitable.

Potential Uses of the Sale Proceeds

So they will now have an additional cash of about $20 million. Add this to the existing cash hoard of about $10 million, the total cash amount will be around $30 million. This is about $3.75/share.

How can the company make best use of this cash? They do not have any long-term debt to worry about.

There are 3 possible choices:

1. Return part of this cash to the shareholders as a special dividend,

2. Use some of this cash to buyback stock, and/or,

3. Invest some of this cash in new stores, new products, new marketing and promotions, etc to generate additional revenue and earnings, and grow the business.

For #1, this is what the PR for the sales had to say

Jeff Gramm, the Company’s Chairman, said, “As we announced last December, we have been marketing our headquarters property with hopes of unlocking value for the benefit of our stockholders. Aided by a strong local real estate market and the tireless efforts of our team, we are happy to be close to accomplishing this goal. Tandy Leather has been a 100-year fixture in Fort Worth and we are actively evaluating spaces in the area for our new headquarters and flagship store. If the transaction closes as planned, we expect to issue a moderate portion of the proceeds (net of taxes, sale expenses and other costs associated with leasing, outfitting and moving to new facilities) as a dividend to our stockholders.”

I don’t know how much of a dividend the management might decide to be the moderate portion. Can they pay out $2 million or about 10% of the proceeds from the sale? Certainly. This will be 2/40 = 5% yield. A $4 million payout is about 10% yield.

If they choose to buyback additional stock, that also benefits the shareholders.

If they choose to do #3, it also benefits the current shareholders provided they choose profitable projects to invest in. As we have established, the leaseback transaction will still see the company stay profitable - any new projects the company invests in will raise the value of the stock.

Realistically, they will do a mix of all 3 choices.

Sales/Leaseback transactions are generally value add for the existing shareholders as it frees up capital, swaps interest expense for lease expense which result in greater tax savings, and arbitrages EBITDA multiple and Real Estate multiple. I think this is a brilliant value unlock.

Valuation Estimates

How will the company proceed with its future growth? We don’t know but we are optimistic. We think the company will choose wisely and we base this on the fact that the management runs a profitable operation.

We think the market is likely to expand in the near future.

There is very little competitive threat. They are the biggest player in the niche.

Given all this we can safely say that they do enjoy a moat, even if it is not very strong.

The only tangible way to value the stock today is NCAV, and based on this measure I believe that the stock currently has about 37.5% gains to come. It will very likely be more. And this should happen in 2025 as the headquarter sale is completed and the proceeds are put to good use as a dividend and reinvested in profitable projects.

This review was written with stock closing on Dec 17 at $4.74/share. A 37.5% price increase gives you a target price of $6.52/share.

(The stock is buyable but whether we buy or not depends on whether it will add risk-adjusted alpha to our portfolio or not. If the stock fits our Premium portfolio, I will determine the allocation and update the Premium portfolio table for our paid members. Do your own research, I am not a financial advisor and this is not financial advice.)