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Thesis

Tandy Brands (OTCPK:TBAC) is selling for around 85% of net current assets. While the company has posted large losses in the past two years, it has generated positive cash from operations both years and has significant growth potential.

What do they do?

Tandy designs and markets accessories, including belts, gifts, and eyewear. It sells under a variety of brand names and licenses, including Wrangler, Dockers, and Dr. Martens, as well as private brands for major retailers. The company’s largest line is belts (57.7% of sales), and it has been in this line for over 88 years. Gifts (17.9%), small leather goods (17.2%, mainly wallets), and other (7.2%) make up the rest of the company.

Some 60.3% of sales come from private label sales to companies like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Another 20.1% of sales come from sales under brand licenses like Dockers and totes gifts. Then 15.5% of sales are under totes gifts license, with no other license accounting for more than 5% of sales. In 2009, Tandy acquired the license to sell Wrangler belts and accessories. This is expected to add $15 to $20 million annually in sales, which would make Wrangler about 15% of sales. This license expires at the end of 2010, and management has expressed confidence in renewing this license. If, however, the company loses the license, it would call for a goodwill write off of the acquisition and it would set the company back.

Finally, 19.6% of sales are from Tandy's own brands, which include Amity, Rolfs, and Surplus.

Does Tandy have a moat?

No- the industry is too competitive, and Tandy is so dependent on Wal-Mart that there is almost no way this company can earn any form of above average returns.

Operational Risks

The biggest risk here is customer concentration. Wal-Mart makes up 43% of sales, and Kohl’s (NYSE:KSS) makes up 10%. Its top ten customers make up about 75% of sales. If the company lost any of its major customers, it would hurt profitability. If, however, it lost Wal-Mart, it could really destroy the company. Note, however, that the company has counted Wal-Mart as its major customer since at least 1994 (I can’t find annual reports before this year), so Tandy does have a long term relationship with WMT.

Also, if Tandy loses any of its licenses, particularly the Wrangler or totes, it would affect profitability.

To an investor, another risk is Tandy has lost a significant amount of money over the past two to three years and could continue to burn money as it implements a new “product life cycle management” strategy. While much of the losses were non-cash write offs, if the company continues to lose money, it could eventually burn through its assets and erode the margin of safety.

Valuation

Tandy currently has net current assets (current assets minus all liabilities) of $4.55 per share. Most of this is inventory, but it also has a significant amount of accounts receivables. In addition, the company owns 559k square feet of warehouse and office facilities and has a total tangible book value of $5.82. Trading for around $3.85 today, the company trades at a significant discount to both net current assets and tangible book value. (note- the company released a new 10q about 3 days ago, I grabbed all of the numbers directly off the new 10Q- if you use an old database to get the numbers, you will get significantly different numbers)

Catalysts

No great catalysts. However, earnings have been depressed by both non-cash write offs and significant write offs of account receivables from bankrupt companies. While this does speak poorly on management’s decisions to allow credit, an improving economy should slow the rate of retail bankruptcy-- which will reduce those account write offs. Note that EBITDA levels have significantly improved when comparing the past nine months with the previous fiscal year’s nine months. An investor could look at this and view TBAC as a turnaround play. For me, however, I think the business is too competitive to invest in a turnaround.

Additionally, the Wrangler acquisition will significantly increase sales, which if successful could add a nice growth kicker to the story. In its most recent quarter, management noted that one factor behind the quarter’s loss was the Wrangler brand having higher sales than expected, which increased its earn out payments. This could add a nice growth kicker to this asset play.

Finally, over the past six months, there has been a decent amount of buying between the $3 and $3.60 level by several directors, mainly by William Summit (one of Tandy's directors).

Price Target

I have a price target of $5.06 on TBAC. This assigns the company value only for its current assets, plus 40% of its property plant and equipment. While the company could be worth significantly more if it executed on its growth strategy, given the competitive intensity and significant customer threats, I think the $5.06 price target is a nice, conservative number.

Disclosure: No current position; however, I am considering opening one.

Source: Tandy Brands Could Be a Net Net, Turnaround Play