The Business and Strategy

Tandy Leather Factory, Inc. is one of the world's largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, and organized in 2005 as a Delaware corporation, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.

What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100+-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.

We sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting ("clicking"), splitting, and some assembly. We maintain our principal offices at 7602 S.W. Loop 820, Benbrook, Texas 76126.

Currently, the Company operates a total of 102 retail stores. There are 93 stores in the United States ("U.S,"), eight stores in Canada and one store in Spain. As of September 30, 2026, the Company had temporarily closed one of its Canadian stores for relocation and we anticipate to open this store in Q4 2026.

Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our customers learn the craft in classes, open table, and from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather. Our websites provide inspiration, detailed product descriptions and specifications, educational information and videos, and a convenient place to also purchase products - especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web customers, leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the needs of those customers who build businesses around leather. With dedicated direct account representatives, a direct-from-our-warehouse shipping model, bulk and volume-based competitive pricing, customized product development, and production and pre-production services, we are providing choices for long-term, strategic relationships with our largest customers.

We continue to focus on improving our financial sustainability and profitability. In the short term, we are managing operating expenses and gross margin to deliver free operating cash and operating income even in the face of possible continued economic headwinds. We will also continue to selectively invest in profitable sales growth where it makes sense, but rebuilding a durable, profitable business model is the highest priority.

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Results of Operations

Three Months Ended September 30, 2026 and 2025

The following table presents selected financial data:

Net Sales

Consolidated net sales for the quarter ended September 30, 2026 increased by $1.3 million or a 7.3% increase compared to the same period in the prior year period. We believe the increase was mainly due to our sales campaign and improved allocation of the correct product mix in our stores during those sales periods and better execution in stores and in our E-Com channels. The improved sales is also due in part to closure of our distribution operations for at least six weeks during the third quarter of 2025 due to the relocation of our corporate offices. We also saw marginal improvement in our non-traditional sales such as classes and other community engagements.

Gross Profit

Gross profit for the quarter increased by $1.4 million, or 13.6%, compared to the same period in 2025. Gross margin percentage for the quarter ended September 30, 2026 increased 350 basis points compared to the prior-year quarter, primarily driven by sales growth, pricing changes, and tariff refunds received in the quarter which represented about 270 basis points of the 350 basis points of the margin improvement. The Company's estimates of overhead allocation and the timing of inventory receipts may also have a temporary impact on gross margin percentage fluctuations from quarter to quarter.

Operating expenses

Operating expenses for the quarter increased by $0.1 million or 1.4% compared to the corresponding prior year period, primarily as a result of an increase in employee benefits compared to prior year of $0.1 million, an increase in salaries of $0.1 million, an increase in selling expenses of $0.1 million, an increase of depreciation of $0.1 million; offset by a reduction in property tax of $0.1 million, and a reduction of rent of $0.2 million.

Income Taxes

Our effective income tax rate for the three months ended September 30, 2026 and September 30, 2025 was 17.7% and 26.2%, respectively. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, expenses that are non-deductible for tax purposes, and any change in estimates in our valuation allowance associated with our deferred tax assets.

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Nine Months Ended September 30, 2026 and 2025

The following table presents selected financial data:

Net Sales

Consolidated net sales for the nine months ended September 30, 2026 increased $2.1 million, or 4.0%, compared to the corresponding prior year period. We believe the increase was mainly due to our sales campaign and improved allocation of the correct product mix in our stores during those sales periods. The improved sales is also due in part to closure of our distribution operations for at least six weeks during the third quarter last year due to the relocation of our corporate offices. We also saw improvement in our non-traditional sales such as classes and other community engagements and Web sales.

Gross Profit

Gross profit increased by $3.8 million, or 12.0%, compared to the same period in 2025, and our gross margin percentage for the nine months ended September 30, 2026, increased year over year by 450 basis points, of which approximately 100 basis points is due to tariff refunds received in the third quarter of 2026, which we do not expect to recur. The margin improvement for the nine months ending September 30, 2026 is primarily driven by pricing changes, slightly offset by promotional discounts for the same period compared to prior year. The Company's estimates of overhead allocation and the timing of inventory receipts may also have a temporary impact on gross margin percentage fluctuations from quarter to quarter.

Operating expenses

Operating expenses increased $1.9 million or 6.2% compared to the corresponding prior year period, primarily as a result of an increase in employment cost of $0.8 million, occupancy costs by $0.6 million, an increase in depreciation of $0.2 million, an increase in credit card fees of $0.2 million, an increase of $0.1 million in software expense, an increase in legal expense of $0.1 million; partially offset by a decrease in freight to customer of $0.1 million.

Income Taxes

Our effective income tax rate for the nine months ended September 30, 2026 and September 30, 2025 was 29.5% and 25.1% respectively and are primarily due to improvement in our projected taxable income in 2026 and the recognition of tax benefits on the sales of our corporate property in 2025, partially offset by forecasted income taxes loss projected due to our 2025 operation and certain foreign and state jurisdictions obligation in which we operate. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, expenses that are nondeductible for tax purposes, and the change in our valuation allowance associated with our deferred tax assets.

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Capital Resources, Liquidity and Financial Condition

We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments. We expect to fund our operating and liquidity needs primarily from a combination of current cash balances and cash generated from operating activities. Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy. Our cash balances as of September 30, 2026, totaled $5.7 million.

On January 3, 2023, the Company entered into a credit agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. Under the Credit Agreement, the bank provides the Company a credit facility of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement.

In the fourth quarter of 2025, the Company renewed the promissory note under its Credit Agreement with JPMorgan Chase Bank, N.A. through October 31, 2026. Under the Credit Agreement, the bank provides the Company a credit facility of up to $4,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement. As security for the credit facility, the Company has pledged, as collateral, certain of its assets, including the Company's cash in deposit accounts, inventory and equipment. The interest rate is based on CME term SOFR + 210 basis points, and the credit facility renews annually. As of the date of this filing, no funds had been borrowed under this facility, and we are in compliance with all covenants.

Share Repurchase Program and Share Repurchase

On September 15, 2026, the Board of Directors approved the renewal of the stock plan and the Company shall be authorized to repurchase up to $5 million (at then-current market value) of the Company's common stock in open-market transactions at prevailing market prices upon periodic instructions from the Board or an authorized sub-committee of the Board until September 30, 2028. As of September 30, 2026, $5.0 million remained available for repurchase under this new program.

Cash Flows

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For the nine months ended September 30, 2026, cash used in operations was $2.8 million, driven by net income from operations of $1.1 million, non-cash expense of $5.1 million, including depreciation, amortization, and stock-based compensation; offset by an increase in inventory of $4.5 million, a decrease in operating lease liabilities of $3.7 million, a decrease in accrued expenses of $0.3 million, an increase in prepaid expenses of $0.2 million, an increase in tax payments of $0.2 million, and a decrease in accounts payable trade of $0.1 million. Cash used in investing activities was $1.4 million mainly for purchases of property and equipment for new stores and investment in software for our new loyalty program. Cash used in financing activities was $6.2 million, primarily for dividend payments and withheld shares used as taxes at vesting for the employees. These activities, together with the effect of exchange rate changes of less than $0.1 million, resulted in a net decrease in cash of $10.4 million.

For the nine months ended September 30, 2025, cash used in operations was $5.5 million, driven by a net loss from operations of $0.4 million, non-cash expense of $0.9 million, including depreciation, amortization, and stock-based compensation, an increase in inventory of $0.2 million, an increase in prepaid expenses of $0.2 million, a decrease in accounts payable of $0.8 million, a reduction in accrued expense and other liabilities of $0.9 million, an increase in other assets of $0.2 million, and a decrease in operating lease liabilities of $3.7 million. Cash provided by investing activities was $18.3 million, which included net proceeds from the sale of our corporate headquarters of $24.9 million, partially offset by purchases of property and equipment of $6.6 million. Cash used in financing activities was $14.2 million, primarily for dividend payments. These activities, together with the effect of exchange rate changes of $0.2 million, resulted in a net decrease in cash of $1.3 million.