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Struggling Tandy Brands Accessories Inc. has received a belated holiday gift — more time to dig itself out of a sizable credit hole.
The Dallas-based men’s accessories and gifts firm said Wednesday that it had been granted a waiver by Wells Fargo, its senior lender, after falling out of compliance with the profitability requirements of its $35 million credit facility with the bank.
Additionally, it said it had signed a “nonbinding term sheet” with another lender, as yet unidentified, for a facility that would replace the existing loan agreement by the end of next month. Based on LIBOR rates, the new facility is expected to carry interest rates of between 9.3 and 12 percent over a two-year period.
“We expected the new facility would be more expensive than our previous facility,” said Rod McGeachy, president and chief executive officer of Tandy. “However, it is important to us to balance the capital cost with potential dilution to our shareholders. The current term sheet contains no dilutive features, and we believe this new facility will provide us the liquidity we need to execute our recently announced restructuring initiatives.”
Tandy has confronted a series of daunting challenges since the holiday season, when it experienced higher-than-expected returns and allowances in the gift segment of its business and wound up in violation of the provisions of its Wells Fargo facility. Since alerting the Securities and Exchange Commission to the problem in mid-February, its shares have shed more than two-thirds of their value and it’s faced the prospect of being delisted by the Nasdaq exchange.
Shares picked up on Wednesday following news of the waiver and negotiations, ending the day at 46 cents, up 2 cents, or 4.6 percent. Shares were valued at $1.52 as recently as Feb. 13.
The waiver from Wells Fargo was considered particularly crucial. The facility, initiated in August 2011 and amended on five different occasions since then, was secured by “substantially all of our assets and those of our subsidiaries,” Tandy said in an SEC filing last September.
Last month it hired Deloitte Financial Advisory Services to help it resolve its problems and named John Little, a principal at Deloitte, its chief restructuring officer. Since then it’s said it expected to cut nearly a third of its workforce, streamline its product offerings and ultimately shed $6 million to $7 million in annual expenses.
On Wednesday it made good on its pledge to report its long-delayed second-quarter financial results by April 22. In the three months ended Dec. 31, the company had a net loss of $5.7 million, or 79 cents a diluted share, versus net income of $2.8 million, or 39 cents, in the prior-year period. Eliminating the effect of a $6.7 million inventory writedown related to the holiday returns, it would have had net income of $1.8 million, or 25 cents a diluted share.
Sales grew 5.5 percent, to $47.9 million from $45.4 million, principally on the contributions of newly licensed businesses, such as Eddie Bauer. Gross margin contracted to 14 percent of sales, from 32.3 percent in the prior year. Excluding the writedown, gross margin would have been roughly twice the reported level, at 27.9 percent.
“Although we met our gross shipment plan in our gifts segment and reported 17 percent net sales growth during the quarter, our net sales were lower than expectations due to the higher-than-expected returns of unsold inventory and unplanned promotional activity by some of our retail partners, which drove higher-than-expected sales concessions,” McGeachy commented. “Meanwhile, our accessories segment ongoing sales met our expectations at virtually flat to last year considering the lower sales of exited product categories.”
He added that gift-segment margins are expected to improve in the future through “reducing our exposure to sales concessions and outsourcing our gifts distribution center to reduce both our variable and fixed expenses.”