Build-A-Bear Workshop, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 29, 2023; comparisons are to the periods ended July 30, 2022. The quarter’s financial statements are unaudited. The company notes that results are seasonal and a single period may not indicate full-year performance.
Business context and performance
Build-A-Bear operates corporately run stores and e-commerce, commercial wholesale and licensing businesses, and international franchising. At quarter-end it had 351 corporately operated stores, 76 partner-operated retail locations, and 64 franchised stores. Direct-to-consumer accounted for 95% of Q2 revenue.
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Total revenue | $109.2m | $100.7m | $229.3m | $218.3m |
| Gross profit | $58.6m | $49.9m | $123.5m | $111.7m |
| Gross margin | 53.7% | 49.5% | 53.9% | 51.2% |
| SG&A | $48.3m | $42.3m | $94.0m | $85.9m |
| Income before taxes | $10.5m | $7.6m | $29.8m | $25.8m |
| Net income | $8.3m | $5.8m | $22.9m | $20.0m |
| Diluted EPS | $0.57 | $0.38 | $1.57 | $1.27 |
Cash flow, liquidity and capital
- First-half operating cash flow was $31.8m, versus $6.7m a year earlier; management attributed the increase mainly to lower inventory purchases than in the prior-year period and higher net income.
- Investing cash outflow was $6.1m, including capital expenditures. Financing cash outflow was $35.3m, including a $22.1m special dividend and share repurchases. Cash and restricted cash declined $9.6m during the half to $32.6m.
- At July 29, cash was $32.6m and current assets were $124.0m versus current liabilities of $93.9m. The company had no revolver borrowings and approximately $24.7m of availability on its $25.0m facility, net of a letter of credit.
- There was no reported funded debt outstanding; operating lease liabilities totaled $82.6m, comprising $27.2m current and $55.4m long-term.
- Inventory was $66.3m, down $21.4m from July 2022. First-half capital expenditures were $6.1m; management expected FY2023 capital expenditures of approximately $15m–$20m.
- The company repurchased 394,321 shares for $8.1m during the first half and reported $35.3m remaining under its $50.0m repurchase authorization as of September 7, 2023. It paid a special dividend of $1.50 per share on April 6, 2023.
Material changes versus prior comparable periods
- Q2 revenue rose 8.5%; first-half revenue rose 4.9%. Q2 growth reflected higher North American store transactions and growth in commercial and franchise revenue. First-half retail sales were up 3.3%, while digital sales declined due partly to the timing of product launches.
- Q2 net income increased to $8.3m from $5.8m; first-half net income increased to $22.9m from $20.0m. Q2 diluted EPS increased to $0.57 from $0.38.
- Retail gross margin improved 440 basis points in Q2 and 310 basis points in the first half, primarily due to lower freight costs and improved occupancy or distribution-cost leverage.
- SG&A rose $6.1m in Q2 and $8.1m in the first half, driven by inflation-related wage costs, planned talent additions, and growth investments. SG&A as a share of revenue increased to 44.2% from 42.0% in Q2 and to 41.0% from 39.3% in the first half.
- Commercial revenue increased to $5.0m in Q2 and $11.7m in the first half, chiefly from partner-operated retail accounts. First-half European revenue was down 4.5%, with foreign exchange cited as a factor.
Outlook, commentary and risks
- Management described continued strategic investment in digital and omnichannel capabilities, brand expansion, and additional experience locations. It expected more total locations at FY2023 year-end than at FY2022 year-end, while anticipating fewer European locations.
- Management expected wage inflation to continue through the rest of FY2023, but anticipated lower freight costs than the prior year. It may use selective price increases to mitigate cost pressures; it cautioned that inflation, consumer spending, and input-cost changes could adversely affect results.
- The company cited risks including discretionary-spending weakness, changing consumer preferences, store traffic and lease economics, competition, supply-chain concentration and disruption, foreign exchange, technology and data security, and seasonal volatility. Holiday-season sales have historically been strongest in the fourth quarter.
- Contingencies include a UK customs dispute: a $4.7m gross receivable was reserved by $3.7m, leaving $1.0m net; management said it did not expect a material adverse impact. A TCPA text-message class action settlement was reached with a plaintiff and insurer but remained subject to final court approval; it was not expected to cause significant company expense.
- The company adopted the expected-credit-loss standard in FY2023, recording a $0.8m reduction to opening retained earnings. Management reported effective disclosure controls. Inventory-management software implementation was ongoing and expected to be completed by the end of Q3 FY2023.
Important facts for investors to verify
- Whether store traffic, digital demand, and commercial-account growth continue to support revenue after the timing-related first-half decline in digital sales.
- Whether lower freight costs offset ongoing wage inflation and other increased operating expenses, supporting gross margin and earnings.
- Cash use and capital returns: the effects of the special dividend and repurchases on liquidity, alongside planned capital spending and purchase obligations of $83.7m, including $27.2m due within 12 months.
- Progress and final outcomes in the UK customs dispute and TCPA settlement, including any change to the receivable reserve or settlement expense.
- Execution of the inventory-management system transition and management’s store-expansion plans; the filing’s outlook is qualitative apart from the stated capital-expenditure range.