Build-A-Bear Workshop, Inc. — Q3 FY2022 Form 10-Q
Reporting period: 13 weeks ended October 29, 2022; year-to-date figures cover 39 weeks. Financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Business context
The company operates direct-to-consumer retail and e-commerce, commercial licensing and wholesale, and international franchising businesses. At quarter-end it had 347 company-managed stores, 3 seasonal locations, 65 third-party retail locations, and 66 franchised stores. Direct-to-consumer accounted for 95% of Q3 revenue.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | 39 weeks FY2022 | 39 weeks FY2021 |
|---|---|---|---|---|
| Total revenue | $104.5 | $95.1 | $322.8 | $281.6 |
| Gross profit | $54.3 | $49.6 | $166.1 | $148.4 |
| Gross margin | 52.0% | 52.1% | 51.4% | 52.7% |
| SG&A | $44.4 | $41.7 | $130.3 | $117.9 |
| Income before taxes | $9.9 | $7.9 | $35.7 | $30.6 |
| Net income | $7.5 | $5.9 | $27.5 | $23.1 |
| Diluted EPS | $0.51 | $0.36 | $1.78 | $1.44 |
Q3 revenue rose 9.8% year over year, led by North American in-store traffic and growth in commercial and franchise revenue. Net retail sales increased 8.3%; existing stores contributed $17.2 million of growth, partly offset by a $7.0 million decline in digital sales and $2.5 million of unfavorable foreign-currency translation. Commercial revenue increased to $4.1 million from $2.7 million; franchising revenue rose to $1.1 million from $0.8 million.
Q3 retail gross margin improved 30 basis points to 52.3%, reflecting higher-sales leverage on occupancy, distribution, and labor costs. Year-to-date retail gross margin fell 120 basis points to 51.5%, primarily due to freight and other inflationary costs. SG&A increased in dollars, including higher store labor and marketing, but declined as a share of revenue to 42.5% in Q3 and 40.4% year to date. Management-reported EBITDA was $12.9 million for Q3 and $45.0 million year to date, versus $10.9 million and $39.7 million, respectively, in the prior-year periods.
Cash, liquidity and capital
Cash and cash equivalents were $12.0 million at October 29, down from $32.8 million at fiscal year-end. Year-to-date operating cash flow was $11.2 million, versus $17.2 million; capital expenditures were $6.8 million, versus $4.6 million. Cash used in financing was $26.1 million, principally reflecting $24.2 million of share repurchases. Inventory was $88.3 million, up $26.4 million from the prior-year quarter, as the company advanced purchases to address inflation and support seasonal demand.
The company had no revolving-credit borrowings at quarter-end and approximately $24.5 million available under its $25 million facility, after a $0.5 million letter of credit. Total operating lease liabilities were $91.9 million. In November 2022, the credit agreement was amended to replace LIBOR-based rates with SOFR-based rates. The company reported compliance with its credit covenants.
Outlook, commentary and risks
Management expected fiscal 2022 revenue and profit to exceed fiscal 2021, and forecast $12–$14 million of fiscal-year capital expenditures. It expected inflationary pressures to continue through the rest of FY2022 and anticipated unfavorable British-pound currency effects into Q4. Management said recent e-commerce trends had improved and returned to positive in Q4, following a greater-than-planned Q3 decline during the mobile-first site update; Q3 e-commerce sales were nevertheless 105% above Q3 FY2019.
Management expected year-end inventory below the FY2021 year-end level and planned to finish FY2022 with more total locations overall, while having fewer locations in Europe. It cited inflation, freight and supply-chain disruption, discretionary-spending weakness, foreign exchange, store traffic and execution of digital and omnichannel initiatives among the principal risks. Retail operations are seasonal, with historically higher sales in Q4, so interim results may not indicate full-year performance.
The company accrued a legal reserve of $4.1 million, identified as a legal reserve accrual in accrued expenses. A TCPA class-action matter had a tentative settlement with the plaintiff and an insurer, subject to court approval, which management did not expect to result in significant company expense. For a UK customs-duty dispute, the company reported a $4.1 million gross receivable, a $3.2 million reserve and a $0.9 million net receivable; it had sought permission to appeal to the UK Supreme Court after the Court of Appeal dismissed its appeal.
The board authorized a new share-repurchase program of up to $50 million through August 31, 2025; $3.5 million had been used under it by quarter-end. The prior $25 million program was completed. The filing states that repurchases are discretionary and may be modified or discontinued.
Most important facts for investors to verify
- Whether Q4 and full-year results met management’s stated expectation for FY2022 revenue and profit growth, given seasonality and inflation.
- Whether e-commerce recovery continued after the site redesign and whether in-store growth compensated for digital-sales declines.
- How freight, inventory costs, pricing and consumer demand affected gross margins and year-end inventory.
- Cash generation and liquidity after buybacks, capital spending, lease obligations and purchase commitments; the filing disclosed $92.9 million of purchase obligations, including $27.9 million due within 12 months.
- Developments in the UK customs dispute and court approval and final terms of the tentative TCPA settlement.