Build-A-Bear Workshop, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year of 52 weeks ended January 30, 2021, compared with the 52 weeks ended February 1, 2020. This is an annual filing, not a standalone Q4 report.
Business context
Build-A-Bear is a multichannel retailer of customizable plush products, operating company-managed stores, e-commerce, commercial/wholesale and licensing activities, and international franchises. At year-end it had 354 company-managed stores and 71 franchised stores. COVID-19 drove mandated store closures and operating restrictions; e-commerce growth helped offset lost in-store sales.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $255.3 million | $338.5 million |
| Net retail sales | $249.2 million | $323.5 million |
| Net income (loss) | $(23.0) million | $0.3 million |
| Operating cash flow | $13.4 million | $21.6 million |
| Capital expenditures | $5.0 million | $12.4 million |
| Cash, cash equivalents and restricted cash | $34.8 million | $26.7 million |
- Revenue fell $83.2 million, about 25%. Net retail sales declined 23%; commercial revenue was $4.4 million versus $11.9 million, and franchise revenue was $1.7 million versus $3.2 million.
- Consolidated gross profit was $97.4 million (38.2% of revenue), versus $153.6 million (45.4%). Retail gross margin was 40.7%, down 470 basis points. The company recorded $7.3 million of store asset impairment charges.
- SG&A was $117.6 million, down from $152.0 million, reflecting furloughs, pay reductions, lower marketing and other cost controls. The company reported a $20.2 million pretax loss and a $2.8 million income tax expense.
- Cash from operations remained positive but declined year over year. Cash increased by $8.1 million during the year. The company had no borrowings under its revolving credit facility; $18.8 million was available to borrow at year-end, after a $1.0 million letter of credit.
- Operating lease liabilities totaled $133.9 million, including $32.4 million current and $101.5 million long-term. Inventory fell $6.4 million to $46.9 million.
Material changes and management commentary
- Temporary store closures and restrictions reduced existing-store sales by $97.2 million; e-commerce contributed a $30.3 million increase, partly offsetting that decline. Management said e-commerce demand grew significantly and expanded fulfillment options, including ship-from-store, pickup and curbside pickup.
- Second-half revenue was $168.3 million, 94% above first-half revenue of $87.0 million. Management attributed the improvement to store reopenings, e-commerce demand and expense management.
- Company-managed stores declined from 372 to 354, including 21 closures and three openings. The Discovery store format represented 40% of the store base. Franchise stores declined from 92 to 71.
- Management renegotiated a large portion of store leases, obtaining rent reductions, deferrals and abatements. It also entered a five-year, asset-based revolving credit agreement with PNC Bank in August 2020.
Outlook, risks and unusual items
- The filing provides no numerical financial guidance. Management said results would remain difficult to predict due to COVID-19, potential renewed closures or restrictions, consumer spending and confidence, and vaccine and economic developments.
- Key risks include dependence on discretionary consumer spending and mall/tourist traffic; continued pandemic effects; e-commerce fulfillment and technology/cybersecurity; reliance on a concentrated vendor base (four vendors supplied approximately 77% of inventory purchases); international, currency and Brexit exposure; and lease commitments.
- COVID-related government programs reduced SG&A by $4.2 million for payroll reimbursements and included $0.8 million of U.K. business grants. The company recorded $7.3 million in store impairments and increased deferred tax valuation allowances, reporting no net deferred tax asset at year-end.
- A U.K. customs-duty dispute remains unresolved. The company reported a $4.6 million gross receivable, a $3.5 million reserve and a $1.1 million net receivable; it said it did not expect a material adverse impact. The filing states there were no pending legal proceedings expected to materially harm results or financial condition.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued an unmodified opinion and identified gift-card breakage revenue and store-asset impairment as critical audit matters.
Important facts for investors to verify
- Whether e-commerce growth can continue to offset lower store traffic and the return of company-managed stores to profitable operation.
- Store- and segment-level trends, including the sustainability of the reported second-half rebound and non-GAAP store contribution.
- Cash use, borrowing-base availability and compliance with the PNC facility’s minimum availability covenant.
- Future impairment, lease and closure costs, and the company’s ability to manage its substantial operating lease obligations.
- Assumptions behind gift-card breakage revenue, deferred tax asset valuation allowances and recovery of the U.K. customs receivable.