Build-A-Bear Workshop, Inc. — Q3 2020 Form 10-Q
Reporting period: Thirteen weeks ended October 31, 2020; year-to-date (YTD) period covers 39 weeks. Unaudited results. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Build-A-Bear operates company-managed retail stores and e-commerce, commercial licensing and wholesale activities, and international franchises. COVID-19 disrupted store operations and consumer traffic, while digital demand remained strong. At quarter-end, 358 company-managed stores and 75 franchised stores were reported; approximately 98% of company-managed stores were open.
Financial performance
- Q3 revenue: $74.7 million, up 6.1% from $70.4 million. Net retail sales rose 8.7% to $72.4 million, primarily because of e-commerce growth; commercial revenue declined to $1.9 million and franchise revenue to $0.4 million.
- Q3 profit and margins: Gross profit was $34.8 million, or 46.6% of revenue, compared with $27.7 million and 39.5% a year earlier. Net income was $1.7 million, or $0.11 per diluted share, versus a $5.9 million loss, or $(0.40) per share. Lower occupancy costs following rent negotiations and improved merchandise margin supported the quarterly retail gross margin.
- YTD revenue and earnings: Revenue fell 30.9% to $161.7 million from $234.0 million. Gross profit was $50.4 million (31.2% of revenue), versus $100.9 million (43.1%). Net loss widened to $33.5 million, or $(2.24) per diluted share, from a $5.9 million loss, or $(0.40) per share. YTD retail gross margin was 35.0%, down from 43.1%.
- Operating cash flow and investment: YTD operating cash flow was positive $3.1 million, versus negative $1.6 million a year earlier. Capital spending was $4.0 million, down from $10.1 million. Cash and cash equivalents on the balance sheet were $25.8 million at October 31, 2020; the cash-flow statement reports $27.5 million including $1.7 million of restricted cash.
- Liquidity and obligations: Current assets were $90.7 million and current liabilities $91.3 million. The company had no borrowings under its new revolving credit facility; approximately $10.5 million was available after a $1.0 million letter of credit, subject to the borrowing base. Operating lease liabilities totaled $143.1 million ($35.5 million current and $107.7 million long-term). Net interest expense was immaterial.
- Equity and taxes: Stockholders’ equity was $56.7 million, down from $88.6 million at fiscal year-end, principally reflecting the YTD loss. A global valuation allowance meant no tax benefit was recorded on the YTD pretax loss; YTD tax expense was $2.5 million.
Material changes versus prior comparable periods
- Q3 revenue and earnings improved year over year, led by triple-digit e-commerce growth, despite 7% fewer store operating days. The filing identifies this as the company’s 12th consecutive quarter of double-digit or greater e-commerce demand growth.
- YTD revenue contracted sharply after company-managed stores temporarily closed beginning in March. E-commerce growth partly offset lower store sales; commercial and franchise revenue also declined.
- YTD results included $7.0 million of store asset impairment charges, primarily related to North American locations. The comparable 2019 YTD period included a $5.9 million lease-accounting adoption charge recorded directly in retained earnings, rather than current-period operating expense.
- Expense reductions, working-capital actions and lower capital spending helped cash generation. Management restored employee base salaries to pre-reduction levels effective September 27, 2020.
Outlook, risks and unusual items
- Management said the pandemic’s full financial impact could not be estimated and expected an adverse effect on Q4 2020 results and potentially later periods. The holiday quarter is seasonally significant.
- At the start of Q4, 43 U.K. stores were temporarily closed under government mandates, in addition to two temporarily closed stores in Ireland. By December 2, 39 U.K. locations had reopened as restrictions eased.
- Management said current cash, access to the revolving facility and cost-preservation measures were expected to fund working capital and other needs for at least 12 months. It may pursue further cash-preservation measures, including asset monetization, stricter inventory management, renewed furloughs or position reductions, and lower discretionary spending.
- The August 2020 PNC facility provides up to $25 million, subject to a borrowing base, and matures in 2025. It includes an availability covenant and restrictions on, among other things, dividends and share repurchases. The company stated it would not use cash for share repurchases in fiscal 2020.
- COVID-related government assistance reduced SG&A by approximately $0.3 million in Q3 and $3.3 million YTD; $1.2 million was outstanding from tax authorities at quarter-end. Management judged reimbursement probable.
- A U.K. customs-duty dispute remains under appeal. The related receivable was $4.5 million gross, with a $3.6 million reserve and $0.9 million net balance; the next appeal hearing was expected in the first half of calendar 2021. The company stated it did not expect a material adverse impact.
- Other key risks include changes in consumer spending and shopping behavior, store traffic and operating restrictions, holiday demand, the interactive in-store experience, supply-chain concentration, and potential further store impairments. Management reported no material changes to the previously disclosed risk factors.
Investor facts to verify
- Whether e-commerce growth and improved Q3 profitability persisted through the holiday quarter, and how subsequent store closures affected results.
- Cash generation, liquidity availability under the borrowing-base facility, and compliance with its availability covenant.
- Whether lease concessions, cost controls and inventory management remain effective, and whether additional store impairments are required.
- The resolution and collectability of the U.K. customs receivable, and the timing and amount of government reimbursements.
- How the $33.5 million YTD loss, tax valuation allowance and lease obligations affect financial flexibility.