Business context and reporting period
Build-A-Bear Workshop, Inc. filed this unaudited Form 10-Q for the 13 weeks ended May 4, 2019, compared with the 13 weeks ended May 5, 2018. The company operates corporately managed retail and e-commerce channels, a commercial business (including licensing and wholesale), and international franchises. Results are seasonal; the company says its fourth quarter is typically its strongest.
At quarter-end, the company operated 366 corporate stores and had 90 international franchised stores. Nearly 97% of consolidated revenue came from direct-to-consumer operations.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $84.4 million | $83.2 million | Up 1.4% |
| Net retail sales | $81.0 million | $81.4 million | Down 0.5% |
| Commercial revenue | $2.8 million | $1.0 million | Up $1.8 million |
| International franchising revenue | $0.6 million | $0.7 million | Down $0.2 million |
| Gross profit | $38.2 million | $37.0 million | Gross margin 45.3%, versus 44.5% |
| Retail gross margin | 45.2% | 44.3% | Up 90 basis points |
| SG&A | $35.8 million | $36.3 million | Down $0.5 million |
| Income before taxes | $2.4 million | $0.6 million | Improved |
| Net income | $1.2 million | $0.4 million | Diluted EPS of $0.08, versus $0.02 |
| Operating cash flow | $5.1 million | $1.4 million | Cash increased by $2.3 million |
| Capital expenditures | $2.4 million in cash-flow statement | $3.0 million | MD&A separately reports $2.7 million spent in Q1 2019 |
Cash and cash equivalents were $20.2 million at May 4, 2019, up from $17.9 million at February 2, 2019. The company had no borrowings on its $35 million revolving credit facility and reported the full amount available and compliance with all covenants. The facility expires December 31, 2020. The filing does not report conventional funded debt outstanding; operating lease liabilities were $168.2 million, including $30.6 million current and $137.7 million long-term.
Material changes versus the prior comparable period
- Consolidated revenue rose modestly despite lower retail sales, primarily because commercial revenue increased through wholesale, fixtures and outbound licensing.
- North American revenue increased 4.5%; European revenue fell 14.8%. The company cited Brexit-related uncertainty and the effect of European privacy rules on direct marketing. Consolidated e-commerce sales increased by a double-digit percentage.
- Retail gross margin improved on merchandise margin expansion and lower occupancy costs. SG&A declined with continued expense discipline.
- Cash from operations improved, which management attributed mainly to higher net income and receivable collections.
- Beginning February 3, 2019, the company adopted the new lease accounting standard. It recognized a $144.5 million operating lease right-of-use asset and $168.2 million in lease liabilities at May 4. Adoption included a $7.4 million after-tax charge to opening retained earnings; prior-year balance sheets were not recast.
Outlook, commentary, risks and contingencies
- No revenue or earnings guidance is provided. The company expects fiscal 2019 capital expenditures of $13 million to $15 million, primarily for store remodels, new stores and IT infrastructure, and said operating cash flow and available credit should fund near-term requirements.
- Management’s strategy includes diversifying store locations and formats, expanding e-commerce and franchises, developing licensed and other brand revenue, and improving profitability through expense discipline. The company reported 37% of its corporate store base was in the updated Discovery design.
- Management said new Bonus Club enrollment processes compliant with European privacy requirements had improved member opt-in rates. It expects the new China franchise partner, which operated nine locations, to open up to 10 locations by fiscal year-end; it also reported progress toward six stores in India and expected stores in Chile.
- Key stated risks include discretionary consumer spending, mall and tourist traffic, changing preferences, international trade and tariffs, foreign exchange, lease renewals, technology and data security, supply-chain concentration, distribution disruptions, and execution of store and franchise strategies. The company cautions that quarterly results fluctuate and are seasonal.
- A U.K. customs dispute remains under appeal. The company reported a $4.0 million gross receivable, a $3.1 million reserve and a $0.9 million net receivable, and said it does not expect a material adverse impact.
- The effective tax rate was 50.3%, versus 45.2%, primarily reflecting valuation allowances in certain foreign jurisdictions and a negative tax impact from vesting equity awards. The filing reports no material changes to risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether the growth in commercial revenue and e-commerce can offset weak retail sales, particularly continued weakness in Europe.
- Progress on margins, store portfolio changes, franchise openings and the company’s $13 million to $15 million capital-spending plan.
- Lease obligations and credit-facility covenants, including the $35 million facility’s December 2020 expiration.
- The outcome and recoverability of the U.K. customs receivable and the adequacy of its reserve.
- The filing’s cash-flow figures differ slightly between statements and MD&A: Q1 2018 operating cash flow is $1.364 million in the cash-flow statement and $1.383 million in MD&A. The cash-flow statement reports Q1 2019 capital expenditures of $2.440 million, while MD&A states $2.7 million spent through the quarter; investors may wish to reconcile these presentations.