Build-A-Bear Workshop, Inc. — Q2 2015 Form 10-Q
Reporting period: 13 weeks ended July 4, 2015; year-to-date period covers 26 weeks. Comparisons are with the corresponding periods ended June 28, 2014. The company operates company-owned retail stores and web stores, international franchises, and commercial licensing and wholesale businesses. Results are seasonal, with sales typically highest in the fourth quarter.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $81.0 million | $76.2 million | $174.4 million | $174.2 million |
| Income (loss) before taxes | $(0.4) million | $(4.0) million | $6.6 million | $1.3 million |
| Net income (loss) | $(0.6) million | $(4.3) million | $6.2 million | $0.7 million |
| Diluted EPS | $(0.04) | $(0.25) | $0.35 | $0.04 |
| Cash used in operating activities | — | $7.6 million | $0.5 million |
Q2 net retail sales rose 6.5% to $80.3 million; total revenue increased 6.3%. First-half revenue was essentially flat and net retail sales declined 0.1%. Comparable store sales increased 8.7% in Q2 and 5.0% for the first half, reversing declines in the prior-year periods. Q2 retail gross margin increased to 43.5% from 39.0%; first-half retail gross margin increased to 45.2% from 41.6%. Management attributed the improvements to merchandise margin, distribution costs and occupancy-cost leverage. SG&A was $35.9 million in Q2 and $73.2 million in the first half.
Financial position and liquidity
- At July 4, cash and cash equivalents were $41.8 million, down from $65.4 million at January 3, 2015. Total assets were $177.6 million; stockholders’ equity was $95.2 million.
- The company reported no borrowings under its $35 million revolving credit facility and approximately $33.9 million available, after a $1.1 million standby letter of credit. It was in compliance with financial covenants. The facility expires December 31, 2016.
- First-half investing cash use was $6.1 million, mainly for IT systems and store construction. Financing cash use was $9.8 million, including $9.2 million of stock repurchases. The company expects fiscal 2015 capital expenditures of $20–$25 million.
- First-half operating cash use increased year over year, primarily reflecting timing of inventory shipments and payments, partly offset by increased store contribution and fewer gift-card redemptions.
Material changes, outlook and risks
- Q2 retail sales growth reflected comparable-store gains, partly offset by currency translation, store closures and other retail/e-commerce effects. Management cited product assortment and marketing, improved product planning, and higher traffic as contributing factors.
- The company’s strategy emphasizes selective store openings and refreshes, expanding consumer segments and product offerings, international growth, and improving profitability. It planned to begin systematically refreshing stores with its “Discovery” format in the second half of 2015. No specific revenue or earnings guidance was provided.
- Company-owned stores numbered 315 at quarter-end, versus 313 a year earlier; international franchised stores numbered 67, versus 75. The company reported 12 company-owned store closures and 3 openings in the first half.
- On July 7, 2015, the board authorized an additional $10 million repurchase program, on top of the existing $10 million program. Through August 7, the company reported repurchases of approximately 533,000 shares for $9.3 million, with $10.7 million remaining available.
- A UK customs audit remains contested. The company had paid $3.5 million of disputed duty, included in receivables, pending appeal; management did not expect a material adverse outcome but noted an unfavorable resolution could materially affect a period.
- Key disclosed risks include discretionary consumer demand, mall traffic and leases, comparable-store sales, product and inventory sourcing, foreign exchange, international operations, competition, technology and customer-data security, and seasonal fluctuations. Management said there were no material changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- Whether Q2 comparable-store momentum and improved retail margins persist, particularly given essentially flat first-half revenue.
- Drivers of the first-half operating cash outflow and the decline in cash, including the timing of working-capital movements and repurchases.
- Current covenant compliance and usable borrowing availability under the credit facility.
- Developments in the UK customs appeal and recoverability of the $3.5 million recorded receivable.
- Execution, cost and returns of planned store refreshes, openings, closures and the expanded repurchase authorization.