Build-A-Bear Workshop, Inc. — Q2 2016 Form 10-Q
Reporting period: The 13 weeks ended July 2, 2016; year-to-date (YTD) figures cover the 26 weeks ended that date. Comparisons are with the periods ended July 4, 2015. Figures are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context and results
The company operates company-owned stores and e-commerce under its direct-to-consumer (DTC) segment, alongside international franchising and commercial licensing/wholesale. At quarter-end it had 321 company-owned stores and 77 franchised locations. Management notes the business is seasonal, with sales typically highest in the fourth quarter.
| Metric | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Total revenue | $75.1 | $81.0 | $170.1 | $174.4 |
| Net retail sales | $73.9 | $80.3 | $168.0 | $171.9 |
| Net income (loss) | $(4.3) | $(0.6) | $(0.8) | $6.2 |
| Basic and diluted EPS | $(0.28) | $(0.04) | $(0.05) basic; $(0.05) diluted | $0.36 basic; $0.35 diluted |
| Cash used in operating activities | — | $(22.2) | $(7.6) | |
| Cash used in investing activities | — | $(10.4) | $(6.1) | |
| Capital expenditures | — | $11.9 | $6.1 |
Margins, liquidity and debt
- Retail gross margin was 42.2% in Q2, down 1.3 percentage points year over year, mainly due to fixed-occupancy cost deleverage; merchandise margin improved slightly. YTD retail gross margin was 45.6%, up 0.4 percentage points, reflecting merchandise-margin and occupancy improvements, partly offset by higher distribution costs.
- SG&A was $37.1 million in Q2 and $76.7 million YTD, up 3.8% and 5.2%, respectively. SG&A was 49.3% of revenue in Q2 (44.1% prior year) and 45.1% YTD (41.8% prior year).
- Cash and cash equivalents were $10.2 million at July 2, versus $45.2 million at January 2, 2016 and $41.8 million a year earlier. Current assets were $88.8 million and current liabilities $63.9 million.
- There were no borrowings under the revolving credit facility. The company reported $35.0 million available under its secured line of credit and compliance with its financial covenants. The facility expires December 31, 2017.
- YTD operating cash use increased by $14.6 million from the prior year, which management attributed primarily to lower store contribution and timing of inventory shipments/payments and gift-card redemptions. Cash declined by $35.0 million during the first half.
Changes versus prior comparable periods
- Q2 revenue fell 7.3%; retail sales declined 7.9%. Consolidated comparable sales fell 8.6% in Q2, compared with 8.8% growth a year earlier. YTD comparable sales fell 2.8%, compared with 5.1% growth.
- Management attributed the Q2 comparable-sales decline primarily to the prior-year Minions collection’s strong performance. Q2 e-commerce comparable sales grew 11.7%, while store comparable sales fell 9.3%.
- Q2 pretax loss widened to $6.2 million from $0.4 million; YTD results shifted to a $1.0 million pretax loss from $6.6 million pretax income. The DTC segment reported pretax losses of $6.6 million in Q2 and $1.5 million YTD; commercial and franchising segments remained profitable.
- Higher SG&A, store preopening expenses and currency translation contributed to pressure. SG&A included unrealized currency losses related to British pound movements, investment in initiatives and international expansion, marketing timing, and strategic-review costs. Store preopening costs rose as Discovery-format stores opened or were remodeled.
Outlook, commentary and risks
- Management expected to spend $25–$30 million on fiscal 2016 capital expenditures, primarily for stores and IT infrastructure. It expected 15–20 net store additions for the year and 50–55 Discovery-format stores by year-end; 31 were operating at July 2.
- The company’s board was evaluating strategic alternatives to enhance shareholder value, with financial and legal advisers retained. No timetable or outcome was assured, and management said it would not update the market unless disclosure was appropriate or necessary. The review itself added costs and was identified as a risk.
- Management said cash from operations and the credit facility should fund near-term working-capital and other cash needs. More than half of quarter-end cash was held outside the United States. No numerical earnings or comparable-sales guidance was provided in the filing.
- Disclosed business risks include discretionary consumer demand, mall traffic, comparable-sales performance, store lease terms, international operations and foreign exchange, product supply and quality, technology and customer-data security, and the uncertain strategic review. Results may fluctuate with seasonality and store openings, closures and remodels.
- A U.K. customs dispute involved $3.4 million of duties paid under protest and recorded in receivables, with a provision for management’s best estimate of probable loss. The company continued to contest the assessment and stated it did not expect a material adverse impact.
Important facts for investors to verify
- Whether comparable sales and store contribution recover after the Q2 decline, including the durability of e-commerce and Discovery-store performance.
- How cash use, inventory and working-capital timing evolve, and whether the $25–$30 million capital-spending plan and store-expansion targets remain achievable.
- The strategic-review outcome, related costs and any implications for the company’s business plan or financing.
- Availability and covenant headroom under the credit facility, which expires at the end of 2017, especially given the reduced cash balance.
- Developments in the U.K. customs appeal and the adequacy of the provision against the receivable.