Build-A-Bear Workshop, Inc. — Q1 2014 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2014; comparisons are with the thirteen weeks ended March 30, 2013. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. Results are unaudited.
Business context
Build-A-Bear operates company-owned interactive retail stores, international franchises, and commercial licensing and wholesale activities. At quarter-end, it operated 316 company-owned stores (256 in North America and 60 in the U.K. and Ireland) and had 83 international franchised stores. The company cautions that results are seasonal and a single quarter may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $97.9 million | $104.3 million |
| Net retail sales | $96.8 million | $102.9 million |
| Gross margin | $42.4 million | $42.9 million |
| SG&A | $37.8 million | $43.7 million |
| Income before taxes | $5.3 million | $0.1 million |
| Net income | $5.0 million | $13,000 |
| Diluted EPS | $0.29 | $0.00 |
| Cash from operations | $(1.5) million | $0.8 million |
| Capital expenditures | $1.1 million | $3.8 million |
- Total revenue declined 6.1%; retail sales declined 5.9%. Retail comparable sales fell 2.2% overall, including declines of 1.9% in North America and 3.2% in Europe.
- Retail gross margin increased to 43.5% of retail sales from 41.5%, a 200-basis-point improvement, attributed mainly to better merchandise margin; lower sales volume partly offset the benefit through occupancy-cost deleverage.
- SG&A declined 13.6%. Management cited lower store payroll, other store expenses, and corporate overhead. Management transition and store-closing expenses were $0.4 million versus $2.3 million in the prior-year quarter.
- The effective tax rate was 5.3%, versus 88.2%; the filing attributes the rate change to the increase in pretax income. The company had previously recorded a valuation allowance on substantially all deferred tax assets.
- Cash and equivalents were $41.9 million at March 29, 2014, compared with $44.7 million at December 28, 2013. Current assets were $106.4 million and current liabilities $66.4 million.
- There were no borrowings under the $35 million revolving credit facility. Approximately $33.9 million remained available after a $1.1 million standby letter of credit; the company reported compliance with its covenants. The facility expires December 31, 2015.
- Operating cash use reflected the timing of inventory receipts and payments and increased gift-card redemptions, partly offset by increased store contribution. The company had no material debt borrowings reported.
Changes, outlook, and management commentary
- Revenue fell by $6.3 million. Management attributed the retail-sales decrease mainly to store closures (a $6.0 million impact) and lower comparable-store sales, partly offset by new stores, non-traditional locations including web sales, and favorable foreign-currency translation.
- Management said the comparable-sales decline was primarily due to Easter and associated school breaks shifting into Q2 in 2014, along with weather affecting retail generally.
- The company planned to close approximately 10 to 15 locations in 2014, primarily in North America, while selectively refreshing stores and opening new locations as opportunities arose.
- Fiscal 2014 capital expenditures were projected at $12 million to $15 million, primarily for store refreshes and repositioning and infrastructure. No specific earnings or revenue guidance was provided.
- Management said cash from operations and potential credit-facility borrowings should be sufficient for near-term working-capital and other cash needs. The $50 million share-repurchase authorization was extended through March 31, 2015; approximately $6.4 million remained available as of May 2, 2014.
- Key risks include discretionary consumer spending, mall traffic, comparable-sales performance, store portfolio and lease economics, vendor and inventory-flow dependence, foreign exchange, information-technology and data-security exposure, and international franchise execution. Management reported no material changes to the risk factors in the 2013 Form 10-K.
Contingencies and unusual items
The company is contesting a U.K. customs audit assessment for disputed duty, penalties, and interest. It had paid $3.1 million pending appeal, recorded in receivables, and management did not expect a material adverse outcome, while acknowledging an unfavorable resolution could materially affect results, liquidity, or financial position. The quarter also included a $0.1 million store-asset impairment charge, compared with $0.5 million in Q1 2013. No off-balance-sheet arrangements were reported.
Investor facts to verify
- Whether the Q1 comparable-sales decline was temporary and whether sales recovered after the Easter and weather-related timing effects.
- Whether store closures and expense reductions support sustainable profitability without materially weakening sales.
- Whether the company generates positive operating cash flow as inventory, payables, and gift-card movements normalize.
- The outcome and any additional cash impact of the U.K. customs appeal.
- Progress against the planned $12 million to $15 million capital-spending range, store-closure plan, and remaining share-repurchase authorization.
- Cash availability, covenant compliance, and the status of the credit facility approaching its December 2015 expiration.