Build-A-Bear Workshop, Inc. — Q3 2014 Form 10-Q
Reporting period: 13 weeks ended September 27, 2014; year-to-date period covers 39 weeks. The company operates company-owned retail stores, international franchises and commercial licensing/wholesale businesses. Results are seasonal, with sales typically highest in the fourth quarter.
Financial performance
Amounts below are in USD millions except per-share data. Comparisons are with the corresponding 2013 periods.
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Total revenue | $86.7 | $84.8 | $260.9 | $271.0 |
| Net retail sales | $85.6 | $83.6 | $257.8 | $266.9 |
| Income (loss) before taxes | $2.1 | $(1.1) | $3.4 | $(7.1) |
| Net income (loss) | $1.8 | $(1.4) | $2.5 | $(7.6) |
| Diluted EPS | $0.10 | $(0.08) | $0.14 | $(0.46) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4.4 | $(16.8) |
- Q3 retail comparable sales rose 0.8% overall (North America +1.0%; Europe unchanged); 39-week comparable sales fell 2.0% (North America −1.6%; Europe −3.6%).
- Retail gross margin was 43.7% in Q3 versus 40.1% and 42.3% year to date versus 39.6%. Management attributed the improvement mainly to selected price increases, lower product costs and, in Q3, lower packaging costs and improved occupancy-cost leverage.
- SG&A was $36.2 million in Q3, up 1.1%, and $108.1 million year to date, down 7.2%. SG&A as a share of revenue declined to 41.8% from 42.2% in Q3 and to 41.4% from 43.0% year to date.
Balance sheet, liquidity and capital
- At September 27, 2014, cash and cash equivalents were $40.5 million, total current assets $109.5 million and current liabilities $72.4 million. Cash was $44.7 million at December 28, 2013 and $13.8 million at September 28, 2013.
- Total assets were $174.9 million and stockholders’ equity $86.4 million. The balance sheet reports no debt; the company also said it had made no borrowings under its credit line during the first 39 weeks.
- The secured revolving credit facility provides up to $35 million and expires December 31, 2015. At period-end, approximately $33.9 million was available, with a $1.1 million standby letter of credit outstanding; the company reported compliance with financial covenants.
- Year-to-date investing cash use was $6.6 million, including $5.6 million of property and equipment purchases and $0.9 million of short-term investments. Financing used $2.0 million, including $3.2 million for share repurchases, partly offset by $1.3 million from employee option exercises.
Changes, outlook and risks
- Q3 revenue increased 2.2%, while year-to-date revenue declined 3.7%. Q3 retail sales growth reflected comparable-sales gains, new and non-traditional locations and currency translation, partly offset by store closures. Year-to-date retail sales were pressured by store closures, weaker comparable sales and weather-related traffic declines; management also cited elimination of a gift-with-purchase promotion it considered unprofitable.
- Management described ongoing real-estate optimization, cost reduction, product-margin work and a shift toward brand-building marketing. It planned approximately 15 store closures in fiscal 2014, mainly in North America, alongside selective openings and non-traditional locations. The company had 313 company-owned locations and 70 international franchised stores at quarter-end.
- Fiscal 2014 capital expenditures were expected to total $12–$14 million; $5.7 million had been spent through the first 39 weeks. Management believed operating cash flow and available credit would fund near-term requirements. Fiscal 2014’s fourth quarter was expected to contain 14 weeks. No full-year earnings or revenue guidance was stated.
- Key risks include discretionary consumer demand, mall traffic, store and lease economics, product and inventory execution, international operations and currency translation, technology and data security, and competition. Management said risk factors were not materially changed from its 2013 Form 10-K.
- The company is contesting a UK customs assessment. It had paid $3.2 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.
- Unusual items included $0.4 million of store-asset impairment charges year to date and Q3 management transition costs of $0.7 million and store-closing costs of $0.1 million. After quarter-end through November 3, the company repurchased about 12,000 shares for $145,000; approximately $3.8 million remained under the repurchase program.
Important facts for investors to verify
- Whether Q3 comparable-sales stabilization and gross-margin gains persist, particularly as year-to-date comparable sales remained negative.
- Progress and costs associated with planned store closures, the smaller store base and the expected $12–$14 million capital-spending range.
- Cash generation through the seasonal fourth quarter, use of the credit facility and its December 2015 expiration.
- Outcome and potential financial effect of the UK customs appeal and the recoverability of the related $3.2 million receivable.
- Repurchase activity and remaining program authorization, alongside liquidity needs and operating performance.