Business context and reporting period
Build-A-Bear Workshop, Inc. filed this unaudited Form 10-Q for the 13 and 26 weeks ended June 30, 2012, compared with the periods ended July 2, 2011. The company sells an interactive stuffed-animal retail experience through company-owned stores, e-commerce, licensing and international franchises. Results are seasonal, with sales typically strongest in the fourth quarter and then the first quarter.
At quarter-end, the company operated 354 company-owned stores and had 84 international franchised stores. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Total revenue | $80.4 | $81.8 | $176.8 | $177.8 |
| Net retail sales | $79.0 | $80.4 | $174.2 | $174.6 |
| Loss before tax | $(8.3) | $(10.7) | $(9.4) | $(14.3) |
| Income tax benefit | $0.8 | $4.0 | $0.9 | $5.4 |
| Net loss | $(7.6) | $(6.7) | $(8.6) | $(8.9) |
| Loss per diluted share | $(0.46) | $(0.37) | $(0.53) | $(0.50) |
- Retail gross margin was 35.0% in Q2 versus 35.8% a year earlier; for the first half it was 37.7% versus 37.4%. Total gross margin was $28.0 million in Q2 and $66.1 million in the first half.
- SG&A was $37.1 million in Q2, down 8.9%, and $77.2 million in the first half, down 5.8%. As a share of revenue, SG&A fell to 46.1% in Q2 and 43.7% for the first half.
- Cash used in operating activities was $15.0 million in the first half, compared with $12.9 million a year earlier. Investing activities used $6.1 million; financing activities had no net cash use. Cash declined by $19.9 million from year-end to $26.5 million.
- At June 30, cash was $26.5 million, current assets $92.5 million and current liabilities $59.9 million. Stockholders’ equity was $122.4 million. The filing reports no outstanding borrowings under the credit facility; approximately $38.9 million was available, with a $1.1 million standby letter of credit outstanding.
Material changes versus the prior comparable period
- Q2 revenue declined 1.7%; consolidated comparable-store sales fell 1.7%, following 7.1% growth in Q2 2011. First-half revenue declined 0.6%, while comparable-store sales were down 0.1% versus a 2.0% decline in the prior-year period.
- Q2 net loss widened despite lower SG&A, as gross margin dollars fell and the tax benefit was substantially smaller. First-half net loss improved modestly, primarily alongside reduced SG&A and a smaller pretax loss, but the tax benefit also fell sharply.
- Q2 retail margin pressure reflected promotional selling of seasonal inventory and fixed occupancy-cost deleverage. First-half retail margin improved modestly, supported by warehousing, distribution, packaging and occupancy leverage, partly offset by promotions and higher product costs.
- Commercial revenue fell to $1.1 million in the first half from $1.8 million, mainly because of lower licensing activity. Franchise fees increased slightly to $1.5 million.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2012 capital expenditures of $20–$23 million; $8.3 million had been spent in the first half. Planned investment included store remodels and openings, new-design stores and information systems.
- Management planned to close ten stores in fiscal 2012 and approximately 15 additional traditional North American stores in the first half of 2013. Its long-term target was 295–320 company-owned stores, expected within three to five years, with most North American closures anticipated in 2013–2014. It expected franchisees to open 10–12 net stores in 2012.
- Management attributed weaker Q2 comparable sales partly to the earlier Easter and shifted school breaks in North America and weaker UK consumer sentiment. It cited holiday gift-card redemptions and a McDonald’s Happy Meals promotion as traffic and transaction-value supports. Initiatives included store redesign, market optimization, refreshed loyalty and gift-focused marketing.
- The company expected cash from operations and available credit to fund near-term working-capital and other requirements. The $40 million revolving line had a seasonal overline to $50 million from July through December, expired December 31, 2013, and carried interest at LIBOR plus 1.8%. The June 30 amendment reduced the minimum tangible-net-worth covenant for the second and third quarters; the company said it was in compliance with all covenants.
- The $50 million share-repurchase program was extended through March 31, 2013. As of August 6, 2012, approximately $8.7 million remained available; repurchases were not assured and were subject to market conditions and credit-agreement restrictions.
- Unusual items included a $0.5 million loss related to the Ridemakerz investment and $0.2 million of store-asset impairment in the first half. The Ridemakerz investment’s book value was reduced to zero, although the company retained an approximately 25% interest and reported no material remaining obligations.
- The company was contesting findings in an ongoing UK customs audit. Management did not expect tax examinations and other contingencies to have a material adverse impact, but an unfavorable resolution could materially affect a particular period. Other risks include discretionary consumer spending, mall traffic, inventory and vendor dependence, foreign exchange, leases, competition and franchise operations.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends improved after the Q2 decline, particularly in the UK.
- Whether cost savings can offset promotional pressure, occupancy costs and higher product costs without impairing sales.
- Cash burn, seasonal working-capital needs, capital-spending delivery and continued compliance with credit covenants.
- Execution and sales-transfer assumptions for planned store closures, relocations and new-design stores.
- Progress and financial exposure in the UK customs audit, and the effect of the US deferred-tax valuation allowance on future tax benefits.
- Actual timing and amount of any share repurchases, given cash needs and credit-agreement limits.