Build-A-Bear Workshop, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 29, 2012 (52 weeks). The filing is an annual report, not a standalone Q4 report; quarterly figures below refer to the fiscal fourth quarter. Build-A-Bear operated 351 company-owned stores and had 91 international franchise stores at year-end.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $380.9 million | $394.4 million |
| Net retail sales | $374.6 million | $387.0 million |
| Net loss | $49.3 million; $3.02 per diluted share | $17.1 million; $0.98 per diluted share |
| Retail gross margin | $145.7 million; 38.9% | $154.5 million; 39.9% |
| Cash provided by operations | $14.9 million | $16.0 million |
| Cash and cash equivalents at year-end | $45.2 million | $46.4 million |
| Working capital at year-end | $30.5 million | $37.6 million |
- Pre-tax loss was $48.4 million. FY2012 included a $33.7 million noncash impairment of all UK-related goodwill, $4.5 million in total asset impairments, and a $4.7 million deferred-tax valuation allowance charge.
- SG&A rose 1.6% to $165.5 million; as a share of revenue it increased to 43.4% from 41.3%. Retail gross margin declined 100 basis points, reflecting weaker occupancy-cost leverage and merchandise margin, partly offset by distribution and packaging savings.
- Operating cash flow was $14.9 million; investing activities used $15.1 million, including $17.3 million of net capital expenditures. The company ended the year with no revolving-credit borrowings. Its $35 million facility had approximately $33.9 million available after a $1.1 million standby letter of credit; it expires December 31, 2014.
- Undiscounted operating lease obligations totaled $205.7 million, including $45.3 million due in FY2013. The filing reports no cash dividends in 2012 or 2011.
Changes versus the prior comparable year
- Revenue declined 3.4%; comparable-store sales fell 3.3% overall, comprising a 2.0% decline in North America and an 8.4% decline in Europe. Net loss widened from $17.1 million to $49.3 million, primarily because of the goodwill impairment and weaker trading.
- Commercial revenue decreased to $2.8 million from $3.9 million; franchise fees increased to $3.6 million from $3.4 million. Three vendors, whose manufacturing facilities are primarily in China, supplied about 80% of FY2012 inventory purchases.
- Cash from operations decreased by $1.1 million. Year-end cash fell $1.2 million, while working capital and stockholders’ equity also declined.
Outlook, management commentary, risks and unusual items
- Management’s turnaround plan targets a North American store base of 225–250, with 50–60 additional closures by the end of 2014. It expected 35–40 closures in 2013 and approximately 20 more in 2014, alongside relocations, downsizing and remodels. Management expected roughly 20% of sales from closed stores to transfer to other stores in the same markets.
- Management planned about $20–$25 million of FY2013 capital expenditures, principally for technology and store remodels/relocations. It reported that the first six stores with the new design exceeded sales expectations by an average of 30%; this is management-reported early performance, not a forecast guarantee.
- Management attributed pressure to weak UK consumer spending, declining transactions, discretionary consumer demand and mall traffic. Other material risks include store lease economics, execution of closures and remodels, competition and changing children’s play habits, and reliance on a small number of overseas suppliers. The founder and CEO, Maxine Clark, announced plans to retire; a successor search was underway.
- The company disputed a UK customs authority’s proposed assessment of approximately £1.2 million (about $2.0 million) for taxes, penalties and interest and intended to appeal. Management stated it did not expect a material adverse outcome, but acknowledged an unfavorable resolution could affect results, liquidity or financial position.
- The filing reports different Q4 North American/US comparable-store-sales figures in separate sections: +1.5% and +2.4%. Investors should verify the applicable geography and calculation. Q4 revenue was $118.1 million and net loss was $36.4 million; the quarter included the $33.7 million goodwill impairment and a $4.7 million deferred-tax valuation allowance charge.
Important facts for investors to verify
- Reconcile the two reported Q4 comparable-store-sales figures and review the underlying quarterly results.
- Assess whether the planned closures and store redesigns improve sales productivity, margins and cash generation, including the actual sales transferred from closed locations.
- Review UK and Canadian performance, deferred-tax-asset realizability, and the assumptions behind the goodwill and store-asset impairment assessments.
- Track liquidity against capital spending, lease obligations, the December 2014 credit-facility expiration and covenant requirements.
- Monitor the outcome of the UK customs appeal, CEO succession, and supplier concentration and sourcing risks.