Business context and reporting period
Build-A-Bear Workshop, Inc. operates company-owned retail stores, commercial licensing and wholesale activities, and international franchises. This unaudited Form 10-Q covers the 13 and 39 weeks ended October 1, 2011; comparisons are with the periods ended October 2, 2010. The business is seasonal, with sales typically highest in the fourth quarter.
At quarter-end, the company operated 344 company-owned stores, seven temporary pop-up locations, and 76 international franchised stores.
Financial performance and liquidity
| Metric | Quarter | 39 weeks |
|---|---|---|
| Total revenue | $97.4 million, down 2.7% | $275.2 million, essentially flat |
| Net retail sales | $95.4 million, up 4.0% | $269.9 million, up 2.3% |
| Net income (loss) | $0.9 million; diluted EPS $0.05 | $(8.1) million; diluted loss per share $0.45 |
| Retail gross margin | 40.2%, up from 38.6% | 38.4%, up from 37.4% |
| Operating cash flow | Not separately provided | $(13.2) million, versus $(17.3) million |
Quarterly pretax income was $1.9 million, compared with a $1.9 million loss a year earlier. The quarter’s income tax expense was $1.0 million (54.2% effective rate); the nine-month tax benefit was $4.4 million. Nine-month store contribution, a company-defined non-GAAP measure, was 11.3% of store-location retail sales, versus 11.7%.
Cash and cash equivalents were $25.1 million at October 1, down from $58.8 million at January 1 and slightly above $24.7 million a year earlier. Current assets were $114.5 million and current liabilities $73.1 million. The company had no borrowings under its credit line, approximately $48.9 million available after a $1.1 million standby letter of credit, and was in compliance with its financial covenants. The facility expires December 31, 2012. No funded debt was reported on the balance sheet.
For the 39 weeks, investing activities used $10.9 million, including $9.7 million for property and equipment; financing activities used $9.8 million, primarily for share repurchases. Capital expenditures were $9.9 million through the period.
Material changes versus the prior comparable period
- Quarterly retail sales rose, but total revenue declined because commercial revenue fell to $1.2 million from $7.6 million. The prior-year quarter included a $5.8 million wholesale transaction with no associated gross margin.
- Quarterly retail gross margin improved 160 basis points, attributed to lower warehouse and distribution costs, improved occupancy-cost leverage, and better merchandise margin. SG&A declined 3.3% for the quarter, but increased 4.0% year to date, partly due to consulting, advertising, and payroll costs.
- Comparable store sales increased 1.1% in the quarter (North America 0.7%; Europe 3.0%), but declined 0.9% year to date. Management attributed quarter growth to merchandise assortments, a promotion, and improved mall traffic; higher average transaction value was partly offset by fewer transactions. Earlier-year declines reflected lower transactions and weaker UK consumer sentiment and spending.
- Year-to-date retail segment pretax loss was $15.0 million, compared with $14.9 million a year earlier; commercial and franchising segments remained profitable.
Outlook, risks, contingencies, and unusual items
- No formal earnings forecast was provided. Management planned to support fourth-quarter sales with product innovation and limited editions, an expanded assortment of toys, and digital and social-media engagement.
- Management expected approximately $12 million of fiscal 2011 capital expenditures, six store openings and six closures, and approximately 80 franchised locations by year-end. It stated that operating cash and available credit should fund near-term requirements.
- The company repurchased approximately 672,000 shares for $3.7 million after quarter-end through November 7. By that date, cumulative repurchases under the $50 million program were approximately $40.2 million, leaving $9.8 million available. Repurchases are discretionary.
- Key disclosed risks include discretionary consumer spending and mall traffic, comparable-store sales, product demand and inventory flow, dependence on a limited number of vendors, lease terms, international operations and currency translation, competition, and execution of store and digital initiatives. Results may fluctuate with seasonality, holidays, and consumer preferences.
- Goodwill impairment testing was due no later than December 31, 2011. The company reported approximately $0.3 million of unrecognized tax benefits and said $46,000 could reasonably be reduced within 12 months. It disclosed an ongoing sales-and-use-tax audit, with related interest costs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether fourth-quarter holiday trading sustains comparable-store sales growth after the 0.9% year-to-date decline.
- Whether margin improvements persist and offset higher year-to-date SG&A and ongoing retail-segment losses.
- Holiday-season working-capital needs, cash generation, and continued compliance with credit-facility covenants.
- Progress against store opening, closure, capital expenditure, and franchise-location expectations.
- Share-repurchase pace and remaining authorization, alongside liquidity needs and the pending goodwill impairment test.