Build-A-Bear Workshop, Inc. — Q3 2017 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 30, 2017; comparisons are to the periods ended October 1, 2016. Dollar amounts are in millions unless noted. The company operates company-owned retail and e-commerce, commercial licensing/wholesale, and international franchising businesses. Results are seasonal, with sales typically highest in the fourth quarter.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Total revenue | $82.4 | $83.7 | $250.3 | $253.9 |
| Income before taxes | $2.2 | $2.8 | $4.1 | $1.8 |
| Net income | $1.4 | $1.8 | $2.7 | $1.1 |
| Diluted EPS | $0.09 | $0.11 | $0.17 | $0.07 |
| Retail gross margin | 44.2% | 43.3% | 45.1% | 44.9% |
- Q3 revenue declined 1.6%; net retail sales fell 1.6% to $80.6 million. Consolidated comparable sales decreased 7.4%, including declines in stores and e-commerce.
- Q3 retail gross margin improved 90 basis points, reflecting better merchandise margin from lower discounts, selective price increases and sourcing efficiencies, partly offset by fixed-occupancy deleverage. SG&A rose 2.7% to $34.3 million, primarily on performance-based compensation and higher store count.
- For the first 39 weeks, revenue fell 1.4%, while net income rose to $2.7 million from $1.1 million. Commercial revenue increased to $5.0 million from $2.6 million, attributed to wholesale and licensing activity; franchise fees rose to $1.7 million from $1.4 million.
- Cash used in operating activities was $7.0 million, versus $14.3 million in the prior-year period. Investing activities used $12.5 million, including store and technology spending; capital expenditures were $12.8 million. Financing activities used $1.5 million, including $1.0 million for share repurchases.
- At September 30, cash was $10.9 million, inventory $62.0 million, current assets $94.1 million and current liabilities $59.4 million. No line-of-credit borrowings were outstanding; approximately $35 million was available, and the company reported compliance with its covenants. The filing reports no funded debt on the balance sheet.
Changes, outlook and material items
- Management attributed weaker comparable sales to continued mall-traffic declines, changes in the retail footprint, weather and, in Q3, disruption from the planned web-platform transition. Q3 growth in conversion, units per transaction and dollars per transaction partly offset the decline.
- The company said the web-platform upgrade was essentially complete ahead of the holiday season. Strategy priorities include store-format evolution, product expansion, brand/experience marketing and profitability improvement.
- Management expected fiscal 2017 capital expenditures of $20–$23 million, approximately 20 Discovery-format remodels, and 20–25 new stores, including Concourse Shops, by year-end. The company ended Q3 with 100 Discovery-format stores, including 23 Concourse Shops.
- The Board authorized a share-repurchase program of up to $20 million through September 30, 2020. By quarter-end, 112,325 shares had been repurchased for $1.0 million at an average $8.88 per share. The program is discretionary and subject to credit-agreement restrictions; line-of-credit proceeds cannot fund repurchases.
- On October 31, 2017, the company drew $4.0 million on its credit line, expected to fluctuate during Q4 and be repaid before year-end. The credit agreement expires December 31, 2018.
- A UK customs-duty dispute remained pending. The company reported a $3.5 million gross receivable, a $2.8 million reserve and a $0.7 million net receivable, and stated it believed the dispute would not materially adversely affect results, liquidity or financial position.
- The company planned to adopt the new revenue-recognition standard in fiscal 2018 using the modified retrospective method; management expected the most significant effect to relate to deferred revenue, particularly gift cards. Lease-accounting adoption was planned for fiscal 2019, with impact still under assessment.
- Key risks include discretionary consumer demand and mall traffic, comparable-sales weakness, execution of digital and store initiatives, inventory/vendor and supply-chain exposure, cybersecurity, and seasonal operating volatility. The filing also notes that lower cash flow could constrain planned repurchases. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether comparable-sales trends and e-commerce performance improve after the web-platform transition and through the holiday quarter.
- Whether planned store openings, remodels and capital expenditures remain on schedule and deliver expected sales and profitability.
- How the October credit-line draw, seasonal working-capital needs and covenant headroom develop; the draw was subsequent to the September 30 balance sheet.
- Progress and potential resolution of the UK customs dispute, including collectability of the net receivable.
- The eventual accounting and financial-statement effects of the gift-card revenue-recognition change and the timing and extent of share repurchases.