Build-A-Bear Workshop, Inc. — Q2 2013 Form 10-Q
Business context and period: The company operates company-owned retail stores, commercial licensing and wholesale activities, and international franchises. This unaudited filing covers the 13 and 26 weeks ended June 29, 2013; comparisons are with periods ended June 30, 2012. Results are seasonal, with sales typically highest in Q4 and next highest in Q1.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $81.9 million | $80.4 million | $186.2 million | $176.8 million |
| Net loss | $6.2 million | $7.6 million | $6.2 million | $8.6 million |
| Loss per diluted share | $0.38 | $0.46 | $0.38 | $0.53 |
| Retail gross margin | 36.8% | 35.0% | 39.4% | 37.7% |
| SG&A as a share of revenue | 45.1% | 46.1% | 43.3% | 43.7% |
- Q2 revenue rose 1.9%; first-half revenue rose 5.3%. Retail sales drove the increase, with first-half comparable store sales up 9.0% overall (North America +9.7%; Europe +5.9%).
- Q2 pretax loss improved to $6.1 million from $8.3 million; first-half pretax loss improved to $6.0 million from $9.4 million. The company remained loss-making.
- Retail gross margin improved 180 basis points in Q2 and 170 basis points in the first half, primarily from occupancy-cost leverage and less promotional activity; higher product costs partly offset first-half improvement.
- SG&A was $36.9 million in Q2, down slightly year over year, and $80.6 million in the first half, up $3.4 million. The first half included $2.3 million of management transition costs and $0.9 million of store-closing costs, as well as marketing investment and foreign-currency losses.
Cash, liquidity and capital
- Cash and equivalents were $28.1 million at June 29, 2013, down from $45.2 million at December 29, 2012. More than half was held outside the United States.
- First-half operating cash use was $7.5 million, versus $15.0 million a year earlier. Investing cash use was $9.0 million, primarily for stores and information technology. Cash declined $17.1 million during the half.
- No borrowings were outstanding under the revolving credit facility. It provides $35 million of availability; approximately $33.9 million was available after a $1.1 million standby letter of credit. The company reported compliance with its financial covenants.
- The facility expires December 31, 2014, is secured by company assets and a pledge of 65% of foreign-subsidiary ownership, and bears interest at LIBOR plus 1.8%. It restricts dividends and share repurchases, among other matters.
- Fiscal 2013 capital expenditure guidance was $19–$22 million; $9.0 million had been spent in the first half. Management said cash from operations and available credit should fund near-term requirements.
Material changes, outlook and risks
- The company is pursuing a turnaround focused on store productivity, a redesigned store experience, marketing, cost reduction, and store closures. It operated 323 company-owned stores at quarter-end and expected 318 at year-end 2013; it projected four openings and 37 closures for the year. Its stated optimal company-owned footprint is 285–310 stores.
- As of August 5, 16 stores had the new design; management reported average sales increases of approximately 20% at these locations and planned about 30 by year-end 2013, with another 20–25 in 2014. The filing gives no company-wide earnings guidance.
- Management attributed comparable-sales gains to marketing, product mix, sales transferred from closed stores, and gift-card redemptions. Gift-card issuance had increased 30% in Q4 2012 and a further 20% in the first half of 2013.
- Store asset impairment charges were $0.6 million in the first half, associated with locations expected to close. Q2 also included $0.5 million of one-time management transition costs and $0.3 million of store-closing costs.
- A U.K. customs dispute involves an assessment of approximately £1.2 million (about $2 million) for duties, penalties and interest. The company appealed and had paid $0.7 million, recorded in receivables; management did not expect a material adverse outcome, but an unfavorable resolution could materially affect a particular period.
- Key risks include discretionary consumer demand, mall traffic, comparable-sales performance, execution of store closures and leases, international operations and currency movements, vendor and inventory disruption, product quality or liability, and competition. The company noted no material change to the risk factors in its 2012 Form 10-K.
Important facts for investors to verify
- Whether comparable-sales gains and improved retail margins persist as gift-card redemptions and store closures affect results.
- Progress and costs of the turnaround, including projected store closures, redesigned-store performance, and the path to profitability.
- Cash generation, capital spending, covenant compliance, and access to the revolving facility through its 2014 expiration.
- Outcome and accounting treatment of the U.K. customs appeal and the recoverability of the $0.7 million paid.
- Share-repurchase capacity: approximately $7.4 million remained under the $50 million program as of August 5, 2013; confirm any purchases remain consistent with credit-agreement restrictions.