Build-A-Bear Workshop, Inc. — Q3 2012 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2012; comparable periods ended October 1, 2011. Financial amounts below are in U.S. dollars; millions are shown unless noted.
Business context
The company operates interactive stuffed-animal retail stores, web stores, commercial licensing and wholesale activities, and international franchises. Management described the business as being in a turnaround phase, focused on store productivity and profitability through store redesigns, closures, relocations, smaller store footprints and increased brand advertising.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Total revenue | $86.0 | $97.4 | $262.8 | $275.2 |
| Net retail sales | $84.3 | $95.4 | $258.5 | $269.9 |
| Net income (loss) | $(4.3) | $0.9 | $(12.8) | $(8.1) |
| Diluted EPS | $(0.26) | $0.05 | $(0.79) | $(0.45) |
| Retail gross margin | 36.5% | 40.2% | 37.3% | 38.4% |
- Q3 revenue fell 11.7% year over year; comparable store sales declined 11.1% overall, including 11.8% in North America and 7.9% in Europe.
- Q3 retail gross margin declined 370 basis points, primarily from occupancy-cost deleverage and lower merchandise margin. SG&A fell 3.8% in dollars but rose to 42.5% of revenue from 39.0%.
- For the first 39 weeks, operating cash flow was negative $14.5 million, investing cash flow was negative $11.2 million, and capital expenditures were $13.4 million. Cash declined $24.2 million from year-end 2011 to $22.1 million.
- At September 29, cash was $22.1 million, current assets $95.8 million and current liabilities $67.8 million. There were no line-of-credit borrowings; approximately $48.9 million was available, with a $1.1 million standby letter of credit outstanding. The company reported compliance with its credit covenants. No funded debt balance was reported.
- Total assets were $211.2 million and stockholders’ equity was $120.9 million at quarter-end.
Changes versus prior periods
- Q3 shifted from $0.9 million net income to a $4.3 million net loss; nine-month net loss widened from $8.1 million to $12.8 million.
- Nine-month revenue decreased 4.5%, while net retail sales decreased 4.3%. Comparable sales were down 4.0% for the nine-month period, versus down 0.9% in the prior-year period.
- Nine-month retail gross margin decreased 110 basis points. SG&A decreased 5.2% in dollars, but the company said that excluding prior-year consulting costs, SG&A as a percentage of revenue increased 80 basis points.
- Cash used in operating activities increased to $14.5 million from $13.2 million. Capital expenditures rose to $13.4 million from $9.9 million.
Outlook, commentary and risks
- No specific earnings or revenue forecast was provided. Management expected approximately $18 million of capital expenditures for fiscal 2012, primarily for store remodels, new stores and information technology.
- The company projected ending fiscal 2012 with 352 company-owned stores and approximately 90 franchised locations. It planned to close about 30–35 additional North American stores in 2013 and expected its optimal company-owned store base to be 295–320 locations within about two years.
- Management attributed the Q3 sales decline to fewer transactions and comparison with a prior-year quarter that benefited from a major theatrical-release product and associated marketing. It also cited weak UK consumer sentiment and spending. It planned to shift more marketing to Q4 and expand third-party gift-card distribution.
- Seasonality is significant: sales are typically highest in Q4, followed by Q1, and management cautioned that a single period is not indicative of full-year results.
- A UK customs audit resulted in notice of an intended assessment of approximately £1.2 million (about $2.0 million) for taxes, penalties and interest. The company intends to appeal and said it does not expect a material adverse outcome, while acknowledging an unfavorable resolution could materially affect a period.
- The carrying value of the company’s approximately 25% Ridemakerz investment was reduced to zero; the company reported no material remaining obligations under related agreements.
- From September 30 through November 6, the company repurchased about 178,500 shares for $0.6 million, leaving $8.1 million available under its repurchase program. The company identified consumer demand, mall traffic, competition, store execution, inventory and vendor dependence, foreign exchange, and liquidity as risks.
Important facts for investors to verify
- Whether holiday-quarter sales and comparable-store trends improve after the sharp Q3 decline, and whether the planned marketing initiatives generate traffic.
- Whether store closures, remodels and lease actions improve profitability without losing more sales than management anticipates.
- The outcome and potential financial impact of the UK customs assessment and the company’s tax valuation-allowance estimates.
- Cash use, capital expenditure requirements, covenant compliance and available credit as the company enters its seasonal peak.
- Whether margin recovery and the turnaround plan support management’s targeted store base and stated liquidity outlook.