Build-A-Bear Workshop, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Thirteen weeks ended May 4, 2024; comparisons are with the thirteen weeks ended April 29, 2023. The company operates corporately managed retail and e-commerce businesses, commercial licensing and wholesale, and international franchising. Results are seasonal, and the company cautions that a single quarter is not indicative of full-year performance.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $114.7 million | $120.1 million | Down 4.4% |
| Gross profit | $62.2 million | $64.9 million | Down $2.7 million |
| Gross margin | 54.2% | 53.9% | Up 0.3 percentage points |
| SG&A expense | $47.6 million | $45.6 million | Up $1.9 million |
| Operating income | $14.6 million | $19.3 million | Down $4.7 million |
| Net income | $11.5 million | $14.6 million | Down 21.6% |
| Diluted EPS | $0.82 | $0.98 | Down $0.16 |
| EBITDA, non-GAAP | $18.3 million | $22.4 million | Down 18.3% |
| Cash from operations | $10.4 million | $18.8 million | Down $8.4 million |
Revenue mix: Direct-to-consumer revenue was $107.9 million, down 3.8%; commercial revenue was $6.0 million, down from $6.7 million; and international franchising revenue was $0.9 million, down from $1.3 million. DTC represented 94% of consolidated revenue.
Margins and expenses: Retail gross margin rate was 54.2%, down 40 basis points year over year. Higher freight and occupancy costs were partly offset by lower merchandise costs. SG&A rose with higher wage rates, expense timing and inflation, and increased to 41.5% of revenue from 38.0%.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $38.2 million at May 4, 2024, compared with $32.8 million a year earlier and $44.3 million at fiscal year-end.
- Current assets were $123.9 million and current liabilities were $78.7 million. Inventory was $64.0 million, down 4% from the prior-year quarter.
- The company had no revolver borrowings and approximately $24.7 million available under its $25.0 million secured revolving credit facility, after a $0.25 million letter of credit.
- Operating lease liabilities totaled $81.2 million, including $24.3 million current. Executed leases not yet commenced represented an additional $33.8 million in expected lease liabilities.
- Operating cash flow was $10.4 million; capital expenditures were $2.4 million; financing cash outflows were $14.0 million. The company attributed lower operating cash flow primarily to lower sales and increased cash spent on inventory purchases.
- The company repurchased 343,406 shares for $9.2 million and paid $2.9 million in quarterly dividends. It reported $16.9 million remaining under its repurchase authorization at quarter-end; subsequent to quarter-end, it repurchased another $3.8 million, leaving $13.2 million.
Material changes, outlook and risks
- Management said the revenue decline was greater than expected. Lower web demand was a significant contributor, alongside the 53rd-week calendar shift and timing of wholesale shipments. North American revenue declined 6.9%, partly offset by 14.1% growth in Europe. Existing-store traffic and dollars per transaction also declined slightly.
- Management said web demand weakness continued into Q2 and was expected to negatively affect sales through existing stores and the webstore. The filing does not provide quantified full-year revenue or earnings guidance.
- The company expects at least 50 net new locations in fiscal 2024 across North America and international markets through corporate, third-party and franchise models. It expects fiscal 2024 capital expenditures of approximately $18–$20 million.
- Management expects wage-related inflationary pressure to continue through the rest of fiscal 2024. It cited consumer demand, inflation, store traffic, competition, supply-chain concentration, shipping costs, foreign exchange, technology and cybersecurity, and execution of digital and store-expansion strategies as risks.
- Purchase obligations totaled approximately $82.4 million, including $24.4 million due within 12 months. Management believes operating cash flows are sufficient to meet material cash requirements for at least the next 12 months.
- The U.K. customs dispute remains unresolved. A $4.8 million gross receivable is reserved by $3.7 million, leaving a $1.1 million net receivable; management does not expect a material adverse impact.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting or to the risk factors disclosed in the prior Form 10-K.
Most important facts for investors to verify
- Whether web demand and existing-store trends stabilize after the reported weakness continued into Q2.
- Whether planned store additions and $18–$20 million of capital spending deliver expected returns while labor, occupancy and freight costs pressure margins.
- Cash generation and liquidity after repurchases, dividends, inventory needs, purchase obligations and new lease commitments.
- Progress and potential financial effects of the U.K. customs dispute and the assumptions underlying the receivable reserve.
- The terms and any actual sales under the CEO’s and CFO’s disclosed Rule 10b5-1 trading plans; the plans allow sales of up to 91,034 and 22,929 shares, respectively.