Build-A-Bear Workshop, Inc. — Q3 2019 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended November 2, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The company operates direct-to-consumer (DTC), commercial and international franchising businesses. Results are seasonal, with sales typically highest in the fourth quarter.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Total revenue | $70.4 | $68.7 | $234.0 | $235.1 |
| Net retail sales | $66.6 | $65.3 | $222.8 | $227.8 |
| Commercial revenue | $2.6 | $2.2 | $8.5 | $4.2 |
| International franchising revenue | $1.2 | $1.2 | $2.6 | $3.1 |
| Consolidated gross profit | $27.7 | $25.1 | $100.9 | $97.4 |
| SG&A expense | $35.4 | $35.1 | $106.9 | $109.3 |
| Net loss | $(5.9) | $(6.1) | $(5.9) | $(7.5) |
| Loss per diluted share | $(0.40) | $(0.42) | $(0.40) | $(0.51) |
- Q3 consolidated gross margin was 39.4%, versus 36.5%; retail gross margin was 39.5%, up 400 basis points. For the 39-week period, consolidated gross margin was 43.1%, versus 41.5%, and retail gross margin was 43.1%, up 200 basis points.
- Q3 pretax loss was $7.7 million, compared with $10.0 million. The 39-week pretax loss was $6.0 million, compared with $11.9 million. The 39-week tax benefit was $0.1 million versus $4.4 million; the 2019 effective tax rate was 2.1%, affected primarily by valuation allowances in certain foreign loss jurisdictions and tax effects of equity awards.
- For the 39 weeks, operating cash use was $1.6 million, improved from $9.0 million used in 2018. Investing cash use was $10.1 million, compared with $8.8 million; capital expenditures were $10.1 million. Financing cash use was $0.2 million, versus $5.2 million provided in 2018. Cash declined $11.7 million to $6.2 million.
Financial position, liquidity and debt
- At November 2, 2019, cash was $6.2 million, inventory $66.2 million, total current assets $88.9 million and current liabilities $81.4 million. Inventory was up from $58.4 million at February 2, 2019.
- No borrowings were outstanding under the revolving credit facility; $19.0 million was available after a $1.0 million letter of credit. The facility provides up to $20.0 million, expires December 31, 2020, and the company reported compliance with its covenants at quarter-end.
- Adoption of the new lease standard added $135.8 million of operating lease right-of-use assets and $161.9 million of lease liabilities at November 2, 2019, including $31.5 million current and $130.4 million long-term. Prior-year balance sheets were not recast, so total asset comparisons are not directly comparable. Lease adoption also reduced opening retained earnings by $7.4 million.
Changes, outlook and risks
- Q3 revenue increased 2.5% year over year, with retail sales up 2.0%; management cited strong e-commerce growth and new shop-in-shops at selected Walmart locations. Existing-store and e-commerce sales contributed $1.4 million to the Q3 retail increase, and new stores contributed $2.1 million, partly offset by closures and currency.
- For the 39 weeks, revenue declined 0.5% and retail sales declined 2.2%. Commercial revenue rose $4.3 million, while international franchising revenue fell $0.5 million. Europe was down 6.8%; management cited Brexit uncertainty and privacy-law changes that constrained direct marketing. A new Bonus Club enrollment process was producing higher opt-in rates, which management believes may help going forward.
- Management expects fiscal 2019 capital expenditures of $12–$14 million, principally for store openings and remodels and IT infrastructure. It stated that operating cash and credit availability should meet near-term working-capital and other cash requirements. The filing gives no specific revenue or earnings forecast.
- Inventory increased as the company brought product in early ahead of anticipated tariffs and to support product launches. Management cited discretionary consumer demand, mall traffic, changing preferences, international operations and trade/tariff exposure, lease commitments, supply-chain concentration, and technology and data-security issues among its risks. Results can vary materially with holiday timing and other seasonal factors.
- Unusual item: On November 27, 2019, after the reporting date, a U.K. court ruled that customs duty was due on some, but not all, products in a disputed assessment. At November 2, the related receivable was $4.2 million gross, with a $3.2 million reserve and $1.0 million net receivable. The company was evaluating an appeal and said it did not expect a material adverse impact.
Important facts for investors to verify
- Whether the holiday quarter delivers the seasonal sales and profitability needed to improve full-year results.
- Whether e-commerce and Walmart shop-in-shop growth can offset weaker existing retail sales, store closures and European headwinds.
- How inventory levels, tariff exposure and cash generation develop after the early inventory purchases.
- Available liquidity and covenant compliance under the credit agreement, particularly given the facility’s December 2020 expiration.
- The outcome and collectability of the U.K. customs receivable, including any appeal and changes to the reserve.