Build-A-Bear Workshop, Inc. — FY2018 Form 10-K
Reporting period: Fiscal 2018 was the 52 weeks ended February 2, 2019. Comparisons are to the 52 weeks ended December 30, 2017; the company changed its fiscal year-end and separately reported a five-week transition period. Amounts below are U.S. dollars.
Business context
Build-A-Bear operates an interactive stuffed-animal retail experience, e-commerce and commercial licensing businesses, and international franchises. At year-end it had 373 company-managed stores and 97 international franchised stores. Direct-to-consumer accounted for approximately 97% of revenue.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $336.6 million | $357.9 million |
| Net retail sales | $326.3 million | $349.4 million |
| Consolidated gross profit / margin | $138.8 million / 41.2% | $169.0 million / 47.2% |
| Retail gross margin | 42.7% | 46.9% |
| Operating expenses (SG&A) | $157.2 million | $155.1 million |
| Income (loss) before taxes | $(18.5) million | $13.8 million |
| Net income (loss) | $(17.9) million; $(1.23) per diluted share | $7.9 million; $0.50 per diluted share |
| Cash from operations | $9.7 million | $21.1 million |
Cash and cash equivalents were $17.9 million at year-end, down from $30.4 million. Capital expenditures were $11.3 million. The company had no borrowings under its $35 million revolving credit facility and reported full availability and covenant compliance at year-end. Current assets were $99.8 million and current liabilities were $56.2 million. It reported no off-balance-sheet arrangements.
Store contribution, a company-defined non-GAAP measure, was $29.9 million, or 10.4% of store-location retail sales, compared with $48.1 million, or 15.7%, in FY2017. North American store contribution margin was 14.0%; Europe and China together were negative 10.0%.
Material changes and unusual items
- Revenue declined $21.3 million (6.0%). Net retail sales fell $23.1 million, including a $19.0 million decline in existing-store and e-commerce sales and a $15.1 million impact from closures, partly offset by $14.5 million from new stores. Deferred-revenue estimate changes reduced retail sales by $4.7 million.
- Retail gross margin fell 420 basis points. Management attributed approximately 230 basis points to fixed-occupancy deleverage and 60 basis points to the new revenue standard; increased promotions, including Pay Your Age events, drove much of the remaining decline.
- Store asset impairment charges were $5.2 million, including $4.6 million in the fourth quarter; another $0.7 million of store-related impairment was recorded in SG&A. The company also recorded a $3.7 million U.K. deferred-tax-asset valuation allowance.
- Adoption of revenue-recognition standard Topic 606 reduced reported FY2018 revenue by $2.8 million and increased the reported net loss by $2.7 million versus estimates under prior accounting. Comparative FY2017 figures were not restated.
- Management cited declining traditional-mall traffic, Brexit-related uncertainty, the closure of its most productive store, Toys “R” Us inventory liquidation, fewer family-oriented film releases, and new privacy laws that constrained customer communications. The summer Pay Your Age promotion generated substantial attention and reversed the mid-year revenue trend, but involved higher promotional activity.
- Four vendors accounted for approximately 78% of inventory purchases. A U.K. customs dispute remains ongoing: the company reported a $3.9 million gross receivable, a $3.1 million reserve and a $0.8 million net receivable; management did not expect a material adverse outcome. No other pending litigation was identified as likely to materially affect financial condition or results.
Outlook, financing and risks
Management described 2019 as another transitional year and gave no specific revenue or earnings forecast in the supplied filing text. It expected to spend approximately $10–$15 million on FY2019 capital expenditures and anticipated closing up to 30 stores over the next two years, about half outside North America. Plans include diversifying locations and formats, including Walmart pilots, tourist destinations and lower-capital concourse shops. More than 60% of leases were due for renewal within three years.
The credit facility expires December 31, 2020, bears interest at LIBOR plus 1.25%, is secured by company assets and includes financial and distribution restrictions. An April 2019 amendment, after year-end, added or revised EBITDA and liquidity covenants and restricted dividends and repurchases subject to cash, debt and annual payment conditions. Management said operating cash and facility availability should meet near-term needs. Operating leases required $212.9 million of future minimum payments as of year-end; adoption of lease accounting in FY2019 was expected to recognize approximately $200 million of lease liabilities, before certain non-lease components and any final adjustments.
Key risks include discretionary consumer spending and mall traffic, lease economics and store performance, international operations and foreign exchange, Brexit, licensed-product demand, concentrated overseas sourcing and trade costs, competition, cybersecurity and privacy compliance, and the possibility of further store impairments or closure costs. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- Review the audited statements and Topic 606 disclosures to separate underlying trading trends from accounting-related revenue and earnings effects.
- Track comparable-store and e-commerce sales, promotional intensity, retail gross margin and store contribution, especially in Europe and China.
- Assess whether cash generation and the $35 million facility remain sufficient under amended covenants, including the impact of seasonal working capital.
- Evaluate execution of planned store closures and alternative formats, lease renewals, impairment exposure and the expected lease-liability recognition.
- Monitor U.K. performance and Brexit, customer-database rebuilding under privacy rules, vendor concentration and the U.K. customs receivable dispute.