Build-A-Bear Workshop, Inc. — Q1 2013 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2013; comparisons are to the thirteen weeks ended March 31, 2012 unless noted. The company operates company-owned retail stores, commercial licensing and wholesale activities, and international franchises. Management cautions that results are seasonal and a single quarter is not indicative of full-year performance.
Key financial results
| Metric | Q1 2013 | Prior-year period | Change / context |
|---|---|---|---|
| Total revenue | $104.3 million | $96.4 million | Up 8.2% |
| Net retail sales | $102.9 million | $95.2 million | Up 8.1% |
| Comparable store sales | +10.4% | +1.2% | North America +10.6%; Europe +9.7% |
| Retail gross margin | $42.7 million; 41.5% | $38.0 million; 39.9% | Margin improved 160 basis points |
| SG&A | $43.7 million | $40.1 million | Up 9.0%; 41.9% of revenue versus 41.6% |
| Income before taxes | $0.1 million | Loss of $1.1 million | Return to slight pretax profitability |
| Net income (loss) | $13,000 | Loss of $1.0 million | EPS was $0.00 versus $(0.06) |
| Operating cash flow | $0.2 million | Cash use of $9.4 million | Improved $9.6 million |
| Capital expenditures | $3.8 million | $3.8 million | Operating cash flow less capex was approximately negative $3.6 million |
Cash and cash equivalents were $40.8 million at March 30, 2013, down $4.3 million from year-end 2012 and up from $33.5 million a year earlier. Total assets were $169.9 million and stockholders’ equity was $82.0 million. The filing reports no line-of-credit borrowings in the quarter; it does not present a separate debt balance. The $35 million revolving facility had approximately $33.9 million available, after a $1.1 million standby letter of credit.
Changes and operating performance
- Retail sales growth was primarily attributed to an $8.9 million increase in comparable store sales, partially offset by lower sales from closed or relocated stores. Management cited brand marketing, product mix, sales transferred from closed stores, and gift-card redemptions as contributors. Gift-card issuance rose 35% in Q1 year over year.
- Retail gross-margin improvement reflected better fixed-occupancy-cost leverage and less promotional activity, which more than offset higher product costs.
- SG&A increased mainly because of $1.8 million in management-transition costs, additional marketing investment, $0.6 million in store-closing costs, and foreign-currency transaction losses. A separate $0.5 million store-asset impairment charge was recorded in SG&A.
- Income tax expense was $97,000, producing an 88.2% effective tax rate; the company attributed the rate primarily to valuation allowances recorded in prior years.
- Operating cash flow improved primarily due to increased store contribution and the timing of inventory payments. Investing cash use was $3.8 million, mainly for store fixtures and relocations/remodels and information-technology spending.
Outlook, liquidity, and risks
- Management described the business as being in a turnaround, focused on store productivity and profitability through redesigns, marketing changes, lease actions, closures, and relocations. It expects an optimal company-owned store base of 285–320 locations and anticipates 30–45 additional closures in fiscal 2013 and 2014, primarily in North America.
- The company expected fiscal 2013 capital expenditures of $20–$25 million, including approximately 25 store relocations or remodels in the new design, about four new stores, and technology investments. It expected franchisees to open 8–12 stores in fiscal 2013.
- Nine stores had the new design as of May 6, 2013; management reported average sales increases of approximately 25% at those locations and planned approximately 30 redesigned stores by year-end 2013, with a further 20–25 in 2014. As of May 6, 22 stores had closed during fiscal 2013.
- Management said operating cash generation and the credit facility should cover near-term working-capital and other cash needs. The facility expires December 31, 2014, is secured, bears interest at LIBOR plus 1.8%, and includes financial covenants and restrictions. On April 30, 2013, the company amended the facility to reduce the minimum tangible-net-worth requirement and fixed-charge-coverage ratio; it stated it was in compliance as revised.
- A U.K. customs audit remains contested. Authorities indicated an intended assessment of approximately £1.2 million (about $2 million) for taxes, penalties, and interest. The company plans to appeal and believes the outcome will not materially affect results, liquidity, or financial position, while acknowledging an unfavorable resolution could have a material effect.
- Principal disclosed risks include discretionary consumer demand, mall traffic, comparable-sales execution, store lease and closure decisions, product sourcing and vendor concentration, foreign-exchange movements, competition, and franchise management. The company also noted that its quarterly results can fluctuate with seasonality, promotions, store actions, and currency rates.
Important facts for investors to verify
- Whether the comparable-sales improvement and gift-card momentum persist after the quarter, and how much sales transfers from closed stores continue to benefit remaining locations.
- Progress and realized returns from the redesigned stores, planned remodels, and store-closure program, including associated costs and lease obligations.
- Cash generation relative to the $20–$25 million capital-spending plan, and continued compliance with the amended credit-facility covenants.
- Resolution and potential financial exposure from the U.K. customs audit and any other tax examinations.
- The effect of management-transition and turnaround expenses on ongoing profitability; Q1 net income was only $13,000 despite higher sales and margins.