Build-A-Bear Workshop, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended October 28, 2023 (13 weeks), with year-to-date results for the 39 weeks ended October 28, 2023. Comparisons are with the corresponding 2022 periods. Financial amounts below are in U.S. dollars.
Business context
The company operates corporately run stores and e-commerce, commercial wholesale and licensing activities, and international franchises. At quarter-end it had 356 corporately operated stores, 85 partner-operated retail locations, and 70 franchised stores. Direct-to-consumer represented 93% of third-quarter revenue.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Revenue | $107.6m | $104.5m | $336.8m | $322.8m |
| Gross profit | $56.6m | $54.3m | $180.2m | $166.1m |
| Gross margin | 52.7% | 51.9% | 53.5% | 51.4% |
| SG&A | $46.6m | $44.4m | $140.5m | $130.3m |
| Net income | $7.6m | $7.5m | $30.5m | $27.5m |
| Diluted EPS | $0.53 | $0.51 | $2.10 | $1.78 |
- Quarterly revenue increased 2.9% and net income increased 1.8% year over year. Year-to-date revenue rose 4.3% and net income rose 11.1%.
- Third-quarter retail sales grew 1.2%; commercial revenue increased to $6.0m from $4.1m, mainly reflecting partner-operated retail sales. Year-to-date commercial revenue was $17.7m versus $12.5m.
- Gross-margin improvement reflected lower freight costs; year-to-date results also benefited from warehouse-cost leverage. SG&A increased as a share of revenue to 43.3% from 42.5% in Q3 and to 41.7% from 40.4% year to date, driven by wage inflation, added talent, marketing, and growth investments.
- Operating cash flow was $32.7m for the 39 weeks, versus $11.2m in 2022. Capital expenditures were $11.1m versus $6.8m. Financing cash outflow was $39.1m, including $22.1m of dividends and $15.2m of share repurchases. Cash, cash equivalents and restricted cash fell $17.4m from the fiscal-year start to $24.8m.
- At October 28, cash and cash equivalents were $24.4m, plus $0.4m of restricted cash. The company had no revolving-credit borrowings; approximately $24.7m was available under its $25.0m facility after a letter of credit. No funded debt balance is reported; operating lease liabilities totaled $78.4m, including $26.0m current.
Changes, outlook and risks
- Management said consumer spending softened during the final two weeks of Q3, negatively affecting revenue, and that the softness continued into November. This is a notable near-term demand signal; the filing provides no specific revenue or earnings guidance.
- Management expected fiscal 2023 capital expenditures of approximately $16m–$18m and said operating cash flows should meet material cash requirements for at least the next 12 months. Purchase obligations totaled approximately $79.4m, with $26.0m due in the next 12 months.
- Inflation, especially store wage increases, was expected to continue affecting costs. The company cited risks from discretionary-spending weakness, changing consumer preferences, retail traffic, competition, leases, supply-chain concentration, foreign currency, technology and cybersecurity, and geopolitical and trade conditions. Results are seasonal, typically strongest in the holiday fourth quarter.
- The company paid a special dividend of $1.50 per share in April 2023 and repurchased 672,734 shares for $15.2m during the 39-week period. As of December 6, 2023, $29.2m remained under its repurchase authorization.
- A UK customs dispute relates to a $4.5m gross receivable, reserved by $3.5m, leaving $1.0m net; management said it does not expect a material adverse impact. A TCPA class-action settlement was court-approved and did not result in significant company expense.
- The company adopted the expected-credit-loss standard in fiscal 2023, recording a $0.8m reduction to opening retained earnings. Management reported effective disclosure controls. Store inventory management moved to the ERP system in phases and was completed in Q3, with minimal expected effect on controls.
Important facts for investors to verify
- Whether the consumer-spending weakness reported at quarter-end and in November persisted into the holiday quarter.
- Whether revenue growth and margin gains can continue while wage inflation and higher SG&A weigh on profitability.
- Cash generation, planned capital spending, lease and purchase obligations, and the company’s continued shareholder returns.
- Progress on store expansion, partner-operated locations, and commercial revenue growth, alongside performance in Europe.
- Developments in the UK customs dispute and the collectability of the remaining net receivable.