Business context and reporting period
Build-A-Bear Workshop, Inc. filed this unaudited Form 10-Q for the 13 weeks ended April 29, 2023, compared with the 13 weeks ended April 30, 2022. The company operates direct-to-consumer (DTC), commercial and international franchising businesses. Results are seasonal and the company cautions that a single quarter is not indicative of full-year results.
At quarter-end, the company had 349 corporately operated stores, 70 third-party retail locations and 63 international franchised stores. DTC generated 93% of consolidated revenue.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Total revenue | $120.1 million | $117.7 million |
| Gross profit | $64.9 million; 54.1% margin | $61.8 million; 52.5% margin |
| SG&A | $45.6 million; 38.0% of revenue | $43.6 million; 37.1% of revenue |
| Income before tax | $19.4 million | $18.2 million |
| Net income | $14.6 million | $14.2 million |
| Diluted EPS | $0.98 | $0.89 |
| Operating cash flow | $18.8 million | $4.5 million |
| Capital expenditures | $3.1 million | $1.1 million |
Retail gross margin was 54.6%, up 210 basis points, primarily due to lower freight costs and distribution-cost leverage. EBITDA, a non-GAAP measure, was $22.4 million versus $21.5 million.
Cash and cash equivalents were $32.8 million at April 29, 2023, down from $42.2 million at January 28, 2023. Inventory was $66.5 million, down from $70.5 million at fiscal year-end. The company had no revolver borrowings and approximately $24.5 million available under its $25 million borrowing-base facility, net of a $0.5 million letter of credit. No other financial debt balance is reported in the provided filing text. Operating lease liabilities totaled $86.9 million, including $27.8 million current.
Operating cash flow benefited mainly from lower cash spending on inventory purchases and timing of orders. Financing cash outflow included a $22.1 million special dividend and $3.1 million of share repurchases. Cash declined by $9.4 million overall during the quarter.
Material changes versus prior comparable period
- Total revenue increased 2.0%. DTC/net retail sales declined 0.7% to $112.1 million; commercial revenue rose to $6.7 million from $4.3 million, and international franchising revenue rose to $1.3 million from $0.5 million.
- North American revenue increased 3.6%, while European revenue declined 9.6%; management cited weaker digital demand and unfavorable currency translation, partly offset by stronger North American store traffic and growth in commercial and franchising sales.
- Gross profit increased $3.1 million, while SG&A rose $2.0 million, reflecting investment in talent and marketing and higher store labor costs.
- Effective tax rate increased to 24.5% from 22.0%, primarily reflecting state income tax expense; the prior-year rate also benefited from the tax impact of equity awards vesting.
- Operating cash flow increased to $18.8 million from $4.5 million, though management attributed much of the improvement to inventory purchasing timing.
Outlook, commentary and risks
The filing gives no specific full-year revenue or earnings guidance. Management expects fiscal 2023 capital expenditures of approximately $15 million to $20 million and believes operating cash flows will meet material cash requirements for at least the next 12 months. Purchase obligations totaled approximately $87.9 million, with $27.9 million due within 12 months.
Management expects inflationary pressure, particularly supply-chain costs and minimum-wage increases, to continue through fiscal 2023, while freight costs are expected to decline versus the prior year. It plans disciplined expense management, continued investment in digital capabilities and brand expansion, and additional store locations across business models; it expects fewer European locations than at fiscal 2022 year-end. After quarter-end, the company repurchased an additional $7.0 million of shares; as of June 7, $36.4 million remained available under the $50 million repurchase program.
Key risks cited include weaker discretionary spending from inflation and higher interest rates, changing consumer demand, retail traffic and seasonality, supply-chain concentration and cost volatility, lease renewals, technology and cybersecurity, and execution of digital and store-expansion strategies. The company reported no material change to its previously disclosed risk factors.
Contingencies include a UK customs dispute: a $4.6 million gross receivable was reserved by $3.5 million, leaving $1.1 million net. The company says it does not expect a material adverse impact. A TCPA marketing-text class action settlement, subject to final court approval, is not expected to result in significant company expense. The company adopted the expected-credit-loss standard in Q1 and recorded a $0.8 million reduction to opening retained earnings.
Important facts for investors to verify
- Whether the quarter’s revenue and earnings trends persist, particularly DTC digital sales, North American store traffic and European performance.
- How much operating cash flow reflects sustainable performance versus the disclosed timing of inventory purchases.
- Actual fiscal 2023 capital spending, store expansion and closure plans, and progress on the e-commerce and inventory-system initiatives.
- Effects of inflation, wage and supply-chain costs on margins, and the outcome of the UK customs matter and TCPA settlement approval.
- Future capital returns and liquidity, including share repurchases, lease commitments and the company’s ability to meet purchase obligations.