Build-A-Bear Workshop, Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended May 2, 2020; comparative period ended May 4, 2019. Unaudited results were sharply affected by COVID-19-related store closures beginning March 18, 2020.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $46.6 million | $84.4 million |
| Gross profit | $8.1 million; 17.3% of revenue | $38.2 million; 45.4% of revenue |
| Retail gross margin | 26.9% | 45.2% |
| Operating expense (SG&A) | $26.7 million | $35.8 million |
| Net income (loss) | $(21.2) million; $(1.42) per diluted share | $1.2 million; $0.08 per diluted share |
| Operating cash flow | $(2.5) million | $5.1 million |
| Capital expenditures | $2.8 million | $2.4 million |
Cash and cash equivalents were $21.9 million at May 2, down from $26.7 million at February 1, 2020. The cash-flow statement reports $23.5 million of cash, cash equivalents and restricted cash, including $1.6 million of restricted cash. Current assets were $88.1 million and current liabilities were $87.4 million. No borrowings were outstanding under the credit facility; operating lease liabilities totaled $151.4 million ($33.0 million current and $118.4 million long-term).
Material changes versus prior year
- Revenue fell 44.7%. Net retail sales declined 43.7% to $45.6 million; management attributed the drop principally to store closures. Commercial revenue fell to $0.3 million from $2.8 million as wholesale customers’ locations closed. International franchising revenue was $0.6 million versus $0.6 million.
- Management reported a double-digit increase in consolidated e-commerce sales, with digital demand growth reaching triple-digit levels after store closures; the filing does not provide a clear dollar amount for e-commerce sales.
- Retail gross margin declined 18.3 percentage points, primarily because fixed occupancy costs continued during store closures.
- The company recorded $4.8 million of store-asset impairment charges, approximately half for lease right-of-use assets and half for fixed assets. SG&A fell $9.1 million, primarily due to lower labor costs and furloughs.
- Cash used in operations shifted to $2.5 million from $5.1 million provided in the prior-year quarter. Total assets were $276.8 million, versus $309.5 million a year earlier; stockholders’ equity was $68.5 million, down from $88.4 million.
Outlook, risks and unusual items
- COVID-19 uncertainty remained substantial. Management expected Q2 results to be negatively affected and said impacts could continue beyond Q2; it could not estimate the pandemic’s full financial effect. As of June 5, about 35 stores, approximately 11% of corporately managed North American locations, were open. The company expected most stores to reopen by the end of Q2, subject to government permissions.
- Management said cash and cost-reduction actions were expected to fund operations for at least 12 months, but warned that prolonged closures or weak consumer demand could pressure liquidity and might require additional financing or asset monetization. Potential measures included selling or monetizing the Ohio warehouse or inventory, further furloughs, and additional expense and capital-spending reductions.
- Actions included furloughing over 90% of employees, reducing compensation by 20% for employees not on leave, deferring certain bonuses and 401(k) contributions, reducing planned capital expenditures to maintenance levels, and negotiating with landlords. At quarter-end, April store rent had not been paid and landlord discussions were ongoing.
- On May 28, 2020, the credit facility was amended and reduced to $10.0 million, expiring September 30, 2020. A $1.0 million letter of credit left $9.0 million nominally available, but borrowing conditions included cash and fixed-charge-coverage tests. Management did not expect to access the facility before expiration, citing expected cash above $5 million and anticipated inability to meet the coverage test.
- A $1.5 million reduction in SG&A for expected COVID-19 government payroll reimbursements was recorded; some amounts were received after quarter-end. Income tax expense was $2.5 million despite the pretax loss, including a $3.3 million valuation allowance on deferred tax assets; no tax benefit was recorded on the current-period loss.
- Other risks include reduced mall traffic, changes to the interactive in-store experience, closed third-party retail partners, and potential further impairment or excess inventory. The company’s 80 franchise locations were mostly closed at quarter-end. A UK customs dispute remained under appeal; the recorded net receivable was $0.8 million after a $3.4 million reserve against a $4.2 million gross receivable.
Important facts for investors to verify
- Subsequent quarterly revenue, operating cash burn and cash balance as stores reopen, including whether e-commerce growth offsets lost store sales.
- Actual store reopening pace, store-level recovery and the effect of safety and social-distancing changes on customer traffic and profitability.
- Access to liquidity after the September 30, 2020 credit-facility expiration, compliance with borrowing conditions, and progress on landlord arrangements or asset monetization.
- Further impairment charges, inventory exposure, and the realizability of deferred tax assets and government reimbursements.
- Developments in the UK customs appeal and the recoverability of the related receivable.