Business context and reporting period
Build-A-Bear Workshop, Inc. operates interactive stuffed-animal retail stores, e-commerce, commercial licensing and wholesale businesses, and international franchises. This unaudited Form 10-Q covers the 13 and 26 weeks ended August 3, 2019; the comparable periods ended August 4, 2018. The company reported 360 corporately managed stores and 95 international franchised stores at quarter-end. Results are seasonal, with sales typically highest in the fourth quarter.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $79.2 million | $83.2 million | $163.6 million | $166.4 million |
| Consolidated gross profit | $35.0 million | $35.4 million | $73.2 million | $72.4 million |
| Operating expenses (SG&A) | $35.7 million | $37.9 million | $71.5 million | $74.3 million |
| Income (loss) before taxes | $(0.7) million | $(2.5) million | $1.7 million | $(1.9) million |
| Net income (loss) | $(1.2) million | $(1.8) million | $(0.03) million | $(1.4) million |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $1.3 million | $7.7 million |
Q2 consolidated gross margin was 44.1%, versus 42.6% a year earlier; retail gross margin was 44.2%, up 160 basis points. First-half consolidated gross margin was 44.8%, versus 43.5%, and retail gross margin was 44.7%, up 130 basis points. Q2 diluted loss per share was $0.08, compared with $0.12; first-half diluted loss per share was reported as $0.00 versus $0.10.
First-half investing cash outflow was $4.9 million, primarily capital expenditures; financing cash outflow was $0.2 million. Cash declined $2.9 million to $15.0 million. At August 3, current assets were $92.6 million and current liabilities $75.1 million. The filing reports no borrowings on the credit line at quarter-end; $19.0 million was available after a $1.0 million letter of credit. A September 11 amendment provided up to $20.0 million of availability, with a December 31, 2020 maturity, LIBOR plus 3.25% borrowing cost, and financial and other covenants.
The company adopted the new lease accounting standard in February 2019. At August 3, it recorded $163.3 million of operating lease liabilities, of which $30.7 million was current, and a $137.7 million right-of-use asset. These are lease obligations, not reported borrowings. No other funded debt balance is clearly identified in the filing.
Material changes versus comparable periods
- Q2 revenue declined 4.8%; net retail sales fell 7.2% to $75.2 million. The company attributed the retail decline mainly to comparison with the prior-year Pay Your Age event and related voucher redemptions. Double-digit e-commerce growth partly offset the decline.
- First-half revenue decreased 1.7%, and net retail sales fell 3.8%. Management cited weakness in Europe, particularly the U.K., amid Brexit uncertainty and privacy-law changes that inhibited direct marketing.
- Commercial revenue rose to $3.2 million in Q2 and $5.9 million in the first half, reflecting wholesale, fixtures and outbound licensing. Franchise revenue declined to $0.8 million and $1.4 million, respectively.
- SG&A declined year over year in both periods, attributed to payroll savings and disciplined expense management. First-half operating cash flow fell from $7.7 million to $1.3 million, with higher inventory, including inventory brought in early amid anticipated tariffs, a major factor.
- Total assets rose to $299.2 million from $174.8 million a year earlier, primarily because lease assets were recognized under the new standard. Adoption also reduced opening retained earnings by $7.4 million after tax for impairment of certain right-of-use assets.
Outlook, commentary and risks
Management expects fiscal 2019 capital expenditures of $12–14 million; $4.9 million had been spent through the first half. Planned spending supports stores, remodels and IT infrastructure. Management said cash from operations and the credit line should be sufficient for near-term working-capital and other cash needs. No revenue or earnings guidance is provided in the supplied filing text.
Strategy priorities include expanding e-commerce, diversifying store locations and formats, upgrading selected stores, and growing licensing and other brand-based revenue. Management said updated Discovery-format stores were performing ahead of legacy locations; 38% of the store base had that design at quarter-end. The company closed 11 corporately managed stores in the first half and ended with 360; franchise locations ended at 95 after 16 openings and 18 closures.
Key risks include discretionary consumer demand, mall and tourist traffic, changing preferences and competition; Brexit and privacy-related marketing constraints; tariffs, foreign currency and reliance on a limited number of global suppliers; lease-renewal terms; IT disruption and data security; and seasonal and quarterly sales variability. The company said it was in compliance with credit covenants at quarter-end. A U.K. customs dispute remains: a $3.9 million gross receivable is offset by a $3.0 million reserve, leaving $0.9 million net; management believes the dispute will not have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether e-commerce growth, retail margin improvement and commercial revenue gains can offset lower store sales and weak European performance.
- Inventory levels, sell-through and tariff effects, given the year-over-year cash-flow decline and early inventory purchases.
- Availability and covenant headroom under the amended credit facility, including its restrictions on share repurchases and dividends.
- The ongoing cost and cash commitments from operating leases, and the effect of lease adoption on comparisons with prior periods.
- Progress in the U.K. market and the financial effect of the customs dispute, store closures and franchise-store churn.
- The unusually high reported effective tax rates, driven in part by valuation allowances in certain foreign loss jurisdictions and, for the first half, equity-award tax effects.