Business context and reporting period
Build-A-Bear Workshop, Inc. filed this Form 10-K for fiscal 2019, the 52 weeks ended February 1, 2020, comparing it with the 52 weeks ended February 2, 2019. The company sells customizable plush products through corporately managed stores, e-commerce, commercial wholesale and licensing, and international franchising. At year-end it operated 372 corporate locations and had 92 franchised stores.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $338.5 million | $336.6 million |
| Net retail sales | $323.5 million | $326.3 million |
| Gross profit / gross margin | $153.6 million / 45.4% | $138.8 million / 41.2% |
| Income (loss) before tax | $1.6 million | $(18.5) million |
| Net income (loss) | $0.3 million | $(17.9) million |
| Diluted EPS | $0.02 | $(1.23) |
| Operating cash flow | $21.6 million | $9.6 million |
| Capital expenditures | $12.4 million | $11.3 million |
- Revenue rose 0.6%. Commercial revenue increased to $11.9 million from $6.6 million, while international franchising revenue declined to $3.2 million from $3.7 million.
- Retail gross margin expanded 270 basis points. Management attributed the improvement to merchandise margin gains and fixed-occupancy leverage; lower rent and advertising costs also supported the return to profitability.
- Cash and cash equivalents were $26.7 million at year-end. The company had no credit-facility borrowings and $19.0 million available under its $20 million line, after a $1 million letter of credit. The facility expires December 31, 2020 and includes financial covenants.
- FY2019 current assets were $98.8 million and current liabilities were $86.0 million. The balance sheet includes $150.5 million of operating lease liabilities; these reflect lease accounting and are not presented as conventional borrowings.
- Cash flow from operations increased, mainly reflecting improved earnings and lower inventory. Fiscal 2019 investing cash outflow was $12.4 million, principally for store and information-technology projects.
Material changes versus the prior year
- The company returned to a small profit from a substantial FY2018 loss; consolidated gross margin increased from 41.2% to 45.4%, and SG&A declined by $5.1 million to $152.0 million.
- Net retail sales fell 0.9%, reflecting store closures, weaker existing-store sales amid mall traffic declines, foreign exchange, and loyalty-program deferred revenue. E-commerce growth, new Walmart shop-in-shops and gift-card breakage estimates partly offset the decline.
- Commercial revenue grew 81.3%, principally from expansion of third-party retail locations. Franchised stores decreased from 97 to 92 after openings and closures.
- No material store impairment expense was recorded in FY2019, compared with $5.2 million of store asset impairment in FY2018. Total asset impairment charges were $5.9 million in FY2018.
- Adoption of ASC 842 increased reported assets and liabilities: the company recognized operating lease right-of-use assets and lease liabilities, and recorded a $7.4 million cumulative reduction to opening retained earnings. Prior-year figures were not recast.
Outlook, risks and unusual items
- The filing provides no quantified FY2020 guidance. Management had described FY2020 as another transitional year but said it was reassessing plans because of COVID-19.
- After year-end, COVID-19 led to temporary closure of all company-operated stores in the U.S., Canada, U.K., Denmark and Ireland beginning March 17, 2020. The Ohio warehouse briefly closed March 26 and reopened April 1. The filing states that the duration, sales impact and effects on store reopening were uncertain.
- Management reported that COVID-19 had adversely affected sales and earnings and expected a negative first-quarter FY2020 impact. As of April 13, 2020, the company had not borrowed on its facility and reported approximately $23.8 million of operating cash, but considered covenant noncompliance likely. It was discussing options with its lender and exploring other liquidity sources; management believed cash and planned actions were sufficient for the next 12 months, subject to assumptions about the pandemic and recovery.
- Response measures included furloughing over 90% of the workforce, 20% pay reductions for remaining employees and executives, deferring bonuses, delaying 401(k) contributions, reducing or deferring spending, and working with landlords. Further cost cuts or asset monetization could be required.
- Key risks include prolonged store closures or weaker post-reopening traffic, mall dependence, lease obligations and limited rent relief, supplier concentration (four vendors represented approximately 79% of inventory purchases), and possible store impairments or additional tax valuation allowances.
- The 2019 effective tax rate was 83.0%, principally due to valuation allowances in certain foreign jurisdictions and the tax impact of equity awards. The company recorded an additional $0.7 million valuation allowance in FY2019.
- A U.K. customs-duty dispute remains under appeal. The company reported a $4.4 million gross receivable, a $3.4 million reserve and a $1.0 million net receivable, and stated it did not expect a material adverse effect.
Important facts for investors to verify
- Monitor store reopening, consumer traffic and e-commerce trends, and assess whether FY2020 results diverge materially from the FY2019 baseline.
- Check lender discussions, covenant compliance, facility renewal or replacement, borrowing availability and reported cash after pandemic-related outflows.
- Review lease costs, landlord concessions, upcoming lease events and any store closures, impairment charges or termination costs.
- Track merchandise sourcing and inventory exposure, particularly vendor operations in China and Vietnam and the ability to fulfill demand.
- Review subsequent filings for changes in deferred-tax-asset valuation allowances and the outcome or updated reserve assessment in the U.K. customs dispute.