BUILD-A-BEAR WORKSHOP INC quarterly report, Q1 FY2019

Business Context and Reporting Period

Build-A-Bear Workshop operates company-managed stores and e-commerce, commercial licensing and wholesale businesses, and international franchises. This unaudited 10-Q covers the 13 weeks ended May 5, 2018, compared with the 13 weeks ended April 29, 2017. The company changed its fiscal year-end to the Saturday closest to January 31, creating a separate five-week transition period ended February 3, 2018; seasonal results may not indicate full-year performance.

Key Financial Metrics

At May 5, cash was $18.9 million, total current assets $88.8 million, and current liabilities $40.6 million. The company reported no borrowings on its $35 million secured revolving credit line, with approximately $35 million available and covenant compliance. The facility expires December 31, 2018. No separate total-debt figure is clearly provided in the filing. More than half of cash was held outside the United States.

Material Changes Versus Prior Period

• Revenue declined 8.8%; net retail sales fell 8.2% to $81.4 million. Management attributed the retail decline to lower existing-store and e-commerce sales, store closures, and the new revenue standard, partly offset by new stores and foreign exchange. The company also said Toys “R” Us liquidation proceedings negatively affected nearby-store sales.
• Retail gross margin fell 340 basis points to 44.3%, primarily from fixed occupancy-cost deleverage, partly offset by 30 basis points of merchandise-margin expansion. Consolidated gross margin was 44.5%, down 340 basis points.
• SG&A decreased 7.4% in dollars, mainly due to lower performance-based compensation, advertising, and store preopening costs; as a share of revenue, it increased to 43.7% from 43.0%.
• Operating cash flow decreased to $1.4 million, which management primarily attributed to timing of inventory and payroll payments. Cash and cash equivalents declined from $30.4 million at December 30, 2017 to $18.9 million.

Outlook, Risks, and Unusual Items

• Management expects fiscal 2018 capital expenditures of $15–18 million, primarily for store remodels and openings and information technology. It expects 40–45 concourse shops open by fiscal year-end and continued store-format improvements, e-commerce growth, licensing development, and international franchise expansion. The company did not provide numerical revenue or earnings guidance.
• Adoption of ASC 606 reduced first-quarter reported revenue by $0.6 million and net income by $0.4 million versus prior accounting; the company expects a $3.9 million negative impact to fiscal 2018 revenue and pretax income. Historical comparative periods were not restated.
• The company repurchased $0.7 million of shares during the quarter. Since authorization of its $20 million program, it had repurchased approximately 1.1 million shares for $10.0 million through May 5; subsequent to quarter-end through June 11, it repurchased about $0.3 million more, with approximately $9.7 million remaining.
• A disputed UK customs assessment is under appeal: the filing reports a $3.8 million gross receivable, a $3.0 million reserve, and a $0.8 million net receivable. Management believes the dispute will not materially adversely affect results, liquidity, or financial position.
• Key risks include mall traffic and discretionary consumer demand, changing preferences and competition, store leases and portfolio execution, dependence on foreign manufacturers and a limited number of vendors, currency and trade exposure, technology and data-security issues, and franchise execution. The filing reports no changes to previously disclosed risk factors.
• The company began phased implementation of a new ERP system and related control changes; management stated disclosure controls were effective at May 5, 2018. A new lease-accounting standard is expected to materially increase reported assets and liabilities, but its amount was not yet determined.

Most Important Facts to Verify

• Whether retail sales and gross margins recover after the reported comparable-sales decline and occupancy-cost deleverage.
• How much of the $18.9 million cash balance is available domestically, and whether the credit facility is renewed before its December 31, 2018 expiration.
• Actual full-year effects of ASC 606 and the forthcoming lease-accounting standard.
• Progress and returns from planned capital spending, concourse shops, store updates, and share repurchases.
• Developments in the UK customs appeal and the phased ERP implementation and associated controls.