Build-A-Bear Workshop, Inc. — Q3 2018 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended November 3, 2018; comparable periods ended October 28, 2017. Amounts below are in millions unless noted. The company changed its fiscal year-end to the Saturday closest to January 31; fiscal 2018 runs February 4, 2018–February 2, 2019. Results are seasonal and the company cautions that interim results may not indicate full-year performance.
Financial results
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Total revenue | $68.7 | $76.2 | $235.1 | $246.5 |
| Net retail sales | $65.3 | $74.4 | $227.8 | $239.6 |
| Consolidated gross profit | $25.1 | $32.3 | $97.4 | $111.6 |
| Gross margin | 36.5% | 42.4% | 41.5% | 45.3% |
| SG&A | $35.1 | $36.2 | $109.3 | $111.2 |
| Net income (loss) | $(6.1) | $(2.5) | $(7.5) | $0.1 |
| Diluted EPS | $(0.42) | $(0.16) | $(0.51) | $0.01 |
- Q3 retail gross margin was 35.5%, down 6.4 percentage points year over year; the 39-week rate was 41.1%, down 3.8 points. Management attributed pressure to occupancy and distribution cost deleverage, increased promotions, and certain impairment and revenue-standard effects.
- Q3 revenue fell 9.8%; net retail sales declined 12.3%. Commercial revenue increased to $2.2 million from $1.2 million, while international franchising revenue rose to $1.2 million from $0.5 million. For the 39 weeks, commercial revenue declined to $4.2 million from $5.3 million, while franchising revenue increased to $3.1 million from $1.6 million.
- Cash used in operations was $9.0 million for the 39 weeks, versus $0.2 million in the prior period. Investing cash outflow was $8.8 million versus $14.2 million; financing provided $5.1 million versus a $1.5 million outflow. Cash decreased $12.9 million to $8.6 million.
- At November 3, cash was $8.6 million, inventory $57.3 million, current assets $95.8 million and current liabilities $53.6 million. Total assets were $178.9 million and equity $103.9 million.
- Borrowings under the revolving credit line were $7.25 million; approximately $27.75 million remained available. The filing reports covenant compliance. The $35 million secured facility expires December 31, 2018 and bears interest at LIBOR plus 1.8%.
Material changes and management commentary
- Management cited the strategic de-emphasis of National Teddy Bear Day after Pay Your Age Day events, weak U.K. retail conditions, Brexit uncertainty, new privacy laws that impaired direct marketing, mall traffic weakness, and the closure of a formerly highly productive store as factors weighing on sales. Q3 consolidated e-commerce sales increased 17.8%.
- For the 39 weeks, new stores added $10.4 million to retail sales, offset by $11.5 million from store closures and a $10.2 million decline in existing-store and e-commerce sales. Toys“R”Us liquidation activity was also cited as a headwind earlier in the year.
- Management’s strategy emphasizes refreshed and flexible store formats, tourist and nontraditional locations, e-commerce and international franchise expansion, licensing and other brand-related revenue, and expense discipline. At period-end, the company operated 371 corporate stores and had 94 international franchised stores; 37% of corporate stores were in the updated Discovery design.
- No earnings or revenue forecast was provided. Fiscal 2018 capital expenditures were expected to total $14–$15 million; $8.9 million had been spent through the 39-week period. The company expected to repay line-of-credit borrowings before fiscal year-end and said operating cash and credit availability should fund near-term needs.
Accounting, risks and contingencies
- ASC 606 adoption reduced reported revenue by $0.7 million in Q3 and $2.1 million year to date; it increased the reported net loss by $0.5 million and $1.3 million, respectively. The company estimated a $3.9 million negative fiscal 2018 impact to revenue and pre-tax income from the change, with the remaining cumulative effect expected mainly in fiscal 2019 and 2020. Prior-year comparisons were not restated.
- The company recorded a $3.9 million income tax benefit in Q3 and $4.4 million year to date. Management said the 2018 effective tax rate differed from the statutory rate primarily because of the jurisdictional mix of earnings.
- New lease accounting guidance, effective for the company in fiscal 2019, is expected to materially increase balance-sheet assets and liabilities due to recognition of right-of-use assets and lease liabilities.
- A disputed U.K. customs assessment remains under appeal. The company reports a $3.8 million gross receivable, a $3.0 million reserve and a $0.8 million net receivable, and believes the matter will not materially adversely affect results, liquidity or financial position. The filing also notes ordinary-course legal and commercial contingencies.
- Key stated risks include mall traffic and discretionary consumer demand, changing preferences and competition, international operations and foreign exchange, lease and store economics, vendor and distribution disruptions, information security and privacy, and product safety and sourcing. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Q3 retail-sales decline and gross-margin compression persist through the seasonally important fourth quarter.
- How much reported performance reflects ASC 606 gift-card breakage and other timing changes versus underlying sales trends.
- Credit-facility renewal or replacement before its December 31, 2018 expiration, and the company’s liquidity and borrowing needs.
- Execution and economics of store refreshes, new formats, franchise expansion, and the planned $14–$15 million capital program.
- Developments in U.K. trading, privacy-related marketing constraints, and the customs receivable dispute.