Business context and reporting period
Build-A-Bear Workshop, Inc. operates interactive stuffed-animal retail stores, web stores, international franchises and commercial licensing/wholesale activities. This unaudited Form 10-Q covers the 13 and 39 weeks ended October 3, 2015; the comparable periods ended September 27, 2014. The company reported 317 company-owned stores and 67 traditional international franchised stores at quarter-end. Results are seasonal, with sales typically highest in the fourth quarter.
Financial performance
Dollars are in millions except per-share amounts.
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Total revenue | $85.6 | $86.7 | $260.0 | $260.9 |
| Income before tax | $1.4 | $2.1 | $8.0 | $3.4 |
| Net income | $1.1 | $1.8 | $7.3 | $2.5 |
| Diluted EPS | $0.06 | $0.10 | $0.42 | $0.14 |
| Retail gross margin | 45.3% | 43.7% | 45.3% | 42.3% |
- Q3 net retail sales declined 1.5% to $84.3 million. Consolidated comparable-store sales rose 2.1% (North America 0.2%; Europe 8.9%). Total revenue fell about 1.2%, while net income fell about 41% year over year.
- For the 39-week period, net retail sales declined 0.6%; comparable-store sales increased 4.0% (North America 1.9%; Europe 13.1%). Revenue was down about 0.3%, but net income increased to $7.3 million from $2.5 million.
- Q3 retail gross margin improved by 160 basis points, attributed to merchandise margin, distribution costs and fixed-occupancy leverage. Year-to-date retail gross margin improved by 300 basis points.
- SG&A increased 3.9% in Q3 to $37.6 million and 2.5% year to date to $110.8 million. As a share of revenue, SG&A rose to 44.0% from 41.8% for Q3 and to 42.6% from 41.4% year to date. Management cited strategic investment spending; reported SG&A also included management transition costs and currency loss.
- Effective tax rates were 22.0% for Q3 and 9.0% year to date; substantially all domestic deferred tax assets remained subject to a valuation allowance.
Cash flow, liquidity and capital
- Year-to-date operating cash flow was negative $2.7 million, versus positive $4.4 million a year earlier. Management attributed the deterioration primarily to timing of inventory receipts and payments, partly offset by improved store contribution.
- Investing cash outflow was $13.6 million, including $12.9 million of capital expenditures; financing cash outflow was $11.6 million, including $11.1 million of share repurchases. Cash declined $28.2 million from the fiscal-year start to $37.1 million.
- At October 3, cash was $37.1 million, current assets were $119.1 million and current liabilities were $74.8 million. More than half of cash was held outside the United States. The company reported no borrowings and $35.0 million available under its secured revolving credit line, and said it was in compliance with covenants. The line expires December 31, 2016; borrowings bear interest at LIBOR plus 1.8%.
- No long-term debt balance is listed on the balance sheet. The company said operating cash and its credit agreement should fund near-term requirements.
Changes, outlook and risks
- Q3 revenue was pressured by foreign currency translation and store closures, partly offset by comparable-store growth and new stores. Year-to-date, comparable-store growth was offset by currency, closures and declines in other retail, including e-commerce and calendar effects.
- Management’s stated priorities include selective store openings and remodels, product development and marketing across customer segments, expansion of licensing and commercial activity, and cost and margin improvement. Initiatives included a new store design, outlet locations, planned Macy’s shop-in-shops for the holiday season, and a toy-line agreement with Spin Master expected to launch in fall 2016. No specific earnings or revenue guidance was provided.
- Fiscal 2015 capital expenditures were expected to total $20–$25 million; $12.9 million had been spent through the 39-week period.
- Under 2015 repurchase programs, the company had repurchased approximately $12.2 million through October 3. From October 4 through November 10 it repurchased about 485,000 additional shares for $7.4 million. As of November 10, cumulative repurchases under the programs were about $19.6 million, with $1.5 million remaining.
- Management highlighted risks including discretionary consumer spending, mall traffic, comparable-store sales, foreign currency and international sourcing, inventory-flow dependence on a few vendors, store leases, competition, and seasonality. A UK customs audit remained under appeal; $3.6 million of disputed duty had been paid and was recorded in receivables. Management did not expect a material adverse outcome, but noted an unfavorable resolution could materially affect a period.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting. Management reported no material change to the risk factors previously disclosed in the annual report.
Important facts for investors to verify
- Whether margin gains and comparable-store growth persist, particularly given weaker total retail sales and higher SG&A as a percentage of revenue.
- Whether seasonal holiday trading generates sufficient operating cash to offset year-to-date negative operating cash flow and continued investment and repurchases.
- The status and potential financial exposure of the UK customs appeal, including recoverability of the $3.6 million paid.
- Remaining credit-line availability, covenant compliance and the terms or limits affecting further share repurchases.
- Execution and costs of store remodels, new locations, Macy’s shop-in-shops and the planned Spin Master product launch.