Build-A-Bear Workshop, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2014. Results are unaudited; dollar amounts below are in millions unless stated otherwise. The company notes that its business is seasonal and interim results may not indicate full-year performance.
Business context
Build-A-Bear operates company-owned retail stores and a web store, international franchise operations, and commercial licensing and wholesale activities. At quarter-end it had 313 company-owned locations and 75 international franchised stores. Management’s stated priorities include improving store productivity and profitability, optimizing the store portfolio, refining marketing and product planning, and reducing costs.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $76.2 | $81.9 | $174.2 | $186.2 |
| Net retail sales | $75.4 | $80.4 | $172.2 | $183.3 |
| Income (loss) before tax | $(4.0) | $(6.1) | $1.3 | $(6.0) |
| Net income (loss) | $(4.3) | $(6.2) | $0.7 | $(6.2) |
| Diluted EPS | $(0.25) | $(0.38) | $0.04 | $(0.38) |
- Margins and costs: Retail gross margin was $29.4 million in Q2 and $71.6 million in the first half. Retail gross margin rate improved 220 basis points year over year in both periods, to 39.0% and 41.6%, respectively, mainly due to improved merchandise margin and lower distribution costs, partly offset by occupancy-cost deleverage. SG&A fell 7.7% in Q2 and 10.9% in the first half, mainly from store closures, lower payroll and operating costs, and cost reductions.
- Comparable sales: Consolidated comparable store sales declined 4.9% in Q2 and 3.4% in the first half, versus growth of 7.3% and 9.0% in the respective 2013 periods. North America declined 4.0% and 2.8%; Europe declined 8.1% and 5.5%.
- Cash flow: First-half operating cash use was $0.5 million, improved from $7.5 million used a year earlier. Investing cash use was $3.2 million versus $9.0 million; financing provided $0.4 million. Cash decreased $2.9 million during the half to $41.8 million.
- Liquidity and debt: Current assets were $106.1 million and current liabilities $70.1 million at June 28. No revolving-credit borrowings were outstanding; approximately $33.9 million was available under the $35 million facility, with a $1.1 million standby letter of credit outstanding. The company reported compliance with its financial covenants. The facility expires December 31, 2015.
- Other balance-sheet items: Total assets were $173.3 million and stockholders’ equity was $87.5 million. Inventories were $43.5 million, down from $50.2 million at fiscal year-end.
Changes, outlook and notable items
- Revenue fell 6.9% in Q2 and 6.4% in the first half. Management attributed lower retail sales to store closures and lower comparable sales; foreign currency translation and new/non-traditional locations partly offset the declines. Franchise and commercial revenue also decreased.
- Management cited adverse winter weather and lingering school-calendar effects, elimination of a gift-with-purchase promotion, and a shortfall in planned product launches. Some movie-related merchandise sold out earlier than expected. Easter timing, sales transferred to remaining stores after closures, and improved transaction metrics and conversion provided offsets.
- The company intended to close approximately 15 locations during 2014, primarily in North America. First-half capital spending was $3.2 million; full-year capital expenditure expectations were $12–$15 million, mainly for store refreshes and infrastructure. No specific earnings or revenue guidance was provided in the filing.
- Store asset impairment charges were $0.3 million in Q2 and $0.4 million in the first half of 2014, recorded in SG&A. Management also reported the business remained exposed to consumer demand, mall traffic, execution and inventory, lease, international, foreign-exchange, technology and other risks.
- The company is contesting a UK customs audit assessment. It had paid $3.2 million of disputed duty, included in receivables, pending appeal. Management believed the matter would not materially harm results, liquidity or financial position, but noted an unfavorable resolution could have a material effect in a particular period.
- After quarter-end through August 1, the company repurchased approximately 225,000 shares for $2.5 million, leaving $3.9 million available under its repurchase program. The filing reports no off-balance-sheet arrangements. A new revenue-recognition standard was issued, effective for the company beginning January 1, 2017; its impact was still under assessment.
Important facts for investors to verify
- Whether comparable-sales declines and store-traffic pressures persist, and whether improved gross margin can offset lower sales and occupancy deleverage.
- Progress and costs associated with planned store closures, portfolio optimization, and the $12–$15 million full-year capital-spending plan.
- The outcome and any further cash or financial-statement effects of the UK customs appeal and the treatment of the $3.2 million paid.
- Credit-facility availability, covenant compliance, and refinancing or renewal plans ahead of the December 2015 expiration.
- Subsequent share repurchases and remaining program capacity, including whether buybacks affect liquidity needed for operations and investment.