Build-A-Bear Workshop, Inc. — Q1 2016 Form 10-Q
Business context and period: The filing covers the 13 weeks ended April 2, 2016, compared with the 13 weeks ended April 4, 2015. The company operates company-owned stores and e-commerce, international franchises, and commercial licensing and wholesale businesses. Results are seasonal; management cautions that a quarter is not indicative of full-year performance.
Financial results and liquidity
- Revenue: $95.0 million, up 1.7% year over year. Net retail sales rose 2.6% to $94.1 million; commercial revenue declined to $0.5 million from $1.2 million, and franchise fees declined to $0.4 million from $0.6 million.
- Comparable sales: Consolidated comparable sales increased 2.2%, unchanged from the prior-year rate. North America rose 3.0%; Europe declined 1.8%. Management cited higher average transaction dollars, partly offset by fewer transactions, and strong Discovery store results. European comparisons reflected prior-year strength in licensed products, particularly Frozen.
- Profit and margins: Net income was $3.5 million versus $6.8 million; diluted EPS was $0.22 versus $0.40. Pretax income was $5.3 million versus $7.1 million. Retail gross margin increased to 48.4% from 46.8%, supported by gift-card breakage revenue, occupancy-cost leverage, and a 40-basis-point merchandise-margin improvement. SG&A rose 6.6% to $39.7 million, and store preopening expense increased to $1.2 million from $0.02 million.
- Taxes: The effective tax rate was 33.3% versus 3.3%. The prior-year rate benefited from release of a valuation allowance on domestic deferred tax assets.
- Cash flow: Operating cash use was $7.0 million versus $3.8 million; investing cash use was $4.7 million versus $2.9 million, including $6.2 million of capital expenditures. Financing cash use was $1.9 million, including $1.5 million for share repurchases. Cash declined $14.4 million during the quarter to $30.8 million.
- Balance sheet and liquidity: At April 2, cash was $30.8 million, current assets were $110.3 million, and current liabilities were $79.9 million. Stockholders’ equity was $101.1 million. The company reported no borrowings under its $35 million secured revolving credit line, with approximately $35 million available, and was in compliance with its financial covenants. More than half of cash was held outside the U.S. No funded debt balance was reported.
Material changes and management commentary
- Retail sales growth included a $1.6 million increase from a change in deferred-revenue estimates, including gift-card breakage; store closures reduced sales by $2.6 million, while comparable sales and new stores contributed $1.9 million and $1.8 million, respectively. Foreign exchange reduced sales by $1.1 million.
- Management attributed higher SG&A to marketing shifted into the first half of 2016, compensation supporting growth, new initiatives, international expansion, and the change in gift-card breakage presentation.
- The company had 321 company-owned stores and 76 international franchised stores at quarter-end. It planned approximately 10–15 net additional owned locations in 2016 and expected 45–55 stores in its Discovery format by year-end, versus 15 at quarter-end. Management reported first-quarter average sales at Discovery stores were 14% higher.
- The company expected fiscal 2016 GAAP pretax income to increase 15%–25% over fiscal 2015 and planned $25–$30 million in capital expenditures. Management said operating cash and credit availability should fund near-term needs.
- In early May 2016, the board authorized an exploration of strategic alternatives. No timetable was set, and there was no assurance of a transaction or other action. The company also amended its credit agreement in April, extending its term to December 31, 2017 and increasing permitted investments.
Risks, contingencies, and unusual items
- Key risks include discretionary consumer spending, mall traffic, comparable-sales performance, store leases and execution, competition, foreign exchange and sourcing, inventory-flow dependence on a few vendors, digital and customer-data security, and the uncertain strategic review. Quarterly results may fluctuate with seasonality, store activity, marketing timing, and weather.
- The company is disputing U.K. customs assessments and has paid $3.6 million under protest; the amount is included in receivables, with a provision recorded for management’s estimated probable loss. Management stated it believes the dispute will not materially adversely affect results, liquidity, or financial position.
- The share-repurchase authorization expired March 31, 2016. Under the program, approximately 615,000 shares were repurchased for $7.4 million in total. The filing reported no off-balance-sheet arrangements.
- Management stated disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Investor verification points
- Assess whether sales growth and North American comparables can continue, particularly given declining European comparables and lower transactions.
- Verify the sustainability of retail-margin gains and the effect of gift-card breakage, SG&A growth, and planned Discovery-store spending on full-year profitability.
- Compare actual fiscal 2016 pretax income and capital expenditures with management’s stated outlook.
- Monitor operating cash use, the cash balance, offshore cash availability, credit-line covenant compliance, and the amended facility terms.
- Track the strategic-alternatives review and the outcome and financial implications of the U.K. customs dispute.