Build-A-Bear Workshop, Inc. — Q2 2020 Form 10-Q
Reporting period: 13 weeks ended August 1, 2020; year-to-date figures cover 26 weeks. Comparisons are to the corresponding 2019 periods. Amounts are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and operating conditions
Build-A-Bear operates company-managed stores and e-commerce (direct-to-consumer), commercial licensing and wholesale, and international franchising. COVID-19 materially disrupted the quarter: the company reported 60% fewer operating days, and about 90% of company-managed stores were reopened by quarter-end. E-commerce remained operational and recorded triple-digit growth versus the comparable 2019 period, though the filing does not provide a clear dollar amount for that growth.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $40.4m | $79.2m | $87.0m | $163.6m |
| Gross profit | $7.5m | $35.0m | $15.6m | $73.2m |
| Gross margin | 18.7% | 44.2% | 17.9% | 44.8% |
| Net loss | $(13.9)m | $(1.2)m | $(35.1)m | $(0.03)m |
| Diluted loss per share | $(0.93) | $(0.08) | $(2.35) | $(0.00) |
| Operating cash flow | — | $1.9m | $1.3m |
- Q2 revenue declined 49.1%; first-half revenue declined 46.8%. Retail sales were down 47.7% in Q2 and 45.6% year to date. Commercial and franchise revenue also fell.
- Retail gross margin fell to 23.1% in Q2 from 44.1% a year earlier, and to 25.2% from 44.7% for the first half. Lower store sales left fixed occupancy and distribution costs under-absorbed.
- SG&A was $21.5m in Q2, down $14.2m year over year, and $48.2m for the first half, down $23.3m. Savings reflected furloughs, lower labor costs and compensation, position eliminations, and reduced marketing. SG&A also included COVID-related government payroll reimbursements of about $1.5m in Q2 and $3.0m in the first half.
- Cash and cash equivalents were $25.3m at August 1, versus $26.7m at February 1. Cash flow reporting shows $26.9m including $1.7m of restricted cash. First-half investing outflow was $3.4m, mainly capital expenditure; financing outflow was $0.1m.
- Current assets were $92.5m and current liabilities $99.7m at August 1. The company had no borrowings under its credit facility at that date. Operating lease liabilities totaled $151.6m, including $39.9m current and $111.6m long-term; these are lease obligations, not reported bank borrowings.
Material changes, outlook and risks
- The company recorded $2.1m of store asset impairment in Q2 and $6.9m in the first half, primarily due to lower projected revenue and store closures. The first-half charge included $3.6m against right-of-use lease assets and $3.3m against fixed assets.
- It renegotiated approximately 95% of its store leases, securing a mix of rent reductions, deferrals and abatements; one-third of the North American store fleet had variable-rent structures after negotiations. Further landlord concessions were expected to be recognized in Q3.
- On August 25, 2020, after the reporting date, the company entered a PNC senior secured revolving facility of up to $25m, subject to a borrowing base, with a possible lender-approved increase of up to an additional $25m. Slightly more than $10m was available at closing, and no amount was borrowed. The facility has a minimum availability covenant and matures August 25, 2025. The prior U.S. Bank facility was terminated.
- Management said cash, access to the new facility and cost-preservation actions were expected to fund operations for at least 12 months, but warned that COVID-19 would adversely affect Q3 results and possibly later periods. The full impact remained uncertain; management did not provide quantitative earnings or revenue guidance.
- Key uncertainties include further store closures or restrictions, consumer spending and holiday demand, changes to the in-store experience, mall traffic, licensed products tied to delayed film releases, and potential impairment, excess inventory or bad-debt exposure. The business is seasonal, with a significant portion of revenue and net income historically generated in Q4.
- A U.K. customs duty dispute remained under appeal. The company reported a $4.4m gross receivable, a $3.6m reserve and a $0.8m net receivable; it did not expect a material adverse impact.
Important facts for investors to verify
- Whether store reopenings, traffic and e-commerce demand sustain recovery, and how much digital growth offsets weaker store sales.
- Cash and borrowing-base availability under the PNC facility, covenant headroom, and the effect of rent concessions and deferred payments on future cash needs.
- Whether additional store impairments, lease negotiations, closures or restructuring costs arise as the pandemic and consumer demand evolve.
- The pace of margin recovery and holiday-season performance, given the sharp gross-margin decline and the absence of quantitative guidance.
- Progress and potential recoverability of the U.K. customs receivable following the appeal.