Build-A-Bear Workshop, Inc. — Form 10-Q summary
Reporting period: Second quarter and first half of fiscal 2018, ended August 4, 2018; results are unaudited. Each period covers 13 weeks, and the first-half comparison covers 26 weeks. The company changed its fiscal year-end, so fiscal 2018 runs February 4, 2018 through February 2, 2019. Prior-period figures were recast for the calendar change but were not restated for ASC 606.
Business context and performance
Build-A-Bear operates corporately managed stores and e-commerce, commercial licensing and wholesale activities, and international franchises. At quarter-end it had 365 company-operated stores and 96 franchised stores. Direct-to-consumer generated approximately 98% of consolidated revenue.
| Metric | 13 weeks ended Aug. 4, 2018 | Year-over-year comparison | 26 weeks ended Aug. 4, 2018 | Year-over-year comparison |
|---|---|---|---|---|
| Total revenue | $83.2 million | Up 5.0% from $79.2 million | $166.4 million | Down 2.4% from $170.4 million |
| Net retail sales | $81.0 million | Up 6.1% | $162.5 million | Down 1.6% |
| Commercial revenue | $1.1 million | Down from $2.1 million | $2.1 million | Down from $4.1 million |
| International franchising revenue | $1.1 million | Up from $0.7 million | $1.8 million | Up from $1.1 million |
| Gross profit / gross margin | $35.4 million / 42.6% | Margin down from 45.0% | $72.4 million / 43.5% | Margin down from 46.5% |
| Retail gross margin | 42.5% | Down 210 basis points | 43.4% | Down 280 basis points |
| SG&A | $37.9 million | Up from $35.8 million | $74.3 million | Down from $75.0 million |
| Net income (loss) | $(1.8) million; $(0.12) per diluted share | Compared with $0.04 million income | $(1.4) million; $(0.10) per diluted share | Compared with $2.7 million income |
Cash flow, liquidity and capital
- First-half operating cash flow was $7.8 million, versus cash use of $5.3 million a year earlier. Management attributed the improvement primarily to timing of inventory and payroll payments.
- Investing activities used $7.0 million, primarily for store construction, upgrades and IT; capital expenditures were $7.1 million. Financing activities used $1.8 million, including $1.4 million for share repurchases. Cash decreased $1.1 million during the half.
- At August 4, cash was $20.4 million; current assets were $90.6 million and current liabilities were $44.2 million. The balance sheet reported no borrowings under the credit facility. The $35 million secured revolving line was fully available, and the company reported covenant compliance. The facility expires December 31, 2018.
- The company expected fiscal 2018 capital spending of $15 million to $18 million. Its $20 million repurchase authorization had approximately $9.3 million remaining at quarter-end; about $10.7 million had been spent since authorization.
Material changes, outlook and risks
- Quarterly revenue growth reflected stronger North American sales and the Count Your Candles/Pay Your Age promotions. Higher promotional activity reduced merchandise margin. For the first half, store closures, lower existing-store and e-commerce sales, and the commercial revenue decline outweighed new-store contributions and favorable currency effects.
- Management said Europe was affected by Brexit-related uncertainty and new privacy laws implemented in May 2018 that restricted direct marketing. It also cited Toys“R”Us liquidation activity as a drag on some nearby stores.
- ASC 606, adopted December 31, 2017, changed gift-card breakage recognition and had a reported negative revenue effect of $0.7 million in the quarter and $1.3 million in the first half. The company expected a $3.9 million negative impact to fiscal 2018 revenue and pretax income; comparative periods were not restated.
- Management expected 40 to 45 concourse shops by fiscal year-end and planned continued store portfolio updates, e-commerce growth, franchise expansion, and disciplined expense management. It described the company as in the late stages of a multi-year turnaround and emphasized long-term revenue growth and profitability.
- Key disclosed risks include mall traffic and discretionary consumer demand, changing preferences and competition, promotional pressure, foreign currency and international sourcing, lease economics, technology and data security, and execution of store and franchise strategies. The company noted that retail sales are seasonal and typically highest in the fourth quarter.
- A UK customs dispute remains unresolved: the company reported a $3.7 million gross receivable, a $2.9 million reserve and a $0.8 million net receivable, and said it did not expect a material adverse impact. No material change to the previously disclosed risk factors was reported.
- The company expected no significant transition-tax, GILTI or BEAT charge, while noting that its Tax Reform Act accounting remained provisional. It also expected the new lease standard, effective for it in fiscal 2019, to add significant right-of-use assets and liabilities to the balance sheet.
Important facts for investors to verify
- Whether sales growth from the birthday promotion persists and whether margins recover as promotional activity changes.
- How reported results compare after considering ASC 606’s gift-card breakage effects and the expected full-year impact.
- Whether first-half operating cash flow improvement reflects sustainable operations or primarily payment timing, and the company’s liquidity plan as the credit facility approaches expiration.
- Execution and returns from store remodels, new concourse shops, e-commerce and franchise expansion, including the disclosed European headwinds.
- Resolution and collectability of the UK customs receivable, final Tax Reform Act accounting, and the eventual balance-sheet effect of lease accounting.