Business context and reporting period
Build-A-Bear Workshop, Inc. filed this unaudited Form 10-Q for the 13 and 26 weeks ended July 1, 2017; comparatives are the periods ended July 2, 2016. The retailer operates company-owned stores, e-commerce, commercial licensing and wholesale activities, and international franchises. At quarter-end it had 353 company-owned stores and 88 franchised stores. Results are seasonal, with sales typically highest in the fourth quarter.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $77.2 | $75.1 | $167.9 | $170.1 |
| Net retail sales | $74.4 | $73.9 | $163.0 | $168.0 |
| Commercial revenue | $2.1 | $0.8 | $3.7 | $1.3 |
| Pre-tax income (loss) | $(2.6) | $(6.2) | $2.0 | $(1.0) |
| Net income (loss) | $(1.5) | $(4.3) | $1.2 | $(0.8) |
| Diluted EPS | $(0.10) | $(0.28) | $0.08 | $(0.05) |
- Q2 revenue rose 2.8%, while first-half revenue fell 1.3%. First-half retail sales declined 3.0%; higher commercial revenue and franchise fees partly offset the decrease.
- Retail gross margin was 43.7% in Q2, up 1.5 percentage points year over year, mainly on merchandise margin improvement. First-half retail gross margin was 45.5%, down 0.1 percentage point, as merchandise margin gains were offset by fixed-occupancy-cost deleverage.
- SG&A was $35.8 million in Q2 and $73.5 million in the first half, down 3.3% and 4.2%, respectively. As a share of revenue, it declined to 46.4% in Q2 and 43.8% for the first half. Management cited currency gains, lower corporate overhead, and marketing-cost timing; higher store expenses partly offset savings.
- Operating cash flow was negative $11.1 million in the first half, versus negative $22.2 million a year earlier. Investing cash flow was negative $8.0 million, including $8.0 million of capital expenditures. Cash declined $19.9 million from year-end 2016 to $12.6 million; over half was held outside the United States.
- At July 1, cash was $12.6 million, current assets were $92.8 million and current liabilities were $59.7 million. The company reported no borrowings under its $35 million secured revolving credit facility and approximately $35 million available; it was in compliance with its covenants. The facility expires December 31, 2018. The filing does not state a separate total-debt figure.
- Management expected operating cash generation and the credit facility to fund near-term working-capital and other cash requirements. Fiscal 2017 capital spending was expected to total $20–$24 million; $8.0 million had been spent through the first half.
Material changes and management commentary
- Consolidated comparable sales fell 0.9% in Q2, improving from an 8.6% decline a year earlier; first-half comparable sales declined 5.0%, versus a 2.8% decline. Q2 e-commerce comparable sales grew 13.3%, while store comparable sales declined 1.4%.
- Management attributed weak comparable sales primarily to lower store traffic, partly offset by improved conversion, units per transaction and average transaction value. The first-half comparison was also affected by the timing of Valentine’s Day; UK terrorist attacks weighed on Europe’s Q2 trend. Management said marketing changes had begun to support comparable sales from late February.
- The company’s 2017 priorities were channel evolution, product expansion, brand and experience amplification, and profitability improvement. It planned to remodel approximately 20 stores and have 20–25 new stores, including concourse shops, open by year-end. It had remodeled 19 locations and opened 17 new stores through the filing period, and expected to upgrade its e-commerce platform before the holiday season. Franchisees were expected to open approximately 10 stores in 2017.
- The Board’s strategic-alternatives review, announced in 2016, remained underway with no timetable; the company gave no assurance that it would result in an announced or completed transaction.
Risks, contingencies and unusual items
- Key disclosed risks include discretionary consumer demand, mall traffic, comparable-sales performance, store-lease terms, international sourcing and currency exposure, dependence on a limited number of vendors, technology and data security, product safety, competition, and execution of the strategic plan. Management cautioned that quarterly results can fluctuate and that seasonality limits the usefulness of interim results as a full-year indicator.
- The UK customs dispute concerned a $3.3 million gross receivable for disputed duties paid under protest. A $2.6 million reserve left a net receivable of $0.7 million. The company continued to contest the assessment and said it did not expect a material adverse impact.
- The company adopted stock-compensation and intra-entity-transfer tax accounting standards in 2017; the filing reports net retained-earnings and other balance-sheet effects from adoption. It expected to adopt the new revenue-recognition standard in fiscal 2018 using the modified retrospective method, with gift cards and its loyalty program expected to be among the most significant areas of impact. The lease-accounting standard was still under assessment.
- Management reported effective disclosure controls as of July 1, 2017 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether store traffic and comparable sales stabilize, and whether e-commerce growth and marketing changes can offset store weakness.
- Whether planned store openings, remodels, concourse shops and the e-commerce platform upgrade deliver the expected sales and profitability benefits within the stated capital-spending range.
- How seasonal working-capital needs affect cash, inventory and revolver usage after the first-half cash decline.
- The eventual outcome of the UK customs dispute, the Board’s strategic-alternatives review, and the estimated effects of upcoming revenue- and lease-accounting changes.