Business context and reporting period
Build-A-Bear Workshop, Inc. filed this Form 10-K for fiscal 2022, the 52 weeks ended January 28, 2023, compared with the 52 weeks ended January 29, 2022. The company operates experiential retail stores and e-commerce, commercial wholesale/licensing, and international franchising businesses. At year-end it had 350 corporately managed stores, 70 third-party retail locations, and 68 franchised stores.
Year-over-year comparisons reflect pandemic-related closures and reduced operating hours in parts of fiscal 2021; no stores were closed due to the pandemic in fiscal 2022.
Financial performance and liquidity
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total revenue | $467.9 million | $411.5 million | +13.7% |
| Net income | $48.0 million | $47.3 million | +1.5% |
| Diluted EPS | $3.15 | $2.93 | +7.5% |
| Gross profit / gross margin | $245.9 million / 52.5% | $218.0 million / 53.0% | Margin down 0.5 percentage points |
| Pre-tax income | $61.9 million | $50.7 million | +22.1% |
| Operating cash flow | $47.3 million | $28.1 million | +$19.2 million |
| Capital expenditures | $13.6 million | $8.1 million | +$5.5 million |
Net retail sales were $446.2 million (+12.2%); commercial revenue was $18.5 million (+61.0%); international franchising revenue was $3.2 million (+38.9%). Net margin was 10.3%, versus 11.5% in fiscal 2021. Non-GAAP EBITDA was $74.4 million, up from $63.0 million.
Retail gross margin was 52.6%, down from 53.1%, mainly due to higher air and ocean freight costs. Selling, general and administrative expense rose to $183.9 million from $167.3 million, but declined as a share of revenue to 39.3% from 40.6%. Income tax expense increased to $13.9 million from $3.4 million; the prior year included a $7.8 million North American valuation allowance reversal. Fiscal 2022 effective tax rate was 22.5%, compared with 6.8% in fiscal 2021.
Cash, cash equivalents and restricted cash ended the year at $42.2 million, up from $32.8 million. The company had no borrowings under its credit facility and approximately $24.5 million available to borrow, net of a $0.5 million letter of credit. Current assets were $147.4 million and current liabilities were $101.2 million. Inventory was $70.5 million, down $1.3 million. Operating lease liabilities totaled $86.5 million, including $27.4 million current. Purchase obligations were approximately $87.5 million, with $27.5 million due within 12 months.
Financing cash outflow was $25.1 million, including $24.1 million of fiscal 2022 share repurchases. The company repurchased 1.53 million shares during the year. A $1.50-per-share special dividend was paid April 6, 2023; this is a subsequent-period event.
Material changes versus the prior comparable period
- Revenue growth was led by physical retail and commercial accounts. Existing stores contributed a $68.0 million increase; e-commerce decreased $12.1 million, store closures reduced sales by $6.6 million, and foreign currency translation reduced sales by $6.4 million.
- North American stores open throughout the year averaged $1.2 million in net retail sales per store, versus $1.0 million. Net retail sales per square foot increased to $479 from $404 in North America and to £679 from £418 in the U.K.
- Operating cash flow increased primarily because less cash was spent on inventory purchases than in fiscal 2021. Capital spending rose, particularly for information technology and new store openings.
- Five vendors accounted for 77% of merchandise purchases in both years. China supplied 58% of merchandise received in fiscal 2022 and Vietnam 34%.
Outlook, risks, contingencies and unusual items
Management reported record annual pre-tax profit and attributed performance to strategic execution, omnichannel capabilities, diversified revenue, and expense and balance-sheet discipline. Fiscal 2023 is a 53-week year. Management expected a net increase in North American locations, fewer European locations, and more total locations across markets and models by fiscal year-end. It expected inflationary pressures, particularly supply-chain costs and minimum-wage increases, to continue, while freight costs were expected to decline from fiscal 2022. Further selective price increases may be considered.
Key risks include discretionary consumer spending and inflation; freight, labor and supply-chain costs; reliance on a concentrated vendor base and Asian sourcing; retail traffic, leases and store profitability; licensing demand; execution of digital and omnichannel investment; foreign currency exposure; and cybersecurity, privacy and product-safety matters. Management said operating cash flows should meet material cash requirements for at least 12 months, but this depends on business conditions.
Gift-card breakage revenue was $5.1 million, compared with $6.5 million; management estimates breakage using historical redemption patterns. A hypothetical 1% change in the breakage rate would change fiscal 2022 breakage revenue by $1.0 million. This estimate was identified as a critical audit matter.
The U.K. customs dispute left a $4.5 million gross receivable, reserved by $3.5 million, for a $1.0 million net receivable; management did not expect a material adverse effect. A TCPA text-message class action had reached a settlement with the plaintiff and an insurer, subject to court approval, and was not expected to result in significant expense. The U.K. maintained a full valuation allowance on deferred tax assets despite three-year cumulative income, citing limited sustained profitability and economic uncertainty.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of January 28, 2023.
Important facts for investors to verify
- Whether retail demand and in-store growth can offset the reported decline in e-commerce and potential weakening in discretionary spending.
- How freight, labor and other inflationary costs affect gross margin, and whether pricing actions can offset them without reducing demand.
- Gift-card redemption and breakage assumptions, including the $5.1 million recognized and the sensitivity disclosed by the company.
- Cash requirements for the special dividend, share repurchases, capital spending, lease obligations and purchase commitments, alongside available credit and covenant terms.
- Developments in the U.K. customs receivable dispute and final approval and financial effect of the TCPA settlement.
- Execution and returns on store expansion, digital investment, and the planned fiscal 2023 location mix; note that fiscal 2023 includes an additional week.