Build-A-Bear Workshop, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
The filing covers the unaudited 13 weeks ended April 4, 2015, compared with the 13 weeks ended March 29, 2014. Build-A-Bear operates company-owned retail stores and web stores, international franchises, and commercial licensing and wholesale activities. Management cautions that the business is seasonal and that one quarter is not necessarily indicative of full-year results.
- At quarter-end, the company had 317 company-owned stores (257 in North America and 60 in Europe) and 69 international franchised stores.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $93.4 million | $97.9 million |
| Net retail sales | $91.7 million | $96.8 million |
| Income before tax | $7.1 million | $5.3 million |
| Net income | $6.8 million | $5.0 million |
| Diluted EPS | $0.40 | $0.29 |
| Retail gross margin | 46.8% | 43.5% |
| Cash used in operating activities | $3.8 million | $1.5 million |
| Capital expenditures | $2.9 million | $1.1 million |
- Revenue declined 4.6%; net retail sales fell 5.3%. Despite lower revenue, retail gross margin increased 330 basis points and net income rose about 36%.
- SG&A was $37.2 million, down 1.5% year over year, but rose to 39.9% of revenue from 38.6%. Net interest income was $51,000. The effective tax rate was 3.3%, versus 5.3%, primarily reflecting reversal of valuation allowances.
- Cash and cash equivalents were $54.7 million at April 4, 2015, versus $65.4 million at January 3, 2015. More than half of cash was held outside the United States. The quarter’s $10.7 million cash decrease included operating, investing, financing, and foreign-exchange outflows.
- Current assets were $129.7 million and current liabilities $76.9 million. No borrowings were outstanding on the $35 million secured credit line; approximately $33.9 million remained available after a $1.1 million standby letter of credit. The company reported covenant compliance.
- Share repurchases used $3.0 million in the quarter. Through May 7, the company had repurchased about 269,000 shares for $5.0 million under its 2015 program, leaving $5.0 million available.
Material changes versus the prior comparable period
- Management attributed the $4.5 million revenue decrease principally to other retail activity, including calendar timing and web sales, and $1.9 million of unfavorable foreign-currency translation. Comparable-store sales added $1.7 million, partly offset by non-comparable stores, closures, new-store effects, and a deferred-revenue estimate change.
- Consolidated comparable-store sales increased 2.0%, compared with a 2.2% decline a year earlier. Europe rose 13.3%; North America was approximately flat for the quarter, after adverse weather following Valentine’s Day and before Easter.
- Retail gross-margin improvement was attributed mainly to better merchandise margin, supply chain performance, and lower discounting, partly offset by fixed-occupancy deleverage.
- Franchise revenue decreased to $0.6 million from $0.7 million, attributed to fewer franchised stores. Commercial revenue increased to $1.2 million from $0.4 million, with management citing timing of wholesale sales and reduced licensing activity.
- Operating cash use increased year over year. Management cited higher inventory as a factor, partly offset by lower gift-card redemptions related to the calendar shift and increased store contribution.
Outlook, commentary, risks, and unusual items
- Management expects fiscal 2015 capital expenditures of $20 million to $25 million, primarily for store refreshes and repositioning and infrastructure. It expects cash from operations and credit-line borrowings to be sufficient for near-term requirements.
- Plans include selective openings in higher-potential destinations, store-base refreshes beginning in the second half of 2015, international expansion, product and marketing initiatives, and continued cost and margin improvements. The filing provides no specific revenue or earnings guidance.
- Key disclosed risks include discretionary consumer demand, mall traffic, weather and seasonality, comparable-store sales, foreign currency, product sourcing and vendor concentration, lease and store-portfolio management, competition, technology and customer-data security, and franchise and intellectual-property risks.
- The company is contesting a UK customs assessment. It had paid $3.3 million of disputed duty by April 4, 2015, recorded in receivables. Management did not expect a material adverse outcome, but stated an unfavorable resolution could materially affect results, liquidity, or financial position in a particular period.
- Foreign-currency translation produced a $1.0 million quarterly loss in other comprehensive income. The company noted no material change in market-risk disclosures and no off-balance-sheet arrangements.
- After quarter-end, the company repurchased approximately 114,000 shares for $2.0 million from April 5 through May 7. The new revenue-recognition standard was under assessment; the filing noted a proposed effective-date deferral that could move adoption to January 1, 2018.
Important facts for investors to verify
- Whether comparable-store sales and revenue trends persist, particularly given regional differences, weather effects, calendar timing, and currency translation.
- Whether gross-margin gains can continue while SG&A remains elevated as a share of revenue.
- Whether cash generation, planned $20–$25 million capital spending, and share repurchases remain consistent with liquidity needs and credit-facility covenants.
- The status and potential financial effect of the UK customs appeal and recovery of the $3.3 million paid.
- Execution and returns from planned store refreshes, selective openings, international expansion, and product and licensing initiatives.