Build-A-Bear Workshop, Inc. — Form 10-Q Summary
Reporting period: 13 and 39 weeks ended September 28, 2013; comparisons are to the periods ended September 29, 2012. Unaudited consolidated statements. The company operates company-owned retail stores and web sales, commercial licensing/wholesale activities, and international franchises. Retail sales are seasonal, typically strongest in the fourth quarter and then the first quarter.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Total revenue | $84.8 million | $86.0 million | $271.0 million | $262.8 million |
| Net retail sales | $83.6 million | $84.3 million | $266.9 million | $258.5 million |
| Loss before income taxes | $(1.1) million | $(4.5) million | $(7.1) million | $(13.9) million |
| Net loss | $(1.4) million | $(4.3) million | $(7.6) million | $(12.8) million |
| Basic and diluted loss per share | $(0.08) | $(0.26) | $(0.46) | $(0.79) |
- Margins and costs: Retail gross margin was 40.1% of net retail sales in Q3, up 360 basis points, and 39.6% year to date, up 230 basis points. Management attributed improvement to lower promotions and better fixed-occupancy cost leverage. SG&A was $35.8 million in Q3 and $116.5 million year to date; it included $0.4 million and $2.7 million, respectively, in management-transition costs, plus store-closing costs of $0.2 million and $1.1 million.
- Cash flow: Cash used in operations was $16.8 million for the 39 weeks, versus $14.5 million a year earlier, primarily reflecting the timing of inventory receipts and payments. Investing used $14.7 million, mainly for stores and information technology; financing provided $0.7 million, principally from employee option exercises.
- Liquidity and debt: Cash was $13.8 million at September 28, 2013, down from $45.2 million at December 29, 2012. Current assets were $95.9 million and current liabilities $70.7 million. No revolver borrowings were outstanding; approximately $33.9 million was available after a $1.1 million standby letter of credit. The $35 million secured facility expires December 31, 2014; the company reported compliance with its financial covenants.
- Balance sheet: Total assets were $169.0 million, versus $192.1 million at year-end 2012. Stockholders’ equity was $77.8 million, versus $83.1 million. Goodwill was zero, compared with $33.9 million at September 29, 2012.
Material changes and operating developments
- Q3 total revenue declined 1.3%, while year-to-date revenue increased 3.1%. Net retail sales fell 0.8% in Q3 but rose 3.3% year to date. Store closures reduced sales by $6.1 million in Q3 and $13.6 million year to date; comparable-store growth partly offset the reduction.
- Comparable-store sales increased 6.4% in Q3 and 8.2% year to date, versus declines of 11.1% and 4.0% in the prior-year periods. Q3 gains were 7.6% in North America and 2.3% in Europe. Management cited marketing, product mix, fewer promotions, gift-card redemptions, closures and remodels.
- Q3 commercial revenue declined to $0.5 million from $0.9 million, primarily due to lower licensing activity. Franchise fees were $0.8 million in both Q3 periods. Year-to-date commercial revenue was $1.7 million versus $2.0 million; franchise fees were $2.4 million versus $2.3 million.
- The company was in a turnaround focused on store productivity: it had 320 company-owned stores at September 28, including 260 in North America and 60 in the U.K. and Ireland, and 85 international franchised stores. It reported 36 company-store closures through November 5, 2013.
Outlook, risks and unusual items
- Management expected approximately 310 company-owned stores at the end of fiscal 2014—250 in North America and 60 in the U.K. and Ireland—with 10 to 25 additional closures through 2014 and limited opportunistic openings. It expected about 87 franchised locations at fiscal 2013 year-end. The company planned approximately $20 million of fiscal 2013 capital expenditures; $14.7 million had been spent through the first 39 weeks.
- Management said cash from operations and available credit were expected to fund near-term working-capital and other cash needs. It cited store redesign, selective closures and remodels, marketing, and franchise growth as priorities. Sales at remodeled stores and the new store design were reported to have increased by about 20% on average.
- Risks highlighted include discretionary consumer demand, mall traffic, store productivity and lease terms, competition, product and inventory availability, international manufacturing and currency exposure, franchise execution, data privacy, and the seasonal volatility of quarterly results. Management reported no material change to the risk factors in its 2012 Form 10-K.
- A U.K. customs audit remained under appeal. The company had paid $2.7 million of disputed duty, recorded in receivables, and management did not expect a material adverse outcome, while acknowledging an unfavorable resolution could materially affect a period.
- Store-asset impairment charges were $0.6 million year to date, with none in Q3; the comparable 2012 charges were $0.3 million year to date and $0.1 million in Q3. The company also reported $2.7 million of year-to-date management-transition costs. After quarter-end through November 5, it repurchased about 28,000 shares for $0.2 million; approximately $7.1 million remained under the program.
Important facts for investors to verify
- Whether comparable-store growth and improved retail gross margin persist after accounting for closures, remodels, promotions and gift-card redemptions.
- Whether seasonal holiday trading generates sufficient operating cash to rebuild the sharply reduced cash balance and support planned capital spending.
- Progress against store-closure and productivity plans, including the economics of remodels and the stated fiscal 2014 store-count target.
- Availability under the credit facility, covenant compliance and the December 2014 facility expiration, particularly if cash use remains elevated.
- Resolution and potential exposure from the U.K. customs appeal, and the timing and remaining authorization for share repurchases.