Build-A-Bear Workshop, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended March 31, 2012, compared with the 13 weeks ended April 2, 2011. Build-A-Bear operates company-owned retail stores, commercial/licensing activities, and international franchises. At quarter-end, it had 348 company-owned stores, 82 franchised stores, five pop-up stores, and several seasonal or event-based locations. Results are seasonal; management cautions that a single quarter is not indicative of full-year performance.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $96.4 million | $96.0 million | Up 0.4% |
| Net retail sales | $95.2 million | $94.2 million | Up 1.1% |
| Loss before tax | $(1.1) million | $(3.6) million | Loss narrowed |
| Income tax benefit | $0.1 million | $1.4 million | Lower benefit |
| Net loss | $(1.0) million | $(2.3) million | Loss narrowed |
| Loss per diluted share | $(0.06) | $(0.12) | Improved |
| Cash used in operating activities | $9.4 million | $9.6 million | Use decreased $0.2 million |
| Cash used in investing activities | $4.3 million | $2.3 million | Use increased |
Retail gross margin was $38.0 million, or 39.9% of net retail sales, versus $36.6 million, or 38.8%, a 110-basis-point improvement. Management attributed improvement to cost savings in packaging, warehousing and distribution and fixed-cost leverage, partly offset by higher product costs. Selling, general and administrative expense fell 2.9% to $40.1 million and declined to 41.6% of revenue from 43.0%. Comprehensive income was $1.5 million despite the net loss, primarily reflecting foreign currency translation adjustments.
Balance sheet and liquidity
- Cash and cash equivalents were $33.5 million at March 31, 2012, down from $46.4 million at December 31, 2011 and $45.1 million at April 2, 2011. More than half of quarter-end cash was held outside the United States.
- Total assets were $215.5 million; current assets were $99.7 million and current liabilities were $60.7 million.
- No line-of-credit borrowings were outstanding. The $40 million revolving facility had approximately $38.9 million available after a $1.1 million standby letter of credit. It expires December 31, 2013, carries interest at LIBOR plus 1.8%, and is secured by company assets and a pledge of 65% of ownership in foreign subsidiaries. The company reported compliance with financial covenants.
- Capital expenditures were $3.8 million in the quarter. Management expected fiscal 2012 capital expenditures of $20–$25 million.
Material changes and management commentary
- Consolidated comparable-store sales increased 1.2%, versus a decline of 8.5% a year earlier. North America rose 3.6%; Europe fell 10.1%. Management cited an earlier Easter and shifted school breaks, holiday gift-card redemptions, and a McDonald’s Happy Meals promotion in North America; it cited weak consumer sentiment and spending in the U.K. for Europe’s decline.
- Retail sales growth reflected new stores, improved comparable-store sales and e-commerce, partly offset by lower pop-up and other non-store sales and unfavorable foreign currency translation. Commercial revenue declined to $0.4 million from $1.1 million, mainly due to lower licensing activity.
- Management planned to open four to six company-owned stores and close 15 to 20 in fiscal 2012, as well as relocate or downsize 10 to 15 stores. It expected franchisees to open 10 to 12 stores net of closures.
- The company extended its $50 million share-repurchase program through March 31, 2013. As of May 8, 2012, it reported $8.7 million remaining under the program. No purchases were made under the publicly announced program during the quarter; reported quarter purchases were primarily shares withheld for employee tax obligations.
Risks, contingencies and unusual items
- Key stated risks include discretionary consumer demand, mall traffic, comparable-store sales, store lease terms and portfolio profitability, product sourcing and vendor concentration, product liability and recalls, competition, foreign exchange, and the performance of U.K. and Ireland stores and international franchises. The filing reported no material changes to the risk factors in the 2011 Form 10-K.
- The company recorded a $0.5 million loss from its investment in Ridemakerz. Investors exercised a previously granted put option in February 2012; the Ridemakerz investment’s book value was reduced to zero at quarter-end, while the company retained an approximately 17% ownership interest.
- The Q1 effective tax benefit rate was 10.2%, compared with 38.3% a year earlier; management attributed the reduction primarily to changes in the valuation allowance on U.S. deferred tax assets.
- Management said disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved North American comparable sales persist after the Easter and promotional effects, and whether European sales stabilize.
- Whether cost reductions and store closures, relocations and remodels deliver the expected margin and productivity improvements.
- Cash conversion and liquidity through the year, given Q1 operating cash use, planned capital spending, and the seasonal concentration of sales.
- Compliance with credit-facility covenants and the availability and terms of the revolving line as the facility approaches its December 2013 expiration.
- Progress on the planned store and franchise openings and closures, and the outcomes of the remaining share-repurchase authorization and Ridemakerz investment.