Build-A-Bear Workshop, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Thirteen weeks ended July 30, 2022; comparisons are with the thirteen weeks ended July 31, 2021. Year-to-date figures cover 26 weeks. Financial amounts below are in USD millions unless stated otherwise. The filing cautions that results are seasonal and a single period may not indicate full-year performance.
Business context and results
The company operates corporately managed retail stores and e-commerce (direct-to-consumer, or DTC), commercial wholesale and licensing, and international franchising. DTC generated 95% of Q2 revenue. At quarter-end it had 346 corporately managed stores, 65 third-party retail locations, and 62 franchised stores.
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Total revenue | $100.7 | $94.7 | $218.3 | $186.4 |
| Gross profit | $49.9 | $50.4 | $111.7 | $98.8 |
| Gross margin | 49.6% | 53.2% | 51.2% | 53.0% |
| SG&A | $42.3 | $40.9 | $85.9 | $76.2 |
| Income before tax | $7.6 | $9.5 | $25.8 | $22.7 |
| Net income | $5.8 | $6.8 | $20.0 | $17.2 |
| Diluted EPS | $0.38 | $0.42 | $1.27 | $1.08 |
| Cash from operations | Not separately stated | Not separately stated | $6.7 | $18.4 |
Financial position, cash flow and capital
- Q2 revenue rose 6.3% year over year; first-half revenue rose 17.1%. Q2 net income declined, while first-half net income increased.
- Q2 retail sales increased 5.0%; management cited stronger in-store traffic, select price increases and lower promotions, partly offset by weaker digital sales and unfavorable currency translation. Commercial revenue rose to $4.1 million from $2.9 million in Q2; franchising revenue rose to $0.7 million from $0.5 million.
- Gross margin contracted: Q2 retail gross margin rate fell 380 basis points and first-half rate fell 190 basis points. Management attributed the pressure mainly to freight and other inflationary costs, partially offset by fixed-cost leverage.
- Cash and cash equivalents were $14.4 million at July 30, down from $32.8 million at January 29, 2022. Inventory was $87.7 million, up from $71.8 million at fiscal year-end. First-half operating cash flow fell to $6.7 million, primarily reflecting accelerated inventory purchases and higher receivables, partly offset by increased sales and net income.
- First-half capital expenditures were $4.1 million; expected FY2022 capital expenditures were $10–$15 million. Cash used in financing was $21.5 million, including $19.4 million of share repurchases.
- The company reported no revolver borrowings at quarter-end and approximately $24.5 million available under its $25 million secured revolving facility, subject to the borrowing base. It reported $93.5 million of operating lease liabilities; these are lease obligations, not reported funded debt.
Outlook, commentary and risks
- Management expected FY2022 revenue and profit to exceed FY2021, but provided no numerical earnings or revenue guidance. It planned approximately 20 new locations through company-operated and third-party retail formats during the fiscal year and expected a net increase in North American locations.
- Management said inflationary pressures, particularly freight, were expected to continue through the rest of FY2022. Incremental freight expense was approximately $3.8 million in Q2. Mitigations include selected price increases, earlier inventory purchases, and expense management.
- First-half e-commerce sales were below the prior-year period but 180% above the first half of FY2019. The company planned a website update in Q3 to improve the online experience and conversion.
- Key risks include inflation and supply-chain disruption, dependence on a limited number of global suppliers, weaker discretionary spending or retail traffic, changing consumer preferences, currency movements, and execution of digital and store strategies. Results are seasonally strongest historically in Q4; quarterly results can fluctuate.
- After quarter-end, the company completed its prior $25 million repurchase program and announced a new authorization of up to $50 million through August 31, 2025. Repurchases are discretionary and expected to be funded primarily with cash on hand.
- Contingencies include a UK customs dispute: a $4.3 million gross receivable is reserved by $3.3 million, leaving $1.0 million net; the company sought permission to appeal to the UK Supreme Court. A putative TCPA class action was in preliminary settlement discussions; the company said a finalized settlement was not expected to cause significant expense. Accrued expenses included a $4.1 million legal reserve, but the filing does not clearly identify its specific matter.
Important facts for investors to verify
- Whether sales growth and the stated FY2022 outlook persist as inflation, freight costs and consumer demand evolve.
- Inventory levels, cash conversion and liquidity after the first-half cash outflow and planned capital spending and repurchases.
- How much of the gross-margin decline can be recovered through pricing and operating efficiencies without weakening demand.
- Progress and costs of the digital-site overhaul, planned store openings, and performance of non-traditional retail locations.
- Developments in the UK customs appeal, TCPA litigation, and the basis and adequacy of the recorded legal reserve.
- Actual pace and funding of the new $50 million repurchase authorization.