Build-A-Bear Workshop, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended January 2, 2016 (52 weeks), compared with fiscal 2014 ended January 3, 2015 (53 weeks). The fiscal 2015 fourth quarter contained 13 weeks; the prior-year fourth quarter contained 14 weeks. Unless stated otherwise, amounts are USD.
Business context
Build-A-Bear operates an interactive stuffed-animal retail business through company-owned stores and e-commerce, with international franchising and commercial wholesale/licensing activities. At year-end it had 329 company-owned stores and 77 franchised stores. DTC generated $372.7 million of the $377.7 million in total revenue.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $377.7 million | $392.4 million |
| Net retail sales | $372.7 million | $387.7 million |
| Income before tax | $17.9 million | $16.0 million |
| Net income | $27.3 million | $14.4 million |
| Diluted EPS | $1.59 | $0.81 |
| Retail gross margin | $175.6 million; 47.1% | $176.8 million; 45.6% |
| Cash from operating activities | $32.0 million | $34.9 million |
| Capital expenditures | $24.4 million | $10.9 million |
- Total revenue declined 3.7%; net retail sales declined $15.0 million. The filing attributes the decrease principally to the 53rd-week calendar comparison, store closures and unfavorable foreign-currency translation, partly offset by comparable-sales growth and new or remodeled stores.
- Comparable sales rose 1.0% (2014: 1.7%): North America was flat, Europe increased 4.8%, and e-commerce increased 11.8%. Store contribution margin improved to 18.2% from 16.3%.
- Income before tax increased 11.7%. Net income rose more sharply primarily because the company released its remaining U.S. deferred-tax valuation allowance, recording a $9.4 million income-tax benefit for the year. The filing reports a negative 52.8% effective tax rate.
- Fourth-quarter revenue was $117.7 million and net income was $20.1 million, versus $131.5 million and $11.8 million, respectively, in the prior-year quarter. The periods differ in length; fiscal 2015 Q4 also included a $10.2 million tax benefit.
- Cash and cash equivalents were $45.2 million, down from $65.4 million; working capital was $28.9 million, down from $45.3 million. Total assets were $213.3 million and stockholders’ equity was $99.4 million.
- No borrowings were outstanding under the $35 million revolving credit facility, and the company reported covenant compliance and full availability at year-end. The facility expires December 31, 2016. The filing does not report funded debt at year-end.
- Financing activities used $26.4 million, including $25.9 million of share repurchases. Operating cash flow remained positive but declined, which management attributed mainly to inventory-receipt and payment timing and increased receivables.
Material changes and outlook
- FY2015 was the third consecutive year of comparable-sales growth and improved profitability, following the company’s turnaround plan begun in 2013. Retail gross margin expanded 150 basis points, while SG&A declined in dollars but increased as a percentage of revenue to 42.7% from 41.9%.
- The company introduced its Discovery store format, opening 11 such stores in 2015; management reported double-digit sales growth versus heritage stores since launch. It also added outlet, shop-in-shop and seasonal pop-up formats.
- For 2016, management expected pretax profit to increase 15%–25% over fiscal 2015, planned approximately $25–$30 million of capital expenditures, and expected about 10 net additional owned stores. It targeted 45–55 Discovery stores by year-end. These are forward-looking expectations, not guarantees.
- Management cited new product properties, licensing, wholesale, e-commerce and real-estate diversification as growth initiatives. It also noted challenging North American retail conditions and lower store transactions, partly offset by stronger dollars and units per transaction.
Risks, contingencies and unusual items
- Revenue and profitability are exposed to discretionary consumer spending, mall traffic, changing product preferences, competition, store productivity and the execution of the turnaround and expansion strategy.
- Four vendors accounted for approximately 85% of inventory purchases in 2015; the company has no manufacturing facilities and supplier arrangements generally lack long-term supply or pricing commitments. Foreign sourcing, currency movements, product safety and distribution disruptions are additional risks.
- The business carries substantial operating-lease commitments: $202.1 million of minimum payments, including $39.0 million due in fiscal 2016. Store leases, mall dependence and the ability to renew or exit leases may affect costs and profitability.
- The company paid $3.8 million under protest in a dispute with UK customs and recorded its best estimate of probable loss as a provision against the receivable in Q4; the amount of the provision is not clearly stated in the filing text. Management said it continued to dispute the assessment and did not expect a material adverse impact.
- FY2015 included $0.5 million of newly recognized gift-card breakage revenue. The tax-allowance release materially benefited reported net income. These items should be separated from underlying operating trends when assessing results.
- The company reported no material pending litigation believed likely to adversely affect its financial condition or results, and no off-balance-sheet arrangements. Management and the auditor concluded internal controls over financial reporting were effective.
Important facts for investors to verify
- Whether the 2016 pretax-profit target and planned capital spending/store expansion were achieved, and how much performance depended on tax benefits versus operating improvement.
- Comparable-sales trends by geography and channel, particularly North America, and whether Discovery stores sustain their reported sales productivity.
- Cash conversion, working-capital movements, inventory levels, and the impact of ongoing share repurchases on cash and liquidity.
- Renewal or replacement of the revolving credit facility before its December 31, 2016 expiration, along with covenant headroom and restrictions.
- The outcome and final financial impact of the UK customs dispute, and the continued realizability of deferred tax assets.
- Exposure to leases, concentrated suppliers, currency changes, franchisee performance and product-safety or cybersecurity events.