Business context and reporting period
Build-A-Bear Workshop, Inc. operates interactive stuffed-animal retail stores, e-commerce sites, international franchises and commercial licensing activities. This 10-K covers fiscal 2014, ended January 3, 2015; the year had 53 weeks, including a 14-week fourth quarter, compared with 52 weeks in fiscal 2013. The extra week affects period comparability.
At year-end, the company operated 324 company-owned stores and had 71 international franchised stores. Fiscal 2014 results reflect the company’s multi-year turnaround, with plans to shift toward profitable growth.
Financial and operating performance
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Total revenue | $392.4 million | $379.1 million |
| Net income (loss) | $14.4 million | ($2.1 million) |
| Diluted EPS | $0.81 | ($0.13) |
| Operating cash flow | $34.9 million | $19.1 million |
| Capital expenditures | $10.9 million | $19.4 million |
| Cash and cash equivalents at year-end | $65.4 million | $44.7 million |
| Working capital at year-end | $46.7 million | $30.4 million |
- Revenue increased 3.5%; net retail sales rose 3.9% to $387.7 million. Franchise fees fell to $2.5 million from $3.6 million, and commercial revenue declined to $2.1 million from $2.3 million.
- Retail gross margin increased to $176.8 million, or 45.6% of net retail sales, from $153.5 million, or 41.1%. Management attributed the 450-basis-point expansion principally to stronger merchandise margins and supply-chain efficiencies, with additional benefit from occupancy-cost leverage.
- Comparable sales grew 1.6%, after 5.1% growth in 2013. North American comparable sales rose 1.4% and European comparable sales rose 2.3%. North American sales per square foot increased to $409 from $381.
- SG&A was $164.4 million, up 2.3% year over year; it declined to 41.9% of revenue from 42.4%. Reported net margin was 3.7%, compared with a 0.6% loss margin.
- Fourth-quarter revenue was $131.5 million versus $108.1 million; net income was $11.8 million versus $5.4 million, and diluted EPS was $0.67 versus $0.31. Fiscal 2014’s fourth quarter included an extra week.
- The company had no bank borrowings at year-end. Its $35 million revolving facility had approximately $33.9 million available after a $1.1 million standby letter of credit; the company was in compliance with its covenants. Total assets were $212.1 million and stockholders’ equity was $97.6 million.
Material changes versus the prior comparable period
- The company returned to profitability from a fiscal 2013 net loss, alongside stronger retail margins, higher sales productivity and increased operating cash flow.
- Net retail sales increased by $14.5 million. Comparable-sales growth and new, remodeled and relocated stores contributed, while store closures reduced sales by $16.6 million.
- Management reported that closures in North American multi-store markets transferred about 15% of affected-store sales to remaining stores. The North American store count rose from 263 to 265, while company-owned European stores declined from 60 to 59.
- International franchise locations fell from 86 to 71, with 23 closures and eight openings in fiscal 2014. The company cited fewer franchise locations open throughout the year for the decline in franchise fees.
- Operating cash flow rose to $34.9 million, primarily attributed to increased store contribution. Cash increased by $20.7 million during the year.
Outlook, management commentary, risks and unusual items
- For fiscal 2015, management expected capital expenditures of approximately $20 million to $25 million. Plans included selective openings in tourist, outlet and shop-in-shop locations; refreshing stores; international expansion; e-commerce marketing to consumers over age 12; product development; and relaunching outbound licensing. No specific revenue or earnings guidance was provided.
- Management said fiscal 2014 performance benefited from product launches, marketing, higher transaction metrics and store-portfolio optimization. It cited severe first-quarter weather and its lingering effects on mall traffic as a headwind.
- Key risks include discretionary consumer spending and mall traffic, changing product preferences, competition, lease costs and store productivity, reliance on a small number of merchandise vendors, foreign currency and sourcing exposure, franchisee performance, product safety, cybersecurity and privacy risks, and management transitions.
- Fiscal 2014 included a $1.3 million downward adjustment to the loyalty-program deferred-revenue liability, increasing net income by $1.2 million, or $0.07 per diluted share. The filing also describes a program change that reduced the liability by $0.5 million and increased net income by $0.4 million; investors should review the notes for how these estimates and changes relate.
- The company maintained a $15.6 million valuation allowance against deferred tax assets, principally domestic. It reported $1.0 million of unrecognized tax benefits and a pending UK customs-duty appeal; $3.2 million of disputed duty had been paid and recorded in receivables. Management did not expect the appeal to have a material adverse effect, but noted an unfavorable outcome could affect a period’s results, liquidity or financial position.
- Contractual obligations included $176.1 million of future operating lease payments and $34.8 million of purchase obligations, primarily inventory orders. The company reported no off-balance-sheet arrangements and no pending litigation it believed would likely have a material adverse effect.
- After year-end, the board authorized a new share repurchase program of up to $10 million through March 31, 2016, subject to change or termination; repurchases were not mandatory. No dividends were paid, and the company did not expect to pay cash dividends at that time.
Most important facts for investors to verify
- How much of the return to profit and margin expansion is sustainable, particularly after adjusting for the extra fiscal week and loyalty-program estimate changes.
- Whether comparable-sales growth can persist amid traffic pressure, and whether planned store refreshes and selective openings improve returns without increasing closure or impairment costs.
- The collectability and timing of recovery of the $3.2 million UK customs-duty payment, and potential exposure from tax positions and deferred-tax-asset judgments.
- Liquidity needs and covenant headroom after planned fiscal 2015 capital expenditures, share repurchases and substantial lease commitments.
- Whether the shrinking franchise-store base, supplier concentration and management transitions affect growth plans and operating execution.