Build-A-Bear Workshop, Inc. — Q2 2011 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 2, 2011; compared with the periods ended July 3, 2010. The company operates company-owned retail stores, commercial/licensing activities, and international franchises. Results are unaudited and seasonal; the company says the fourth quarter is typically its strongest.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $81.8 million | $74.1 million | $177.8 million | $175.6 million |
| Net loss | $6.7 million | $8.5 million | $8.9 million | $6.8 million |
| Loss per diluted share | $0.37 | $0.45 | $0.50 | $0.36 |
| Operating cash flow | Not separately reported for the quarter | $(12.9) million | $(18.3) million |
- Q2 revenue rose 10.4%, led by retail sales, up 10.9%. Consolidated comparable-store sales increased 7.1% in Q2, but declined 2.0% for the first half.
- First-half retail gross margin was 37.4% of retail sales, versus 36.8% a year earlier. Q2 retail gross margin was 35.8%, up from 30.9%; management attributed the improvement to occupancy-cost leverage and merchandise mix/margin.
- First-half selling, general and administrative expense rose 7.7% to $81.8 million and increased to 46.0% of revenue from 43.3%. Management cited consulting, advertising, and payroll costs.
- First-half store contribution, a company-defined non-GAAP measure, was $16.9 million, or 10.2% of store-location retail sales, versus $17.6 million, or 10.6%, a year earlier. First-half net loss was 5.0% of revenue versus 3.9%.
- Cash and cash equivalents were $34.7 million at July 2, down $24.0 million from the start of the fiscal year. Current assets were $115.7 million and current liabilities $70.4 million. No borrowings were outstanding; the company reported approximately $48.9 million available under its credit facility and compliance with financial covenants.
- First-half cash used in investing was $7.2 million, including $6.0 million for property and equipment; cash used in financing was $4.7 million, primarily reflecting $5.1 million of share repurchases. There is no funded debt reported on the balance sheet.
Changes and management commentary
- Q2’s comparable-store-sales improvement was partly attributed to Easter and associated school breaks falling in Q2 in 2011 rather than Q1 in 2010. Management said first-half comparable sales were pressured by fewer transactions; UK sales were also affected by VAT increases and government spending cuts.
- Q2 retail sales benefited from comparable-store sales, pop-up and other non-store locations, and new stores. For the first half, those gains were partly offset by lower comparable sales and closures/relocations.
- At July 2, the company operated 342 company-owned stores, down from 346 a year earlier, and 70 international franchised stores, up from 60.
- Management expected approximately five company-owned store openings and five to ten closures in fiscal 2011; it also expected franchisees to open five to ten stores net of closures. The company planned three new company-owned store openings in Q3.
- Fiscal 2011 capital expenditures were projected at $12–$15 million; $6.1 million had been spent in the first half. The company expected operating cash and available credit to fund near-term requirements. Its $50 million repurchase program was extended through March 31, 2012; $18.5 million remained available as of August 3, 2011.
Risks, contingencies, and unusual items
- Key stated risks include discretionary consumer demand, mall traffic, comparable-store sales, competition, product preferences, reliance on a limited number of suppliers, inventory flow and transportation costs, foreign exchange, store leases, and the profitability of European company-owned stores.
- The $40 million revolving facility, with a seasonal overline to $50 million from July through December, expires December 31, 2012; borrowings bear interest at LIBOR plus 1.8% and are subject to covenants and restrictions.
- The filing notes interest costs related to an ongoing sales-and-use-tax audit but does not provide a clear estimate of potential exposure. Unrecognized tax benefits were approximately $0.3 million; management said $0.1 million could be resolved within twelve months.
- Goodwill was $33.5 million and was scheduled for impairment testing no later than December 31, 2011. The Ridemakerz investment had a book value of zero; the company retained an approximately 15% interest and options that could increase ownership to approximately 24%.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no changes to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- How much of Q2’s comparable-sales growth reflected the Easter calendar shift, and whether sales momentum persisted after the quarter.
- Whether the first-half decline in transactions and comparable sales reverses, particularly in Europe, and whether higher gross margin can offset rising SG&A.
- Cash burn, seasonal working-capital needs, and planned capital spending relative to cash, credit availability, and continued share repurchases.
- Actual store openings and closures, franchisee expansion, and the performance of pop-up and other non-store channels.
- Any developments or quantified exposure from the sales-and-use-tax audit, and the outcome of the scheduled goodwill impairment test.