Build-A-Bear Workshop, Inc. — Q1 2017 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2017. Unless otherwise noted, amounts are in U.S. dollars.
Business context
The company operates company-owned stores and e-commerce through its direct-to-consumer segment, alongside commercial licensing and wholesale activities and international franchising. At quarter-end it had 336 company-owned stores and 87 franchised stores. The company described 2017 priorities as channel evolution, product expansion, brand and experience amplification, and improved profitability.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $90.6 million | $95.0 million |
| Net retail sales | $88.6 million | $94.1 million |
| Income before taxes | $4.6 million | $5.3 million |
| Net income | $2.8 million | $3.5 million |
| Diluted earnings per share | $0.17 | $0.22 |
| Retail gross margin | 47.1% | 48.4% |
| Cash from operating activities | $5.9 million provided | $7.0 million used |
| Capital expenditures | $2.3 million | $6.2 million |
- Revenue declined 4.6%; net retail sales declined 5.8%. Commercial revenue rose to $1.6 million from $0.5 million, largely due to higher wholesale sales; franchise fees were $0.4 million in both periods.
- Consolidated comparable sales fell 8.1%, versus 2.2% growth a year earlier. Comparable sales declined 9.0% in North America and 3.3% in Europe.
- Retail gross margin contracted 130 basis points, primarily from fixed occupancy cost deleverage on lower sales and unfavorable U.K. currency effects; merchandise margin expanded 30 basis points.
- SG&A fell 5.1% to $37.6 million, while income tax expense was $1.8 million and the effective tax rate rose to 39.8% from 33.3%.
- Cash and cash equivalents were $35.6 million at April 1, 2017. The company reported no borrowings and approximately $35.0 million available under its $35 million revolving credit line. Total assets were $192.3 million and total current liabilities were $69.8 million. The filing reports no material long-term funded debt balance.
Changes, outlook and management commentary
- Management attributed weak comparable sales principally to Valentine’s Day falling on a weekday and Easter shifting into Q2, along with marketing changes that weighed on early-quarter sales. It said revised media, direct mail and in-store events supported improvement from late February into March.
- Retail sales fell $5.5 million. The filing attributes the decline to lower comparable sales, store closures and foreign exchange, partly offset by new-store sales and a change in deferred-revenue estimates.
- Management expected $20–$25 million of fiscal 2017 capital spending, mainly for information technology and store activity. Plans included remodeling approximately 20 stores into the Discovery format and having 20–25 new stores, including smaller concourse shops, open by year-end. Franchisees were expected to open approximately 10 stores.
- The company planned a web-platform upgrade ahead of the holiday season and continued expansion of licensed and owned product offerings. No quantified earnings or revenue guidance was provided.
- The company continued its Board-authorized review of strategic alternatives, announced in 2016; it gave no timetable and cautioned there was no assurance of an outcome.
- Cash from operations improved by $12.9 million year over year, which management attributed mainly to timing of rent and inventory payments and receivable collections, partly offset by lower net income and timing of inventory receipts and gift-card redemptions.
Risks, contingencies and unusual items
- The company said it exceeded the credit agreement’s $100,000 cap on personal-property lease and rental payments during Q1. It reported that the covenant was subsequently amended and that it was in compliance with the remaining covenants as of April 1. A May 4, 2017 amendment extended the credit facility to December 31, 2018 and increased the permitted-payment amount to $1 million.
- A U.K. customs-duty dispute involved a gross receivable of $3.1 million and a $2.5 million reserve, leaving a $0.6 million net receivable. The company was appealing the assessment and said it did not expect a material adverse impact.
- The company adopted new stock-compensation and intra-entity tax-transfer accounting standards in Q1, with disclosed balance-sheet effects. Its effective tax rate was affected by the stock-compensation accounting change.
- Key stated risks include discretionary consumer demand, mall traffic, comparable-sales performance, foreign exchange and international sourcing, inventory flow, technology and customer-data security, store leases and operations, product safety, and franchise management. The filing notes that results are seasonal and quarterly performance may not indicate full-year results.
Important facts for investors to verify
- Whether the Easter and Valentine’s Day timing effects and marketing changes explain the comparable-sales decline, and whether sales trends improved after Q1.
- Execution, cost and returns from planned store remodels, new formats, e-commerce upgrades and the $20–$25 million capital-spending plan.
- The terms and compliance status of the amended credit covenant, including facility availability and expiration.
- Developments in the U.K. customs dispute and recoverability of the net receivable.
- Potential effects and adoption timing of new revenue-recognition and lease-accounting standards.