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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

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 (Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended April 2, 2016

OR

 

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to              

 

Commission file number: 001-32320

 

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BUILD-A-BEAR WORKSHOP, INC.

 

(Exact Name of Registrant as Specified in Its Charter)

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Delaware	43-1883836
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

 

1954 Innerbelt Business Center Drive St. Louis, Missouri	63114
(Address of Principal Executive Offices)	(Zip Code)

 

(314) 423-8000

(Registrant’s Telephone Number, Including Area Code) 

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was equired to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

 

As of May 6, 2016, there were 15,817,751 issued and outstanding shares of the registrant’s common stock.

 

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BUILD-A-BEAR WORKSHOP, INC.

INDEX TO FORM 10-Q

 

		Page
Part I Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Income Statements and Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
Part II Other Information
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 6.	Exhibits	19
Signatures		20

 

  

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS AND STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except share and per share data)

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Cautionary Notice Regarding Forward-Looking Statements

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, and we undertake no obligation to update these statements except as required by federal securities laws.  Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in the Company’s annual report on Form 10-K for the year ended January 2, 2016, as filed with the SEC, and the following:

 

●

general global economic conditions may deteriorate, which could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending;

●

customer traffic may decrease in the shopping malls where we are located, on which we depend to attract guests to our stores;

●

we may be unable to generate interest in and demand for our interactive retail experience, or to identify and respond to consumer preferences in a timely fashion;

●

our marketing and on-line initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic;

●

we may be unable to generate comparable sales growth;

●

we may be unable to effectively operate or manage the overall portfolio of our company-owned stores;

●

the outcome of the strategic alternatives evaluation process announced on May 3, 2016 is uncertain and the process may or may not result in any changes to the company’s business plan or lead to a specific action or transaction;

●

we may improperly obtain or be unable to adequately protect customer information in violation of privacy or security laws or customer expectations;

●

we may be unable to renew or replace our store leases, or enter into leases for new stores on favorable terms or in favorable locations, or may violate the terms of our current leases;

●

the availability and costs of our products could be adversely affected by risks associated with international manufacturing and trade, including foreign currency fluctuation;

●

our products could become subject to recalls or product liability claims that could adversely impact our financial performance and harm our reputation among consumers;

●

we may not be able to operate our international company-owned stores profitably;

●

we may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of our management team;

●

we are susceptible to disruption in our inventory flow due to our reliance on a few vendors;

●

we may be unable to effectively manage our international franchises or laws relating to those franchises may change;

●

we may fail to renew, register or otherwise protect our trademarks or other intellectual property;

●

we are subject to risks associated with technology and digital operations;

●

we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise;

●

we may be unable to operate our company-owned distribution center efficiently or our third-party distribution center providers may perform poorly;

●

high petroleum products prices could increase our inventory transportation costs and adversely affect our profitability;

●

our plans to leverage the Build-A-Bear brand to drive strategic expansion may not be successful;

●

our market share could be adversely affected by a significant, or increased, number of competitors;

●

we may suffer negative publicity or negative sales if the non-proprietary toy products we sell in our stores do not meet our quality or sales expectations;

●

poor global economic conditions could have a material adverse effect on our liquidity and capital resources;

●

fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; and

●

we may be unable to repurchase shares of our common stock at optimal times or amounts.

 

Overview

  

We are the only global company that offers an interactive “make your own stuffed animal” retail entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals. As of April 2, 2016, we operated 264 stores in the United States, Canada and Puerto Rico (collectively, North America), 57 stores in the United Kingdom, Ireland and Denmark (collectively, Europe) and had 76 franchised stores operating internationally under the Build-A-Bear Workshop brand.

 

 

On May 2, 2016, the Company announced that its Board of Directors had authorized an exploration of a full range of strategic alternatives to enhance total shareholder value. The Company has retained Guggenheim Securities, LLC as its financial advisor and Bryan Cave LLP as its legal counsel to assist with the strategic review. No timetable has been set for the Company’s review process. The Company does not expect to comment further or update the market with any additional information on the process unless and until its Board of Directors deems disclosure appropriate or necessary. There is no assurance that this exploration will result in any strategic alternatives being announced or executed.

 

We operate in three segments that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

 

•

Direct-to-consumer (“DTC”) – Company-owned retail stores located in North America and Europe and two e-commerce sites;

 

•

International Franchising – Other international stores operated under franchise agreements; and

 

•

Commercial – Transactions with other businesses, mainly comprised of wholesale product sales and licensing our intellectual property, including entertainment properties, for third-party use.

 

Our company has been executing a multi-year turnaround plan since late 2012 to improve both consolidated comparable sales and profitability with an immediate goal of achieving sustained profitability. In 2015, we delivered our third consecutive year of consolidated comparable sales growth and improved profitability and believe that we are positioned to evolve our goal to one of sustained profitable growth.

 

In fiscal 2016, we expect to continue to build on these successes to reach more people, in more places, with more products and do it more profitably as we deliver on our MORE strategy. To this end, we are refreshing our brand, updating our aging fleet with our Discovery store, expanding globally, securing new licensed programs and developing proprietary intellectual property to extend our core consumer business and expanding our wholesale and outbound licensing programs which we expect to drive incremental, margin-accretive business.

 

Selected financial data attributable to each segment for the thirteen weeks ended April 2, 2016 and April 4, 2015 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.

 

We use comparable sales as one of the performance measures for our business.  Comparable sales percentage changes are based on net retail sales and exclude the impact of foreign exchange.  Stores are considered comparable beginning in their thirteenth consecutive full month of operation. The percentage change in comparable sales for the periods presented below is as follows:

 

		Thirteen Weeks Ended
		April 2, 2016				April 4, 2015
Comparable sales change (%)
North America			3.0	%			(0.1	)%
Europe			(1.8	)%			14.0	%
Consolidated			2.2	%			2.2	%
Stores			2.2	%			2.0	%
E-commerce			1.0	%			8.8	%
Consolidated			2.2	%			2.2	%

 

 

Our positive consolidated comparable sales was led by the performance in North America as an increase in average dollars per transaction were partially offset by a decline in transactions. We believe this was the result of our overall disciplined management of our business and the elevation of our product and marketing campaigns. Additionally, the strong performance of our new Discovery stores had a positive impact on comparable sales, particularly in North America. We believe that the decline in comparable sales in Europe was the result of the anniversary of the strong performance of licensed product, specifically Disney’s Frozen, in the 2015 first quarter.

  

We expect to improve comparable sales through the following key initiatives:

 

●

More places:  In the first quarter, our 15 Discovery stores achieved an average sales increase of 14% and continue to outpace our heritage stores on all key metrics. Through a combination of remodels and new openings, we expect to end 2016 with between 45 and 55 stores in our Discovery format, including flagship locations at Broadway at the Beach in Myrtle Beach, South Carolina; Navy Pier in Chicago, Illinois; Tivoli Gardens in Copenhagen, Denmark; and an added location in the new Disneytown at the Shanghai Disney Resort in China, expected to open in June 2016. We also expect to continue to diversify our real estate portfolio with the addition of outlet format stores, shop-in-shops and seasonal pop-up locations.

 

 

	●	Targeting more people: We expect to leverage our relationships with key licensors to reach more people, particularly with the teen-plus consumer, through a compelling offering of affinity, collectible, entertainment, sports and fashion properties. We also expect to continue to deliver new licensed and internally developed programs to extend our core consumer base.
	●	Developing more products: In addition to our best in class licensing relationships, we plan to continue to develop and expand our offering of intellectual property concepts such as Honey Girls, Promise Pets, the holiday-specific Merry Mission and Horses and Hearts collections that are supported by digital content including music, videos and games. This story-telling marketing approach is expected to continue to drive higher than average units per transaction.
	●	Driving more profitability: We expect to increase 2016 GAAP pre-tax income by 15% to 25% over our 2015 fiscal results by the disciplined execution of our stated strategies including those initiatives detailed above as well as our on-going efforts in process improvement, system upgrades, value engineering and strategic pricing to enhance merchandise margins and drive an increase in average dollars per transaction.

 

 Stores

 

Company-owned Stores

 

The table below sets forth the number of Build-A-Bear Workshop company-owned stores in North America and Europe for the periods presented:

 

 

		Thirteen Weeks Ended
		April 2, 2016												April 4, 2015
		North												North
			America			Europe				Total					America			Europe				Total
Beginning of period			269				60				329				265				59				324
Opened			1				-				1				-				1				1
Closed			(6	)			(3	)			(9	)			(8	)			-				(8	)
End of period			264				57				321				257				60				317

 

During 2016, we expect to expand our owned and operated locations by adding approximately 10 to 15 stores, net of closures. Through a combination of remodels and new openings, we expect to end the year with between 45 and 55 stores in our Discovery format, including select flagship locations, both domestic and internationally. As of April 2, 2016, we operated 15 stores in our Discovery format and expect to open a minimum of 30 additional new or remodeled Discovery locations in the remainder of the year, with the majority of these occurring in the second quarter. We also expect to continue to diversify our real estate portfolio with the addition of more outlet format stores, shop-in-shops and seasonal pop-up locations. We plan to update stores primarily in conjunction with natural lease events including new store openings, relocations and lease required remodels. We also expect to close select stores in accordance with natural lease events as an ongoing part of our real estate management and day-to-day operational plans.

 

International Franchise Revenue

 

Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our company-owned stores. As of April 2, 2016, we had eight master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 14 countries. The number of international franchised stores, inclusive of pop-up stores and shop-in-shop locations, opened and closed for the periods presented below are summarized as follows:

 

		Thirteen Weeks Ended
		April 2, 2016				April 4, 2015
Beginning of period			77				73
Opened			1				-
Closed			(2	)			(2	)
End of period			76				71

 

 

In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements.  We believe there is a market potential for approximately 300 international stores outside of North America and Europe. In 2016, our international strategy is to leverage the improving strength in our company-owned stores to restructure and extend our international footprint. Key franchisees have started to apply our successful real estate strategies including opening pop-up stores to assess long-term potential and adding shop-in-shops with select partners. We expect to develop market expansion through both new and existing franchisees and a company-owned store model.

 

 Results of Operations

 

The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of total revenues, except where otherwise indicated:

 

		Thirteen weeks ended
		April 2,				April 4,
		2016				2015
Revenues:
Net retail sales			99.0	%			98.1	%
Franchise fees			0.5				0.6
Commercial revenue			0.5				1.3
Total revenues			100.0				100.0
Costs and expenses:
Cost of merchandise sold - retail (1)			51.6				53.2
Cost of merchandise sold - commercial (1)			51.8				30.6
Selling, general and administrative			41.8				39.9
Store preopening			1.3				0.0
Interest expense (income), net			(0.0	)			(0.1	)
Total costs and expenses			94.4				92.4
Income before income taxes			5.6				7.6
Income tax expense			1.8				0.2
Net income			3.7				7.3
Retail gross margin %			48.4	%			46.8	%

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(1)	Cost of merchandise sold – retail is expressed as a percentage of net retail sales. Cost of merchandise sold – commercial is expressed as a percentage of commercial revenue.

 

Thirteen weeks ended April 2, 2016 compared to thirteen weeks ended April 4, 2015

 

Total revenues. Total revenues were $95.0 million for the thirteen weeks ended April 2, 2016 as compared to $93.4 million for the thirteen weeks ended April 4, 2015, an increase of $1.6 million, or 1.7%. Net retail sales were $94.1 million for the thirteen weeks ended April 2, 2016 as compared to $91.7 million for the thirteen weeks ended April 4, 2015, an increase of $2.4 million, or 2.6%. The components of this increase are as follows (dollars in millions):

 

 

Impact of store closures		$	(2.6	)
Increase in comparable sales			1.9
Increase from new stores			1.8
Change in deferred revenue estimates, including breakage			1.6
Impact of foreign currency translation			(1.1	)
Increase in non-comparable stores, primarily remodels and relocations			0.4
Increase from other retail			0.4
		$	2.4

 

Our positive consolidated comparable sales was led by the performance in North America as an increase in average dollars per transaction were partially offset by a decline in transactions. We believe this was the result of our overall disciplined management of our business and the elevation of our product and marketing campaigns. Additionally, the strong performance of our new Discovery stores had a positive impact on comparable sales, particularly in North America. We believe that the decline in comparable sales in Europe was the result of the anniversary of the strong performance of licensed product, specifically Disney’s Frozen, in the 2015 first quarter.

 

 

Commercial revenue was $0.5 million for the thirteen weeks ended April 2, 2016 compared to $1.2 million for the thirteen weeks ended April 4, 2015, a decrease of $0.7 million, resulting from the timing of wholesale sales in 2015. Revenue from international franchise fees was $0.4 million and $0.6 million for the thirteen weeks ended April 2, 2016 and April 4, 2015, respectively, the decrease resulting from a decline in sales at franchised stores.

 

Retail gross margin. Retail gross margin was $45.5 million for the thirteen weeks ended April 2, 2016 as compared to $42.9 million for the thirteen weeks ended April 4, 2015, an increase of $2.6 million, or 6.1%. As a percentage of net retail sales, retail gross margin was 48.4% for the thirteen weeks ended April 2, 2016 as compared to 46.8% for the thirteen weeks ended April 2, 2016, an increase of 160 basis points as a percentage of net retail sales. Our retail gross margin improvement was primarily driven by the increase in net retail sales from gift card breakage revenue, leverage on fixed occupancy costs and a 40 basis point expansion in merchandise margin.

 

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses were $39.7 million for the thirteen weeks ended April 2, 2016 as compared to $37.2 million for the thirteen weeks ended April 4, 2015, an increase of $2.5 million, or 6.6%. As a percentage of total revenues, SG&A expenses were 41.8% for the thirteen weeks ended April 2, 2016 as compared to 39.9% for the thirteen weeks ended April 4, 2015, an increase of 190 basis points. This increase was primarily the result of a decision to shift marketing expenses to the first half of 2016, increased compensation expense to support growth in the business, investments in new business initiatives and international expansion. Additionally, in 2016, gift card breakage is a component of net retail sales while in 2015, it was an offset to SG&A expense.

 

Store preopening. Store preopening expenses were $1.2 million for the thirteen weeks ended April 2, 2016 as compared to $20,000 for the thirteen weeks ended April 4, 2015, an increase of $1.2 million. Store preopening expenses for the thirteen weeks ended April 2, 2016 were predominantly associated with openings of new and remodeled Discovery format stores in the first quarter along with a portion of planned second quarter openings. We opened four of these locations in the fiscal 2016 first quarter and expect to open a minimum of 30 additional new or remodeled Discovery stores in the remainder of the year, with the majority of these occurring in the second quarter.

 

Interest expense (income), net. Interest income, net of interest expense, was $27,000 for the thirteen weeks ended April 2, 2016 as compared to $51,000 for the thirteen weeks ended April 4, 2015.

 

Income tax expense. Income tax expense was $1.8 million with a tax rate of 33.3% for the thirteen weeks ended April 2, 2016 compared to tax expense of $0.2 million with a tax rate of 3.3% for the thirteen weeks ended April 4, 2015, an increase of $1.5 million. The change in the Company’s tax rate as compared to the prior year’s first quarter was driven by the release of the valuation allowance on domestic deferred tax assets in fiscal 2015.

 

Seasonality and Quarterly Results

 

Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including: (1) changes in general economic conditions and consumer spending patterns; (2) increases or decreases in our comparable store sales; (3) fluctuations in the profitability of our stores; (4) changes in foreign currency exchange rates; (5) the timing and frequency of our marketing initiatives, including national media and other public relations events; (6) the timing of our store closings and openings and related expenses; (7) changes in consumer preferences; (8) the effectiveness of our inventory management; (9) the actions of our competitors or mall anchors and co-tenants; (10) seasonal shopping patterns and holiday and vacation schedules; and (11) weather conditions.

 

The timing of store closures, remodels and openings may result in fluctuations in quarterly results based on the revenues and expenses associated with each store location. Expenses related to store closings are typically incurred in stages: when the decision is made to close the store, when the closure is communicated to store associates and at the time of closure. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening.

 

As a toy retailer, our sales are highest in our fourth quarter, followed by the first quarter. The timing of holidays and school vacations can impact our quarterly results. Our European-based stores have historically been more heavily weighted in the fourth quarter as compared to our North American stores. We cannot assure you that this will continue to be the case. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years. The 2014 fiscal fourth quarter had 14 weeks.

 

 

Liquidity and Capital Resources

 

Our cash requirements are primarily for the relocation and remodeling of existing stores, opening of new stores, information systems and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations. We have access to additional cash through our revolving line of credit that has been in place since 2000.

 

Operating Activities. Cash used in operating activities was $7.0 million for the thirteen weeks ended April 2, 2016 compared with $3.8 million for the thirteen weeks ended April 4, 2015, an increase of $3.2 million. This increase in cash used in operating activities over the year ago period was primarily due to the decrease in net income and increase in revenue from gift card redemptions partially offset by the timing of inventory payments.

 

Investing Activities. Cash used in investing activities was $4.7 million for the thirteen weeks ended April 2, 2016 as compared to $2.9 million for the thirteen weeks ended April 4, 2015, an increase of $1.8 million. Cash used in investing activities during the thirteen weeks ended April 2, 2016 primarily related to store construction and upgrades and purchases of information technology infrastructure, partially offset by the maturity of short-term investments. Cash used in investing activities during the thirteen weeks ended April 4, 2015 primarily related to upgrades and purchases of central office information technology systems and equipment and store construction and maintenance.

 

Financing Activities. Cash used in financing activities in the thirteen weeks ended April 2, 2016 was $1.9 million as purchases of our stock used cash of $1.5 million and exercises of employee stock options, net of shares used for withholding tax payments used $0.4 million. Cash used in the thirteen weeks ended April 4, 2015 was $3.5 million as purchases of our stock used cash of $3.0 million and exercises of employee stock options, net of shares used for withholding tax payments used $0.5 million. No borrowings were made under our line of credit in either the thirteen weeks ended April 2, 2016 or April 4, 2015.

 

Capital Resources. As of April 2, 2016, we had a consolidated cash balance of $30.8 million, more than half of which was domiciled outside of the United States. We also have a line of credit, which we can use to finance capital expenditures and working capital needs throughout the year. The bank line provides availability of $35 million. Borrowings under the credit agreement are secured by our assets and a pledge of 65% of our ownership interest in certain of our foreign subsidiaries. The credit agreement contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates and investments. It also prohibits us from declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the credit agreement. We are also prohibited from repurchasing shares of our common stock unless such repurchase of shares would not violate any terms of the credit agreement; we may not use the proceeds of the line of credit to repurchase shares. Borrowings bear interest at LIBOR plus 1.8%. Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge coverage ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. On April 25, 2016, we amended the existing credit agreement extending the term to December 31, 2017 and increasing the amount of permitted investment. As of April 2, 2016: (i) we were in compliance with these covenants; (ii) there were no borrowings under our line of credit; and (iii) there was approximately $35.0 million available for borrowing under the line of credit.

 

Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America typically have a ten-year term and contain provisions for base rent plus percentage rent based on defined sales levels. Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume is not achieved. In addition, some of these leases contain various restrictions relating to change of control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases.

 

Our leases in the U.K. and Ireland typically have terms of 10 to 15 years and generally contain a provision whereby every fifth year the rental rate can be adjusted upwards to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. We may also be required to make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are charged quarterly and paid in advance.

 

In fiscal 2016, we expect to spend a total of $25 million to $30 million on capital expenditures. Capital spending through the thirteen weeks ended April 2, 2016 totaled $6.2 million, on track with our full year plans. Capital spending in fiscal 2016 is expected to primarily support our store activity, including both remodels and new stores, and investment in IT infrastructure.

 

We believe that cash generated from operations and borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for the near future.  Our credit agreement expires on December 31, 2017.

 

 

In November 2015, the board adopted a share repurchase program authorizing the repurchase of up to $15 million of our common stock until March 31, 2016. This program authorized us to purchase our common stock in the open market (including through 10b5-1 trading plans), through privately negotiated transactions, or through an accelerated repurchase transaction. The primary source of funding was cash on hand. The timing and amount of share repurchases depended on price, market conditions, applicable regulatory requirements, and other factors. Shares repurchased under this program were subsequently retired. Under this program, we repurchased approximately 615,000 shares at an average price of $12.05 per share for an aggregate amount of $7.4 million. This program expired on March 31, 2016. 

 

Off-Balance Sheet Arrangements

 

None

 

Inflation

 

We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented.  We cannot provide assurance, however, that our business will not be affected by inflation in the future.

 

Critical Accounting Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes.  Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates.  Such differences could be material to the financial statements.

 

We believe application of accounting policies, and the estimates inherently required therein, are reasonable.  These accounting policies and estimates, including those related to inventory, long-lived assets, goodwill, revenue recognition and income taxes, are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change.  Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

 

Our critical accounting policies and estimates are discussed in and should be read in conjunction with our annual report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on March 17, 2016, which includes audited consolidated financial statements for our 2015, 2014 and 2013 fiscal years. There have been no material changes to the critical accounting estimates disclosed in the 2015 Form 10-K.

 

Recent Accounting Pronouncements

 

See Note 10 – Recently Issued Accounting Pronouncements

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk as disclosed in our Annual Report on Form 10-K for the year ended January 2, 2016 as filed with the SEC on March 17, 2016. 

 

Item 4. Controls and Procedures.

 

Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.  Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure.  Based on the foregoing evaluation, our management, including the President and Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of April 2, 2016, the end of the period covered by this Quarterly Report.

 

 

It should be noted that our management, including the President and Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all error and all fraud.  A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control Over Financial Reporting.  The Company’s management, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

 

PART II – OTHER INFORMATION

 

Item 1A. Risk Factors.

 

There have been no changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended January 2, 2016 as filed with the Securities and Exchange Commission on March 17, 2016, except for the addition of the following risk factor:

 

The outcome of the strategic alternatives evaluation process announced on May 3, 2016 is uncertain and the process may or may not result in any changes to the Company’s business plan or lead to a specific action or transaction.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

		(a)				(b)				(c)				(d)
Period		Total Number of Shares (or Units) Purchased (1)				Average Price Paid Per Share (or Unit)				Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plan or Program (2)				Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plan or Program (2)
Jan. 3, 2016 – Jan. 30, 2016			133,109			$	11.10				132,502			$	7,621,110
Jan. 31, 2016 – Feb. 27, 2016			—				—				—			$	7,621,110
Feb. 28, 2016 – Apr. 2, 2016			35,633			$	12.92				—			$	—
Total			168,742			$	11.48				132,502

  

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(1)	Includes shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted shares which vested during the quarter. Our equity incentive plans provide that the value of shares delivered to us to pay the withholding tax obligations is calculated at the closing trading price of our common stock on the date the relevant transaction occurs.
(2)	In November 2015, the board adopted a share repurchase program authorizing the repurchase of up to $15 million of our common stock. Shares repurchased under this program were subsequently retired. This program expired on March 31, 2016.

 

 

Item 6. Exhibits.

 

The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:

 

 

Exhibit No.		Description
2.1		Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the Registrant (incorporated by reference from Exhibit 2.1 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)
3.1		Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of our Current Report on Form 8-K, filed on November 11, 2004)
3.2		Amended and Restated Bylaws, as amended through February 23, 2016 (incorporated by reference from Exhibit 3.1 to our Current Report on Form 8-K, filed on February 24, 2016)
4.1		Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to our Registration Statement on Form S-1, filed on October 1, 2004, Registration No. 333-118142)
10.1		Joinder and Sixteenth Amendment to Loan Documents between Build-A-Bear Card Services, LLC, Build-A-Bear Workshop, Inc., Build-A-Bear Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into effective as of April 25, 2016 (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K, filed on April 28, 2016)
31.1		Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the President and Chief Executive Officer)
31.2		Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Officer)
32.1		Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the President and Chief Executive Officer)
32.2		Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Officer)
101.INS		XBRL Instance
101.SCH		XBRL Extension Schema
101.CAL		XBRL Extension Calculation
101.DEF		XBRL Extension Definition
101.LAB		XBRL Extension Label
101.PRE		XBRL Extension Presentation

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 12, 2016

 

	BUILD-A-BEAR WORKSHOP, INC. (Registrant)
	By:	/s/ Sharon John
		Sharon John
		President and Chief Executive Officer (on behalf of the registrant and as principal executive officer)
	By:	/s/ Voin Todorovic
		Voin Todorovic
		Chief Financial Officer (on behalf of the registrant and as principal financial officer)

 

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