Table of Contents

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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 August 4, 2018

 

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 required 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 14(a) of the Exchange Act. ☐    

 

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 September 6, 2018, there were 14,971,775 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	4
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18
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 STATEMENTS OF INCOME

AND 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 the 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 fiscal year ended December 30, 2017, as filed with the SEC, and include the following:

 

●

we depend upon the shopping malls in which we are located to attract guests to our stores and a decline in mall traffic could adversely affect our financial performance and profitability;

●

if we are unable to generate interest in and demand for our interactive retail experience and products, including being able to identify and respond to consumer preferences in a timely manner, our sales, financial condition and profitability could be adversely affected;

●

consumer interests change rapidly and our success depends on the ongoing effectiveness of our marketing and online initiatives to build consumer affinity for our brand, drive consumer demand for key products and generate traffic for our stores;

●

decline in general global economic conditions could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending, and have an adverse effect on our liquidity and profitability;

●

our merchandise is manufactured by foreign manufacturers and we transact business in various foreign countries; therefore, the availability and costs of our products, as well as our product pricing, may be negatively affected by risks associated with international manufacturing and trade and foreign currency fluctuations;

●

if we are unable to renew, renegotiate or replace our store leases or enter into leases for new stores on favorable terms, or if we violate any of the terms of our current leases, our growth and profitability could be harmed;

●

we are subject to a number of risks related to disruptions, failures or security breaches of our information technology infrastructure. If we improperly obtain or are unable to protect our data or violate privacy or security laws or expectations, we could be subject to liability as well as damage to our reputation;

●

we may not be able to evolve our store locations to align with market trends or to effectively manage our overall portfolio of stores which could adversely affect our ability to grow and could significantly harm our profitability;

●

we may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team;

●

we may suffer negative publicity or be sued if the manufacturers of our merchandise or of Build-A-Bear branded merchandise sold by our licensees ship any products that do not meet current safety standards or production requirements or if such products are recalled or cause injuries;

●

we may not be able to operate our international corporately-managed locations profitably;

●

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

●

we rely on a few vendors to supply substantially all of our merchandise, and significant price increases or any disruption in their ability to deliver merchandise could harm our ability to source products and supply inventory to our stores;

●

we may fail to renew, register or otherwise protect our trademarks or other intellectual property and may be sued by third parties for infringement or, misappropriation of their proprietary rights, which could be costly, distract our management and personnel and which could result in the diminution in value of our trademarks and other important intellectual property;

●

we may suffer negative publicity or be sued if the manufacturers of our merchandise violate labor laws or engage in practices that consumers believe are unethical;

●

our company-owned distribution center which services the majority of our stores in North America and our third-party distribution center providers used in the western United States and Europe may experience disruptions in their ability to support our stores or may operate inefficiently;

●

our profitability could be adversely affected by fluctuations in petroleum products prices;

●

if we are unable to effectively manage our international franchises, attract new franchisees or if the laws relating to our international franchises change, our growth and profitability could be adversely affected and we could be exposed to additional liability;

●

our business may be adversely impacted at any time by a significant variety of competitive threats;

●

we may suffer negative publicity or a decrease in sales or profitability if the products from other companies that we sell in our stores do not meet our quality standards or fail to achieve our sales expectations;

●

we may be unsuccessful in acquiring businesses or engaging in other strategic transactions, which may negatively affect our financial condition and profitability;

●

fluctuations in our operating results could reduce our cash flow and we may be unable to repurchase shares at all or at the times or in the amounts we desire or the results of our share repurchase program may not be as beneficial as we would like;

●

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

●

limited public float and trading volume for our common stock may have an adverse impact and cause significant fluctuation of market price; and

●

our certificate of incorporation and bylaws and Delaware law contain provisions that may prevent or frustrate attempts to replace or remove our current management by our stockholders, even if such replacement or removal may be in our stockholders’ best interests.

 

 

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 guests participate in the stuffing, fluffing, dressing, accessorizing and naming of their own teddy bears and other stuffed animals. As of August 4, 2018, we operated 365 stores globally and had 96 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we sell products on our company-owned e-commerce sites, third party e-commerce marketplaces, franchisee sites and through third party retail locations under wholesale agreements.

 

Our company is in the late stages of the execution of a multi-year turnaround plan that was initiated in 2013 to improve both sales and profitability with the goal of achieving sustained profitability. In the second quarter of 2018, we continued to evolve and execute our strategic plan with key initiatives in the areas outlined below, which are intended to drive long-term shareholder value:

• Development of our experiential retail model to diversify and expand the impact and reach of our brand globally 

• Simultaneously, leverage the power of our brand and intellectual properties to build margin accretive revenue streams

• Improve long-term profitability through the execution of these strategies as well as disciplined expense management and on-going efforts in process and systems upgrades.

 

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”) – Corporately-managed retail stores located in the United States, Canada, Puerto Rico, the United Kingdom, Ireland, Denmark and China and two e-commerce sites;

•

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

•

International Franchising – Royalties and other revenue from international operations under franchise agreements.

 

Selected financial data attributable to each segment for the thirteen and twenty-six week periods ended August 4, 2018 and July 29, 2017 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

Strategy

 

We expect to improve consolidated sales and profit through the following key initiatives:

 

●

Development of our experiential retail model to diversify and expand the impact and reach of our brand globally: We expect to continue to diversify our real estate portfolio to focus on places where families are increasingly going to shop or going for entertainment. We have been actively identifying and securing more tourist locations. We also expect to continue to diversify our store portfolio inclusive of a new, lower capital, more flexible “concourse shop” model. We expect to continue to make improvements to our aged store fleet by leveraging our new Discovery format in conjunction with select natural lease events. Overall, these locations continue to perform ahead of heritage locations in both sales and profitability. In addition, we expect to continue to grow e-commerce sales. We expect to expand globally through existing and new franchise agreements including the recently added franchises in China and India.

 

●

Leverage the power of our brand and intellectual properties to build margin accretive revenue streams: To meet the needs of our core consumer base (girls and boys ages 3 to 12) while systematically building secondary consumer segments (including collectors, gift-givers and teen-plus target), we expect to continue to develop and expand offerings of successful intellectual properties balanced with core products and a comprehensive program of key licensed products. We expect to leverage the power of both our Build-A-Bear brand as well as our other intellectual properties to further develop our outbound licensed programs and expand these and other margin accretive revenue streams. We also expect to build the entertainment aspects of our business model as we continue to develop content to connect with consumers beyond our retail stores including mobile apps, music videos and other entertainment opportunities to increase engagement, improve efficiency and lead to profitable sales growth.

 

●

Long-Term Profitability Improvement: We are focused on improving profitability through the execution of our stated strategies detailed above as well as disciplined expense management and on-going efforts in process and systems upgrades. While we continue to monitor consolidated comparable sales as an important metric in our business, we believe that total revenue growth and profitability improvement are more indicative of the progress in our business initiatives on a go forward basis.

 

Retail Stores:

 

The table below sets forth the number of Build-A-Bear Workshop corporately-managed stores in North America, Europe and Asia for the periods presented:

 

		Twenty-six weeks ended
		August 4, 2018																July 29, 2017
		North																North
		America				Europe				Asia				Total				America				Europe				Asia				Total
Beginning of period			294				59				1				354				277				60				1				338
Opened			15				-				-				15				22				-				-				22
Closed			(2	)			(2	)			-				(4	)			(5	)			(2	)			-				(7	)
End of period			307				57				1				365				294				58				1				353

 

During 2018, we expect to continue to make improvements to our aged store fleet by leveraging the new Discovery format in conjunction with select natural lease events. As of August 4, 2018, 34% of our store base was in an updated Discovery design.  We also expect to close certain stores in accordance with natural lease events as an ongoing part of our real estate management and day-to-day operational plans. Current plans include expansion into more non-traditional locations, made possible in part by concourse shops. Concourse shops are stand-alone retail units that occupy approximately 200 square feet designed to be operated in open, concourse areas of malls or other covered pedestrian areas. We currently expect to have 40 to 45 concourse shops open by the end of fiscal 2018.

 

 

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 corporately-managed stores. As of August 4, 2018, 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 franchised stores opened and closed for the periods presented below are summarized as follows:

 

		Twenty-six weeks ended
		August 4, 2018				July 29, 2017
Beginning of period			100				92
Opened			7				8
Closed			(11	)			(11	)
End of period			96				89

 

In the ordinary course of business, we anticipate signing additional master franchise agreements and terminating other such agreements. We believe there is a market potential for approximately 300 international stores outside of the United States, Canada, the United Kingdom and Ireland. We continue to expect franchisees to leverage the new formats that have been developed for our corporately-managed operations and sourcing changes that have significantly reduced the capital and expenses required to open stores. We expect to continue to develop market expansion through both new and existing franchisees in 2018 and beyond. For example, our new China franchise partner operates three locations and plans to open up to 10 locations by the end of fiscal year 2018.

 

Results of Operations

 

The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to cost of merchandise sold being expressed as a percentage of net retail sales, commercial revenue, international franchising as well as immaterial rounding:

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Thirteen weeks ended								Twenty-six weeks ended
		August 4,				July 29,				August 4,				July 29,
		2018				2017				2018				2017
Revenues:
Net retail sales			97.4	%			96.5	%			97.7	%			96.9	%
Commercial revenue			1.3				2.6				1.2				2.4
International franchising revenue			1.3				0.9				1.1				0.7
Total revenues			100.0				100.0				100.0				100.0
Costs and expenses:
Cost of merchandise sold - retail (1)			57.5				55.4				56.6				53.8
Cost of merchandise sold - commercial (1)			56.0				46.9				51.6				50.4
Cost of merchandise sold - international franchising (1)			54.1				36.1				50.3				22.7
Total cost of merchandise sold			57.4				55.0				56.5				53.5
Consolidated gross profit			42.6				45.0				43.5				46.5
Selling, general and administrative expense			45.6				45.2				44.6				44.0
Interest expense (income), net			0.0				(0.0	)			0.0				0.0
Income (loss) before income taxes			(3.1	)			(0.2	)			(1.1	)			2.5
Income tax expense (benefit)			(0.9	)			(0.3	)			(0.2	)			0.9
Net income (loss)			(2.2	)			0.1				(0.9	)			1.6
Retail Gross Margin (2)			42.5	%			44.6	%			43.4	%			46.2	%

 

(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. Cost of merchandise sold – international franchising is expressed as a percentage of international franchising revenue.
(2)	Retail gross margin represents net retail sales less cost of merchandise sold - retail; retail gross margin percentage represents retail gross margin divided by net retail sales.

 

 

Thirteen weeks ended August 4, 2018 compared to thirteen weeks ended July 29, 2017

 

Total revenues. Consolidated revenues rose 5.0%, including an 8.7% increase in North America and a 14.9% decrease in Europe inclusive of a 14.4% increase in consolidated e-commerce. Notably, the European results reflected the impact caused by the ongoing uncertainty surrounding Brexit, as well as the May 2018 implementation of new privacy laws, which restricted our ability to directly market to guests.

 

Net retail sales for the thirteen weeks ended August 4, 2018 were $81.0 million, compared to $76.4 million for the thirteen weeks ended July 29, 2017, an increase of $4.6 million, or 6.1%. The components of this increase are as follows:

 

		Thirteen weeks ended
		August 4, 2018
		(dollars in millions)
Increase in existing store and e-commerce sales		$	5.7
Impact of store closures			(4.0	)
Increase from new stores			3.4
Impact of foreign currency exchange rates			0.4
Change in deferred revenue estimates and accounting treatment, including gift card breakage			(0.9	)
		$	4.6

 

The revenue increase was driven primarily by the mid-July launch of a new benefit to our Bonus Club loyalty members targeting the birthday celebrations of children in which the price paid for our special ‘Birthday Treat Bear’ is the age they are turning in their birthday month. The program (“Count Your Candles”) was launched with a one-day event that offered all Bonus Club members the opportunity to ‘pay their age’ for any furry friend in a store (“Pay Your Age Day”). The increased revenue from the promotion, follow-on vouchers and ongoing birthday program more than offset the $2.8 million impact from the January 2018 closure of our previously most productive store and the adoption of the new revenue recognition standard (See Note 1 — Basis of Presentation and Note 2 — Revenue for additional information). In addition, revenue continued to be impacted by the Toys“R”Us liquidation proceedings which we believe negatively impacted stores particularly those in close proximity to Toys“R”Us liquidating locations during the first two months of the quarter, as well as the aforementioned European drivers.

 

Commercial revenue was $1.1 million for the thirteen weeks ended August 4, 2018 compared to $2.1 million for the thirteen weeks ended July 29, 2017. The $1.0 million decrease related primarily to the timing of the prior year’s wholesale orders. 

 

Retail gross margin. Retail gross margin dollars increased $0.4 million to $34.4 million for the thirteen weeks ended August 4, 2018 compared to the thirteen weeks ended July 29, 2017, while the retail gross margin rate declined 210 basis points to 42.5%. The rate decline was driven by contraction in merchandise margin due to the higher promotional activity associated with the Count Your Candles and Pay Your Age Day events covering the final four weeks of the quarter, partially offset by the leverage of fixed occupancy costs.  The decrease in gross margin rate also included an expected 50-basis point impact from adoption of the new revenue recognition standard.

 

Selling, general and administrative. Selling, general and administrative expenses (“SGA”) were $37.9 million for the thirteen weeks ended August 4, 2018, or 45.6% of total revenues, a 40-basis point increase compared to the thirteen weeks ended July 29, 2017. The increase in SGA was primarily driven by store labor and costs related to the stronger sales trend at the end of the thirteen weeks ended August 4, 2018 as well as unfavorable currency exchange rates. 

 

Interest expense (income), net. Interest expense (income) was less than $0.1 million for both the thirteen weeks ended August 4, 2018 and July 29, 2017, respectively.

 

Provision for income taxes. The income tax provision was a benefit of $0.7 million with a tax rate of 29.3% for the thirteen weeks ended August 4, 2018 as compared to $0.2 million for the thirteen weeks ended July 29, 2017.  In the second quarter of fiscal 2018, the effective tax rate differed from the statutory rate of 21% primarily due to the jurisdictional mix of earnings. In the second quarter of fiscal 2017, the effective tax rate differed from the statutory rate of 34% primarily due to the effect of discrete tax items. The statutory rate decreased to 21% as a result of the enactment of the Tax Cut and Jobs Act on December 22, 2017.

 

Twenty-six weeks ended August 4, 2018 compared to twenty-six weeks ended July 29, 2017

 

Total revenues. Net retail sales for the twenty-six weeks ended August 4, 2018 were $162.5 million, compared to $165.1 million for the twenty-six weeks ended July 29, 2017, a decrease of $2.6 million, or 1.6%. The components of this decrease are as follows:

 

		Twenty-six weeks ended
		August 4, 2018
		(dollars in millions)
Decrease in existing store and e-commerce sales		$	(2.1	)
Impact of store closures			(8.3	)
Increase from new stores			7.5
Impact of foreign currency exchange rates			2.2
Change in deferred revenue estimates and accounting treatment, including gift card breakage			(1.9	)
		$	(2.6	)

 

 

The decrease in net retail sales included the $1.3 million impact from the adoption of the new revenue recognition standard (See Note 1 — Basis of Presentation and Note 2 — Revenue for additional information). In addition, our previously most productive store closed in January 2018 and Toys“R”Us conducted liquidation proceedings which we believe negatively impacted sales at our stores, particularly those in closer proximity to a liquidating Toys“R”Us location, partially offset by revenue increase associated with the Pay Your Age events.

 

Commercial revenue was $2.1 million for the twenty-six weeks ended August 4, 2018 compared to $4.1 million for the twenty-six weeks ended July 29, 2017. The $2.0 million decrease related primarily to the timing of the prior year's wholesale orders. 

 

Retail gross margin. Retail gross margin was $70.5 million for the twenty-six weeks ended August 4, 2018 compared to $76.3 million for the twenty-six weeks ended July 29, 2017, a decrease of $5.8 million, or 7.7%. As a percentage of net retail sales, retail gross margin was 43.4% for the twenty-six weeks ended August 4, 2018 compared to 46.2% for the twenty-six weeks ended July 29, 2017. This 280 basis-point gross margin decrease was largely driven by contraction in merchandise margin due to the higher promotional activity associated with the Pay Your Age events.

 

Selling, general and administrative (“SGA”). SGA was $74.3 million for the twenty-six weeks ended August 4, 2018, compared to $75.0 million for the twenty-six weeks ended July 29, 2017, a decrease of $0.7 million, or 1.0%. The decrease in SGA was primarily due to reduced advertising spend, partially offset by store labor and costs related to the stronger sales trend at the close of the thirteen weeks ended August 4, 2018.

 

Interest expense (income), net. Interest expense (income) was less than $0.1 million for both the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively.

 

Provision for income taxes. The income tax provision was a benefit of $0.5 million with a tax rate of 23.9% for the twenty-six weeks ended August 4, 2018 as compared to income tax expense of $1.6 million with a tax rate of 37.3% for the twenty-six weeks ended July 29, 2017.  In the first half of fiscal 2018, the effective tax rate differed from the statutory rate of 21% primarily due to the jurisdictional mix of earnings.  In the first half of fiscal 2017, the effective tax rate differed from the statutory rate of 34% primarily due to the effect of discrete tax items.  The statutory rate decreased to 21% as a result of the enactment of the Tax Cut and Jobs Act on December 22, 2017.

 

 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, but not limited to: (1) changes in general economic conditions and consumer spending patterns; (2) increases or decreases in our existing store and e-commerce sales; (3) fluctuations in the profitability of our stores; (4) changes in foreign currency exchange rates; (5) the timing and frequency of the sales of licensed products tied to major theatrical releases, our marketing initiatives, including national media and other public relations events; (6) the timing of our store openings and closings 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 typically associated with a lease event such as an expiration or lease triggered clause; 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 retailer that has toy products as part of our revenue model, our sales are highest in our fourth quarter. The timing of holidays and school vacations can impact our quarterly results. 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. For example, the 2014 fiscal fourth quarter had 14 weeks and the transition period ended February 3, 2018 had five weeks.

 

Liquidity and Capital Resources

 

Our cash requirements are primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, investments in information technology infrastructure 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.

 

A summary of our operating, investing and financing activities are shown in the following table (dollars in thousands):

 

		Twenty-six weeks ended
		August 4, 2018				July 29, 2017
Net cash provided by (used in) operating activities		$	7,762			$	(5,343	)
Net cash used in investing activities			(7,029	)			(9,326	)
Net cash used in financing activities			(1,833	)			(495	)
Effect of exchange rate changes on cash			(1	)			(296	)
Net decrease in cash		$	(1,101	)		$	(15,460	)

 

Operating Activities. Cash provided by operating activities increased $11.3 million for the twenty-six weeks ended August 4, 2018, as compared to the twenty-six weeks ended July 29, 2017. Generally, changes in cash from operating activities are driven by changes in net income and changes in operating assets and liabilities. This increase in cash from operating activities was primarily due to the timing of inventory and payroll payments.

 

Investing Activities. Cash used in investing activities decreased $2.3 million for the twenty-six weeks ended August 4, 2018, as compared to the twenty-six weeks ended July 29, 2017. Cash used in investing activities during the twenty-six weeks ended August 4, 2018 primarily related to store construction and upgrades, and purchases of information technology infrastructure partially offset by the benefit of an insurance claim. Cash used in investing activities during the twenty-six weeks ended July 29, 2017 primarily related to store construction and upgrades as well as purchases of information technology infrastructure.

 

 

Financing Activities. Financing activities used cash of $1.8 million for the twenty-six weeks ended August 4, 2018, including $1.4 million in purchases of our common stock and $0.4 million related to stock-based compensation. In the twenty-six weeks ended July 29, 2017, financing activities used cash of $0.5 million primarily related to stock-based compensation. No borrowings were made under our line of credit in either the twenty-six weeks ended August 4, 2018 or July 29, 2017.

 

Capital Resources. As of August 4, 2018, we had a consolidated cash balance of $20.4 million and approximately two-thirds of this balance was domiciled within 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. On May 4, 2017, we amended the credit agreement, extending the expiration date to December 31, 2018 and increasing the amount of permitted lease and rental payments for personal property from $100,000 to $1.0 million. The bank line provides availability of $35.0 million. Borrowings under the credit agreement are secured by our assets and a pledge of 66% 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, and 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. As of August 4, 2018: (i) we were in compliance with all 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. We may incur borrowings in amounts that are expected to fluctuate throughout the remainder of the year and all of which we expect to repay before the end of the fiscal year.

 

In fiscal 2018, we expect to spend a total of $15 to $18 million on capital expenditures. Capital spending through the twenty-six weeks ended August 4, 2018 totaled $7.1 million, on track with our full year plans. Capital spending in fiscal 2018 is expected to primarily support our store activity, including both remodels and new stores and investments in information technology 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, 2018.

 

In August 2017, our Board of Directors authorized a share repurchase program of up to $20 million. This program authorized us to purchase up to $20 million of our common stock in the open market (including through 10b5-1 trading plans), or through privately negotiated transactions. The primary source of funding for the program is expected to be cash on hand. The timing and amount of share repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors. The program authorizes us to repurchase shares through September 30, 2020, and does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time without prior notice. Shares repurchased under the program will be subsequently retired. Under this program through August 4, 2018, we repurchased approximately 1.2 million shares at an average price of $8.77 per share for an aggregate amount of $10.7 million.

 

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, 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 15, 2018, which includes audited consolidated financial statements for our 2017, 2016 and 2015 fiscal years. There have been no material changes to the critical accounting estimates disclosed in the 2017 Form 10-K. 

 

Recent Accounting Pronouncements

 

See Note 1 to the Condensed Consolidated Financial Statements — Basis of Presentation — 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 December 30, 2017 as filed with the SEC on March 15, 2018.

 

 

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 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 August 4, 2018, 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 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.

 

 

In fiscal 2018, we implemented a new enterprise resource planning (“ERP”) system by transitioning certain of our corporate operations, including corporate general ledger, corporate procurement and payments, non-retail order to cash and corporate cash management functions to the new ERP system.

 

We have modified our existing internal controls infrastructure, as well as added other processes and internal controls, to adapt to our new ERP system as well as take advantage of the increased functionality of the new system. We believe that the new ERP system and related changes to processes and the design of our internal controls will enhance our internal control over financial reporting while providing us with the ability to scale our business. We believe we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting and we will continue to evaluate the operating effectiveness of related key internal controls during subsequent periods.

 

With the exception of the implementation of our ERP solution, no change in our internal control over financial reporting occurred during the fiscal quarter ended August 4, 2018 that has materially affected, or is reasonably likely to materially affect, our 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 material changes to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 30, 2017 as filed with the Securities and Exchange Commission on March 15, 2018.

 

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

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period		(a) Total Number of Shares (or Units) Purchased (1)				(b) Average Price Paid Per Share (or Unit)				(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)				(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2)
May 6, 2018 – June 2, 2018			167			$	8.85				-			$	9,993,666
June 3, 2018 – July 7, 2018			90,998				7.71				90,777				9,293,740
July 8, 2018 – August 4, 2018			212				8.15				-				9,293,740
Total			91,377			$	7.71				90,777			$	9,293,740

 

(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 August 2017, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $20 million of our common stock. This program authorizes the Company to repurchase shares through September 30, 2020 and does not require the Company to repurchase any specific number of shares, and may be modified, suspended or terminated at any time without prior notice. Shares repurchased under the program will be subsequently retired.

 

 

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 of 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)
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: September 13, 2018

 

	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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