FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain statements that are, or may be considered to be, “forward-looking statements” for the purpose of federal securities laws, including, but not limited to, statements that reflect our current views with respect to future events and financial performance. We generally identify these statements by words or phrases such as “may,” “might,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “future,” “potential”“potential,” “will,” “could,” “target,” “project,” “contemplate,” or “continue,” the negative or any derivative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include, among other things, projections or statements regarding:

These statements are only predictions based on our current expectations and projections about future events. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by these forward-looking statements, including those factors discussed under the caption entitled “Risk Factors” as well as other places in this Annual Report on Form 10-K.

We operate in a competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all the risk factors, nor can it assess the impact of all the risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K, as a prediction of actual results.

You should read this Annual Report on Form 10-K completely and with the understanding that our actual results may be materially different from what we expect. Except as required by law, we undertake no duty to update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.

Unless the context otherwise requires, references in this Annual Report on Form 10-K to the “Company,” “we,” “us,” and “our” refer to Build-A-Bear Workshop, Inc. and, where appropriate, its subsidiaries.

The following discussion contains references to fiscal 2020 and fiscal 2019, which represent our fiscal years ending January 30, 2021 and February 1, 2020, respectively.

PART I

Overview

Build-A-Bear Workshop, Inc.and subsidiaries (collectively, the “Company”), a Delaware corporation, was formed in 1997 and is primarily a specialtymulti-channel retailer offering a “make your own stuffed animal” interactive retail-entertainment experience. As of DecemberJanuary 30, 2017,2021, we operated 361354 corporately-managed locations, including 301305 stores in the United States (“U.S.”) and Canada, 6049 stores in the United Kingdom (“U.K.”) Ireland, Denmark, and China and had 10271 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we sold product on our company-owned e-commerce sites, third-party marketplaces and franchisee sites and through third parties underretailer’s wholesale agreements. There were also 56 locations through our "third-party retail" model in which we sell our products on a wholesale basis to other companies that then in turn execute our retail experience. Select corporately-managed franchised and third party retail locations were temporarily closed due to government mandates as well as our policy related to potential exposure at various times throughout fiscal 2020 as well as at the end of the fiscal year, and most locations operated with other restrictions, such as reduced operating hours and capacity restrictions and limitations.

COVID-19 Pandemic

In March 2020, the World Health Organization announced that COVID-19 was a global pandemic. The pandemic has had far-reaching adverse impacts on many aspects of our operation, directly and indirectly, including our people, consumer behavior, distribution, our suppliers, and the market generally, particularly in our first and second quarters of fiscal 2020. In the first half of the year, we rapidly responded to the onset of a global pandemic that forced a government-mandated temporary closure of all of our corporately-operated stores as well as many third party and franchise locations. We took immediate action to protect the financial well-being of the company including aggressive expense management and cash preservation while pivoting to driving e-commerce demand even as our headquarters staff shifted to working remotely. As we moved into the second half and stores reopened on a staggered basis as guidelines transitioned, our focus turned to accelerating key strategic initiatives to drive digital transformation and evolve retail. The strong growth from our e-commerce channel was the main contributor to revenue in the first half after the temporary store closures that occurred and the demand continued in the second half bolstering our second half revenue and profitability.

The scope and nature of these impacts on our business and financial performance are discussed in more detail throughout this report, including within Item 1. "Business", Item 1A. "Risk Factors, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations", and the footnotes to our financial statements included in Item 15. "Exhibits and Financial Statement Schedules" below.

Segments and Geographic Areas

BusinessOur business is conducted through three reportable segments consisting of direct-to-consumer (“DTC”), commercial, and international franchising. Our reportable segments are primarily determined by the types of customers they serve and the types of products and services that they offer. Each reportable segment may operate in many geographic areas. Financial information related to our segments and the geographic areas in which we operate is contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” See NoteNote 15 – Segment— Segment Information to the Consolidated Financial Statementsconsolidated financial statements for information regarding sales, results of operations and identifiable assets of the Company by business segment and by geographic area.

Description of Operations

Currently, we primarily operate specialty stores that provide a “make your own stuffed animal” interactive entertainment experience in which guests, with the help of our associates, visit a variety of stations to “assemble” and customize a stuffed animal. Our concept is a unique combination of experience and product and we are focused on enhancing our brand equity while meeting the needs of consumers by offering a relevant selection of premium products that meet high quality standards and are on trend. In addition, products are sold through our e-commerce sites, third-party retail locations, and franchisee sites. Our store experience appeals to a broad range of age groups and demographics, including children, as well as their parents and grandparents, teens, adult collectorcollectors and gift givers as well as affinity consumers. We seek to provide outstanding guest service and experiences across all channels and touch points including our stores, our websites,e-commerce sites, our mobile sites and apps as well as traditional, digital and social media. Our sales are historically highest in our fourth quarter, followed by the first quarter and relatively balanced through each quarter of our fiscal year. Guests visit our stores for multiple reasons including interactive family experiences, birthdays, parties and other milestone occasions as well as to purchase gifts including the “gift of experience” that comes with a gift card. We believe the hands-on and interactive nature of our storestores and high touch service model result in guests forming an emotional connection with our brand.  

We believe there are opportunities to leverage the strength of the Build-A-Bear brand and to generate incremental revenue and profits given the high consumer recognition and strong positioning as a trusted, high quality brand that is emotionally connected with both kids and their parents.parents as well as other teens and adults through expanded programs including outbound branded licensing and entertainment, which may positively impact other channels of distribution.

Operating Strategies

Operating Strategies

Our company has been executingIn fiscal 2020, after rapidly responding to the onset of a multi-year turnaround plan that was initiatedglobal pandemic in 2013 to improve both sales and profitability with the goal of achieving sustained profitability. In 2017,fiscal first quarter, we continued to evolve and execute our strategic plan withincluding accelerating key initiatives in the areas outlined below, which are intended to drive long-term shareholder value:

Channel Evolution through Diversifying Real EstateFurther acceleration of our digital transformation including content and Upgrading E-Commerce Capabilitiesentertainment initiatives:

We continued continue to make improvementsdrive efforts to an aged store fleet bymore effectively use technology and improve and enhance fulfillment capabilities while leveraging our expanded digital platforms to inform and drive marketing and content efforts in order to generate sales. This includes advancing our digital capabilities across the enterprise including our CRM (Customer Relations Management) programs with added technology combined with robust consumer data in order to efficiently acquire new Discovery format in conjunction with select natural lease events. We also continuedconsumers and drive lifetime value of existing guests, leveraging our over 10 million opted-in consumer database to diversifyincrease engagement across social channels and through direct communications and using digital media, content and entertainment as marketing and brand-building tools to engage consumers and drive sales.

Rapidly evolving our store portfolio into non-traditional locations inclusive of a new, lower capital, more flexible “concourse shop” model. As of December 30, 2017, we finished the year with 26 concourse shop locations and 105 stores in a Discovery format.retail capabilities which includes expanded e-commerce capabilities:

In the fall of 2017, we added one new franchise agreement covering China, Hong Konglaunched an upgraded e-commerce platform and Macau. We intendhave had double-digit or greater sales increases through this channel for every subsequent quarter following the launch. With increased digital demand, we have expanded our digital marketing and fulfillment capabilities to add new franchise agreements covering other marketsefficiently deliver the increase in order creation by adding diversified capability including improving warehouse throughput, developing buy online ship from store, pickup in store and curbside pickup options as well as partnering with services to provide same day delivery options from local store locations. In addition, we took actions to lower rent in brick-and-mortar store locations for both short- and long-term benefit by renegotiating over 90% of leases while continuing to maintain a high level of lease optionality with over 75% of stores maintaining an event in the future. Separately, we launched a comprehensive enhancement of our website platform and upgrade of e-commerce systems in the fourth quarter of 2017 in order to capitalize on changing macro consumer shopping patterns and add future enterprise selling options.

Product Expansion through Owned Intellectual Property Development, Relevant Licensing and Outbound Brand Licensing into New Categories

To meet the needs of our core consumer base (boys and girls ages 3 to 12) while systematically building secondary consumer segments (including collectors, gift-givers and teen-plus target), we continued to develop and expand offerings of successful intellectual properties balanced with core products and a comprehensive program of key licensed products. We also continued to expand our initiatives to sell pre-stuffed plush products for corporate promotions or to other companies for resell and to further develop outbound licensed programs leveraging the power of the Build-A-Bear brand and other owned intellectual properties.next three years.

BrandMaintaining financial stability and Experience Amplification through Marketing and Entertainment Integration

We adjusted marketing programsmanaging the liquidity needed to elevate and integrate effortssupport our business while making strategic investments designed to create more synergy across channels while leveraging our content development strategy, which includes mobile apps, music videos and other entertainment opportunities to increase engagement, improve efficiency and lead to profitable sales growth.drive future growth:

Continued Focus on Delivering Long-Term Profitability Improvement

We remained focused on improving profitability throughmaintaining the execution ofliquidity needed to support our stated strategies summarized abovebusiness including cash preservation and managing working capital as well as disciplined expense management while making strategic investments to upgrade our processes, systems and on-going efforts in process and systems upgrades.infrastructure with the goal of achieving long-term profitability improvement. In fiscal 2020, we finalized a five-year asset-based credit facility with PNC Bank.

Merchandise Sourcing and Inventory Management

Our stores and e-commerce sites offer an extensive and coordinated selection of merchandise, including a wide range of different styles of plush products to be stuffed, pre-stuffed plush products, sounds and scents that can be added to the stuffed animals and a broad variety of clothing, shoes and accessories, as well as other brand appropriate toy and novelty items.items, sourced from multiple vendors primarily in China and Vietnam. Our stuffed animalplush products and clothing are produced from high quality, man-made materials or natural fibers, and the stuffing is made of a high-grade polyester fiber.

We believe we comply with governmental toy safety requirements specific to each country where we havethere are Build-A-Bear Workshop stores. Specifically, we believe all of the products sold in our stores and through our e-commerce sites meet Consumer Product Safety Commission (CPSC) requirements including the Consumer Product Safety Improvement Act (CPSIA) for children’s products. We also believe we comply with American Society for Testing and Materials (ASTM-F963), European Toy Safety Standards (EN71), China National Toy Standards (GB6675/GB5296.5), China Compulsory Certification (CCC), Australian/New Zealand Standard AS/(AS/NZS 8124 and8124), Canadian Consumer Product Safety Act Toys Regulation (CCPSA), Chile Standard on Safety of Toys NCh 3251 and India Safety of Toys (IS:9873). Our products are tested through independent third-party testing labs for compliance with toy safety standards. Packaging and labels for each product indicate the age grading for the product and any special warnings in accordance with guidelines established by the CPSC.CPSC or other applicable authority. We require our supplier factories to be compliant with the International Council of Toy Industries (ICTI) Ethical Toy Program certification or with other third partythird-party social compliance programs. The ICTI Ethical Toy Program process is thea social compliance program to promote ethical manufacturing in the form of fair labor treatment, as well as employee health and safety in the toy industry supply chain worldwide. In order to obtain this certification, each factory completes a rigorous evaluation performed by an accredited ICTI agent on an annual basis.

The average time from product conception to the arrival in stores is approximately 12 months, including approximately 90 to 120 days from the beginning of production to in-store delivery. Through an ongoing analysis of selling trends, we regularly update our product assortment by increasing quantities of productive styles and eliminating less productive items.styles. Our relationships with our vendors generally are on a purchase order basis and do not provide awithout contractual obligation to provide adequate supply or acceptable pricing on a long-term basis.

As part of our disciplined approach to working capital and strong management of vendor relationships, as of January 30, 2021 our inventory balance decreased $6.4 million compared to February 1, 2020. While we are comfortable with the receipt flow, level, and composition of our inventory, we continue to manage our supply chain to mitigate logistics disruptions and delays in product shipments.

Distribution and Logistics

We own a 350,000 square-foot distribution center near Columbus,in Groveport, Ohio which(near Columbus) that serves the majority of our stores in the United States and Canada. We also contract with a third-party warehouse in southern California to service our West Coast stores. The contract has a one-year term and is renewable. In Europe, we contract with a third-party distribution center in Selby, England under an agreement that ends in December 2019.January 2025, to fulfill our store and e-commerce fulfillment needs. This agreement contains clauses that allow for termination if certain performance criteria are not met. In Asia, we contract with a third-party distribution center in Shanghai, China which is currently on a month-to-month extension while negotiations for an agreement are on-going.

Transportation from the warehouses to stores is managed by several third-party logistics providers. In the United States, Canada and Europe, merchandise is shipped by a variety of distribution methods, depending on the store and seasonal inventory demand. Shipments from our distribution centers are scheduled throughout the week in order to smooth workflow, and stores are grouped together by shipping route to reduce freight costs. All items in our assortment are eligible for distribution, depending on allocation and fulfillment requirements, and we typically distribute merchandise and supplies to each store once every other week or twiceonce a week on a regular schedule, which allows us to consolidate shipments in order to reduce distribution and shipping costs. Back-up supplies, such as stuffing for the plush animals, are often stored in limited amounts at regional pool points.

During fiscal 2020, we introduced "Buy Online, Ship From Store" and "Buy Online, Pick Up In Store" for orders placed in the United States and "Click and Collect" for orders placed in the United Kingdom. These programs allow our brick and mortar stores to operate essentially as small distribution centers allowing us to leverage the geographic proximity of stores, available inventory and labor to fulfill e-commerce demand.

On March 26, 2020, we announced the temporary closure of our warehouse and e-commerce fulfillment center in Ohio as we reviewed our processes related to workplace safety and assessed the scope of the Ohio statewide "stay at home" order, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention and Ohio state health and regulatory authorities. The Ohio warehouse was reopened on April 1, 2020 following the review and reconfiguration of workflow and workspaces to further promote social distancing and minimize interaction as orders are fulfilled. With our guidance, our third-party warehouse in Selby, England implemented updated policies to comply with local social distancing guidelines.

Employees

As of DecemberJanuary 30, 2017,2021, we had approximately 1,000 full-time and 3,2002,700 regular part-time employees in the United States,U.S., Canada, the United Kingdom,U.K., Ireland Denmark and China. The number of part-time employees at all locations fluctuates depending on our seasonal needs. None of our employees areis represented by a labor union, and we believe our relationship with our employees is good.

As a result of COVID-19, on March 26, 2020 and the temporary closure of our corporately-managed stores, we announced the furlough of over 90% of our workforce and pay reductions of 20% for those employees not placed on temporary leave, including each of our named executive officers, both effective March 29, 2020. On October 6, 2020, the Compensation Committee of our Board of Directors authorized the return of base salaries to the amounts that were effective prior to the salary reductions for all employees, including our executive officers. The restoration of the base salaries was effective September 27, 2020 and was not retroactive to the date salaries were reduced in March 2020. As of January 30, 2021, the majority of our workforce in the United Kingdom and Ireland was furloughed as a result of all stores again being temporarily closed to comply with government mandates.

Competition

We view the Build-A-Bear Workshop store experience as a distinctive combination of entertainment and retail withwith limited direct competition. Since we develop proprietary products, we compete indirectly with a number of brands that sell stuffed animals or premium children’s toys in the United States, including, but not limited to, Ty, Fisher Price, Mattel, Ganz, Applause, Hasbro, Commonwealth and Vermont Teddy Bear. In the U.K., we compete with a number of retailers including The Entertainer Toy Shop, Smyths Toys Superstores and Hamleys toy stores. Since we sell a product that integrates merchandise and experience, we also view our competition as any company that competes for family time and entertainment dollars, such as movie theaters, amusement parks and arcades, other mall-based entertainment venues and online entertainment. With the majority of our stores currently operating in traditional shopping malls, we also compete with other mall-based retailers, for prime mall locations, including various apparel, footwear and specialty retailers.retailers, for prime mall locations.

We are aware of several small companies that operate “make your own” teddy bear and stuffed animal stores or kiosks in retail locations, but we believe none of those companies offer the breadth of assortment nor depth of experience or operate as a national or international retail company.

Intellectual Property and Trademarks

We believe our copyrights, service marks, trademarks, trade secrets, patents and similar intellectual property are critical to our success, and we intend, directly or indirectly, to maintain and protect these marks and, where applicable, licenselicense the intellectual property. Our patents have expirations ranging from 2018 todo not expire until the years 2032 and 2033.

We have developed licensing and strategic relationships with leading retailretail and cultural organizations. We plan to continue to add partnershipscollaborate with companies that have strong, family-oriented brands and provide us with attractive marketing and merchandising opportunities. These relationships for specific products are generally reflected in contractual arrangements for limited terms that are terminable by either party upon specified notice. Specifically, we have key strategic relationships with select companies in which we feature their brands on products sold in our stores, including Disney®, DreamWorks Animation, Hasbro,NBCUniversal, Lucasfilm, Warner Bros., Nintendo, and major professional and collegiate sports along with other culturally relevant brands.

Availability of Information

We make certain filingsare subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, we file periodic reports and other information with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments and exhibits to those reports,. We make these filings available free of charge in the Investor Relations section of our corporate website, the URL of which is http://ir.buildabear.com, as soon as reasonably practicable after they are filedwe electronically file such material with, or furnish it to, the SEC. The filings areYou may also available through the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330. Also,request copies of these filings are available on the Internet at http://www.sec.gov. Our Annual Reports on Form 10-K, press releases and investor updates are also available on our website, free ofmaterials without charge in the Investor Relations section or by writing to theour Investor Relations department at World Bearquarters,Headquarters, 1954 Innerbelt Business Center Dr.,Drive, St. Louis, MOMissouri 63114. The SEC maintains a website, http://www.sec.gov, that contains our annual, quarterly and current reports and other information we file electronically with the SEC.  Information on our website is not incorporated by reference into, and does not constitute a part of, this Annual Report on Form 10-K.

We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth below may cause our actual results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.

Risks RelatedMACROECONOMIC AND INDUSTRY RISKS

The COVID-19 pandemic has had and is expected to Our Businesscontinue to have an adverse effect on our business and results of operations.

In March 2020, the World Health Organization announced that COVID-19 was a global pandemic. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including government mandated closures and orders to “shelter-in-place.” The actions that governments around the world have taken, or that private companies have implemented on a voluntary basis, to contain the spread of COVID-19 have resulted in various disruptions, including temporary store closures, limited store operating hours, restricted crowd levels, reduced customer traffic and consumer spending, manufacturing delays, and disruptions in logistics and product shipments. During this period, we have focused on protecting the well-being of our customers, employees, contractors, suppliers, and other business partners. We are also working with our suppliers to minimize potential disruptions, while managing the changing dynamics in our business. These disruptions had a material impact on our business operations and financial performance for fiscal 2020. All of our stores in North America, the United Kingdom and Ireland were closed in March 2020 and almost all remained closed at the beginning of the second quarter. We reopened the majority of our stores by the end of the second quarter 2020 in accordance with local restrictions and where we believed we could provide for the safety and well-being of our employees and customers. Disruptions continued thereafter, however, as certain stores were required to temporarily close either individually or as part of entire geographic region mandates. In the fourth quarter of 2020, all of our stores in the U.K. and Ireland were again temporarily closed due to government mandates with reopenings expected in April 2021. Due to the uncertainty of COVID-19 and the speed at which the pandemic continues to impact our markets, we are continuing to assess the situation, including government-imposed restrictions, market by market.

The extent to which the pandemic continues to impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict or assess including, the duration and spread of the pandemic, actions taken to limit the spread, and the public’s willingness to comply with such actions, the availability and efficacy of vaccines and treatments for COVID-19, the extent of the impact on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates, consumer discretionary spending and consumer confidence, actions governments take, including governments’ positions towards monetary and/or fiscal policy, including potential stimulus and the impact of governmental regulations that might be imposed in response to the pandemic. Numerous state and local jurisdictions have imposed, and others in the future may impose, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions for their residents to mitigate the spread of COVID-19. Such orders, restrictions and changes in consumer behavior have negatively impacted our operations. In addition to these more near-term impacts, we are unable to accurately predict the full impact COVID-19 will have on our longer-term operations as well, particularly with respect to our current mix of merchandise offerings, consumer shopping behavior and store traffic trends.

To the extent COVID-19 adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to consumer traffic, general global economic conditions, and demand for our interactive retail experience.

We depend upon the shopping malls and tourist locations in which weour stores are located to attract guests to our stores and a declineguests. Continued or further declines in mallconsumer traffic could adversely affect our financial performance and profitability.

While we invest in integrated marketing efforts and believe we are more of a destination location than other retailers, we rely to a great extent on consumer traffic in the malls and tourist locations in which our stores are located. Traffic to tourist locations in general has been reduced and may continue to be negatively impacted by COVID-19, which might disproportionally affect our business relative to other retailers that have locations in more traditional settings or that have a greater mix of online sales ordering. We rely on the ability of the malls’ anchor tenants, generally large department stores, and on the continuing

popularity of malls and tourist locations as shopping destinations to attract high levels of consumer traffic. We cannot control the development of new shopping malls nor the closure of existing malls, the addition or loss of anchors and co-tenants, the availability or cost of appropriate locations within existing or new shopping malls or the desirability, safety or success of shopping malls. Additionally, in recent years, thereThe pandemic accelerated a trend that has been a trendoccurring for years of consumers preferringshifting behavior to increasingly purchase products from online merchants rather than traditional brick and mortar stores, and whilebrick-and-mortar stores. While we havehad significant positive growth in our e-commerce sales and continueare working to develop and strengthen our online business, we continue to depend heavily on sales at our physical store locations. Consumer mall traffic may also be reduced due to factors such as the economy, civil unrest, actual or threatened acts of terrorism to shopping malls,locations, the impact of weather or natural disasters or a decline in consumer confidence resulting from international conflicts or war. A decrease in shopping mallconsumer traffic could have an adverse effect on our financial condition and profitability.

In particular, COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in areas that attract dense crowds, such as shopping malls. This resulted in temporary store closures in fiscal 2020 and significant declines in mall traffic and continues to pose risks for store closures and continued reductions in traffic in 2021. As an example, our store portfolio in the United Kingdom was temporarily closed as a result of government mandates beginning in November 2020 and continuing into Spring 2021, with only brief openings of a week or less between periods of the mandated lockdown. Further, temporary store closures continue to occur in response to periodic coronavirus exposures in order to comply with government mandates and company policy surrounding the potential exposures.

A decline in general global economic conditions could lead to disproportionately reduced discretionary consumer spending and a corresponding reduction in demand for our products and have an adverse effect on our liquidity and profitability.

Since purchases of our merchandise are dependent upon discretionary spending by our guests, our financial performance is sensitive to changes in overall economic conditions that affect consumer spending. Consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. A slowdown in the North American or European economies or in the economies of the countries in which our franchisees and third-party retail partners operate or uncertainty as to the economic outlook could reduce discretionary spending or cause a shift in consumer discretionary spending to other products. For example, the potential adverse effects of COVID-19 across geographies and the U.K.'s decision to leave the European Union ("EU"), commonly referred to as Brexit, in the U.K. market, may be underestimated and the actual effects are dependent on many factors that may be beyond the control of the authorities in the countries in which we operate including the United States, Canada, and the U.K. The potential adverse effects of any of these factors would likely result in lower net retail sales and could also result in excess inventories, which could, in turn, lead to increased merchandise markdowns and related costs associated with higher levels of inventory and adversely affect our liquidity and profitability. In addition, economic uncertainty can affect the credit and capital markets and our financial condition which may affect our ability to access capital resources under our credit agreement. The amount available for borrowing could be restricted under this agreement if the amount of our assets used to calculate the borrowing base (specified percentages of eligible credit card receivables, eligible inventory, and, under certain circumstances, eligible foreign in-transit inventory and, in the discretion of the agent, eligible receivables) decrease.

Brexit has increased the uncertainty in the economic and political environment in Europe. On December 24, 2020, the U.K. and the EU reached a post-Brexit Trade and Cooperation Agreement that contains new rules governing the relationship between the U.K. and the EU, including with respect to trade, travel and immigration, among other things. Our business in the U.K. may be adversely impacted by ongoing uncertainty, fluctuations in currency exchange rates, changes in trade policies, or changes in labor, immigration, tax, data privacy or other laws. Any of these effects, among others, could materially and adversely affect our business, results of operations, and financial condition.

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 and drive consumer demand for our products and services.

We continue to update and evaluate our marketing initiatives, which are focused on building our brand, sharing relevant product news, executing timely promotions and adapting to rapidly changing consumer preferences. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our integrated marketing and advertising programs, access to leading entertainment relationships in a profitable manner and future marketing and advertising efforts that we undertake, including our ability to:

Moreover, our branding and marketing efforts could be undermined by the nature of our mall-based, interactive experience, as consumers make different choices in order to continue social distancing practices. The perception that our experience may not be safe, in particular for vulnerable populations, could have a material adverse impact on the effectiveness of our branding and marketing efforts which could negatively impact our financial results. Our planned marketing expenditures may not result in increased total sales or generate sufficient levels of product and brand awareness, which could also have a material adverse effect on our financial condition and profitability. Additionally, we have shifted a number of our marketing programs to digital outlets which may not be as effective as historical programs.

Our profitability could be adversely affected by fluctuations in petroleum products prices.

The profitability of our business depends to a certain degree upon the price of petroleum products, both as a component of the transportation costs for delivery of inventory from our vendors to our stores and as a raw material used in the production of our plush products and stuffing. We are unable to predict what the price of crude oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers the increased costs that would result from higher petroleum prices. Therefore, any such increase could have an adverse impact on our business and profitability.

Our business may be adversely impacted at any time by a variety of significant competitive threats.

We operate in a highly competitive environment characterized by low barriers to entry. We compete against a diverse group of competitors. Because we are primarily mall-based, we see our competition as those mall-based retailers that compete for prime mall locations, including various apparel, footwear and specialty retailers. As a retailer whose signature product is a stuffed animal that is typically purchased as a toy or gift, we also compete with big box retailers and toy stores, as well as manufacturers that sell plush toys. Since we offer our guests an experience as well as merchandise, we also view our competition as any 

company that competes for our guests’ time and entertainment dollars, such as movie theaters, restaurants, amusement parks and arcades. In addition, there are several small companies that operate “make your own” teddy bear and stuffed animal experiences in retail stores and kiosks. Although we believe that none of these companies currently offer the breadth and depth of the Build-A-Bear Workshop products and experience, we cannot be certain that they will not compete directly with us in the future.

Many of our competitors have longer operating histories, significantly greater financial, marketing and other resources, and greater name recognition. We cannot be certain that we will be able to compete successfully with them in the future, particularly in geographic locations that represent new markets for us. If we fail to compete successfully, our market share and results of operations could be materially and adversely affected.

The retail sector has experienced an immense increase in sales initiated online and using mobile applications, as well as online sales for both in-store or curbside pick-up. Online and multi-channel retailers continue to focus on delivery services, with customers increasingly seeking faster, guaranteed delivery times and low-cost or free shipping. Our ability to be competitive on delivery times and delivery costs depends on many factors, and our failure to successfully manage these factors and offer competitive delivery options could negatively impact the demand for our products and our profit margins.

OPERATIONAL RISKS

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.

We believe that our success depends in large part upon our ability to continue to attract new and repeat guests with our interactive shopping experience, and our ability to anticipate, gauge and respond in a timely manner to changing consumer preferences, includingsuch as online buying, and fashion trends.trends including licensed relationships. We cannot assure yoube certain that there will continue to be a demand for our “make-your-own stuffed animal” interactive experience, including our store design and brand appearance, or for our stuffed animals, related apparel and accessories. A decline in demand for our interactive shopping experience, our stuffed animals, related apparel or accessories, or a misjudgment of consumer preferences, fashion trends or the demand for licensed products, including those that are associated with new movie releases, could have a negative impact on our business, financial condition and results of operations. In addition, due to COVID-19, we modified our interactive shopping experience in order to comply with social distancing guidelines and sanitation practices, which could have a negative impact on the appeal of our interactive shopping experience. Conversely, if we do not modify our experience to a sufficient degree to address safety concerns relative to social distancing remediation, the perception that we are not adequately addressing these concerns may adversely affect our brand.

Our future success depends, in part, on the popularity and consumer demand for brands of licensors such as Disney, LucasFilm, Marvel, HasbroLucasfilm, Warner Bros., and The Pokémon Company.Nintendo. If we are not able to meet our contractual commitments or are unable to maintain licensing agreements with key brands, our business would be adversely affected. There can be no certainty that our access to licensed brands will continue to be successful or enable us to maintain high levels of sales in the future and the timing of future entertainment projects may not coincide with the timing of previous successes impacting our ability to maintain sales levels. In addition, if we miscalculate the market for our merchandise or the purchasing preferences of our guests, we may be required to sell a significant amount of our inventory at discounted prices or even below costs, thereby adversely affecting our financial condition and profitability.

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.

We continueare subject to updaterisks associated with technology and evaluate our marketing initiatives, which are focused on building our brand, sharing relevant product news, executing timely promotions and adapting to rapidly changing consumer preferences. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our integrated marketing and advertising programs and future marketing and advertising efforts that we undertake, including our ability to:digital operations.

Our planned marketing expendituresoperations are subject to numerous technology related risks, including risks related to the failure of the computer systems that operate our point of sale and inventory systems, websites and mobile sites and their related support systems. We engage key third-party business partners to support various functions of our business, including, but not limited to, information technology, web hosting and cloud-based services. We, and those third party business that support us, are also subject to risks related to computer viruses, telecommunications failures, and similar disruptions. Also, we may not resultrequire additional capital in increased totalthe future to sustain or comparablegrow our technological infrastructure and digital commerce capabilities.

Business risks related to technology and digital commerce include risks associated with the need to keep pace with rapid technological change, internet security risks, risks of system failure or inadequacy, governmental regulation and legal uncertainties with respect to the internet, and collection of sales or generate sufficient levelsother taxes by additional states or foreign jurisdictions. If any of product and brand awareness, whichthese risks materialize, it could have a material adverse effect on our financial conditionbusiness. Further, as our online sales have increased and profitability.have become critical to our growth, the risk of any interruption of our information technology system capabilities is heightened.

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 revenue and profitability could be harmed.

We lease all of our store locations. The majority of our store leases contain provisions for base rent plus percentage rent based on sales in excess of an agreed upon minimum annual sales level. A declinenumber of our leases include a termination provision which applies if we do not meet certain sales levels during a specified period, typically in general global economic conditionsthe third to fourth year and the sixth to seventh year of the lease, which may be at either the landlord’s option or ours. Although we have largely shifted our leases in North America to shorter term leases to provide flexibility in aligning stores with market trends, this strategy has risk if we renew leases at a time when commercial rental rates are higher than the rate we could leadhave secured with a longer term lease. Furthermore, some of our leases contain various restrictions relating to disproportionately reduced consumer demand forchange of control of our products,company. Our leases also subject us to risks relating to compliance with changing shopping location rules and the exercise of discretion by our landlords on various matters within these locations. We may not be able to maintain or obtain favorable locations within these desirable shopping locations. The terms of new leases may not be as favorable, which represent relatively discretionary spending,could cause an increase in store expenses negatively impacting overall profitability. If we execute termination rights, we may incur expenses and have an adverse effect oncharges associated with those closures that could negatively impact our liquidity and profitability.

Since purchasesAdditionally, several large landlords dominate the ownership of prime malls, particularly in the U.S. and Canada, and because of our dependence on these landlords for a substantial number of our locations, any significant erosion in their financial conditions or our relationships with these landlords could negatively affect our ability to obtain and retain store locations. Further landlord consolidation may negatively impact our results of operations.

Our leases in the U.K. and Ireland also typically contain provisions requiring rent reviews every five years in which the base rent that we pay is adjusted to current market rates. These rent reviews require that base rents cannot be reduced if market conditions have deteriorated but can be changed “upwards only.” We may be required to pay base rents that are significantly higher than we have projected. As a result of these and other factors, we may not be able to operate our European store locations profitably. If we are unable to do so, our results of operations and financial condition could be harmed, and we may be required to record significant additional impairment charges.

Our company-owned distribution center that 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 be required to close and operations may experience disruptions or may operate inefficiently.

The operation of our stores is dependent on our ability to distribute merchandise are dependent upon discretionary spending byto locations throughout the U.S., Canada, Europe and China in a timely manner. We own a 350,000-square-foot distribution center in Groveport, Ohio and rely on this warehouse to receive, store and distribute merchandise for the majority of our guests,North America stores. To operate this location, our financial performanceability to meet changing labor needs while controlling our costs is sensitivesubject to changes in overall economic conditions that affect consumer spending. Consumer spending habits are affected by, among other things,external factors such as labor laws, regulations, unemployment levels, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perceptionchanging demographics. In addition, we rely on third parties to manage all of economic conditions. A slowdownthe warehousing and distribution aspects of our business in the United States, Canadian or European economies orwestern U.S., Europe and in China. For example, as noted above, in Europe, we contract with a third-party distribution center in Selby, England under an agreement that ends in January 2025, and the effects of Brexit could adversely affect this distribution arrangement. Any significant interruption in the economiesoperation of the countries in whichdistribution centers due to natural disasters or severe weather, events such as fire, accidents, power outages, system failures, public health issues such as the current COVID-19 pandemic (or other future pandemics), or other unforeseen causes could damage a significant portion of our franchisees operate or uncertainty asinventory. These factors may also impair our ability to the economic outlookadequately stock our stores and fulfill e-commerce orders and could reduce discretionary spending or cause a shift in consumer discretionary spending to other products. Any of these factors would likely result in lower net retaildecrease our sales and could also result in excess inventories, which could, in turn, lead to increased merchandise markdowns and relatedincrease our costs associated with higher levelsour supply chain.

In March 2020, we announced the temporary closure of inventoryour warehouse and e-commerce fulfillment center in Ohio as it reviewed its processes related to workplace safety and assessed the scope of the Ohio statewide "stay at home" order, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention and Ohio state health and regulatory authorities. The Ohio warehouse was reopened at the beginning of April 2020 following the review and reconfiguration of workflow and workspaces to further promote social distancing and minimize interaction as orders are fulfilled. Additional closures may be required or voluntarily adopted by us under federal and state law guidelines, and any such closure(s) may be long term. In addition, the newly implemented changes to workflow and workspaces could slow our order processing times and impact our ability to optimize the e-commerce channel.

We may not be able to evolve our store locations over time to align with market trends, successfully diversify our store models and formats in accordance with our strategic goals or otherwise effectively manage our overall portfolio of stores which could adversely affect our liquidityability to grow and could significantly harm our profitability.

Our future results will largely depend on our ability to optimize store productivity and profitability by strategically evolving our real estate portfolio to align with market trends while selectively opening new locations and systematically refreshing our store base. For example, our strategy includes a focus on tourist locations due to changing consumer preferences and declining traditional mall traffic and we cannot be certain that this strategy will be successful. Our ability to manage our portfolio of stores in future years, in desirable locations as well as operate stores profitably, particularly in multi-store markets, is a key factor in our ability to achieve sustained profitable growth. We cannot be certain when or whether desirable locations will become available, the number of Build-A-Bear Workshop stores that we can or will ultimately open, or whether any such new or relocated stores can be profitably operated. We may decide to close other stores in the future. For example, in January 2018, we closed a flagship store in Anaheim, California. This store had much larger annual sales than our typical mall-based stores. 

Additionally, in fiscal 2020 we operated 22 stores located within other retailers’ stores and 56 stores through our "third-party wholesale" model and as such are subject to the operational risks of these retailers, including but not limited to, ineffective store operations, labor disputes and negative publicity, all of which could have a negative impact on our sales and operating performance.

INTERNATIONAL RISKS

We may not be able to operate our international corporately-managed locations profitably.

In addition to our U.S. locations, we currently operate stores in the U.K., Canada, Ireland and China. Our future success in international markets may be impacted by differences in consumer demand, regulatory and cultural differences, economic uncertainty can affectconditions, public health issues such as COVID-19, changes in foreign government policies and regulations, changes in trading status, compliance with U.S. laws affecting operations outside the creditU.S., such as the Foreign Corrupt Practices Act, as well as other risks that we may not anticipate. Brand awareness in international markets may be lower than in the U.S. and capital marketswe may face higher labor and might impactrent costs, as well as different holiday schedules. Although we have realized benefits from our accessoperations in the U.K. and Ireland, we may be unable to capital resources atcontinue to do so on a consistent basis. For example, in the U.K. we have recorded a full valuation allowance as of the end of fiscal 2020 on our deferred tax assets and during fiscal 2020 we recorded $1.9 million in long-lived asset impairments including right-of-use assets. In 2016, we opened our first corporately-managed location in China and subsequently recognized an affordable cost to meetimpairment charge on a substantial portion of the store’s assets. In addition, the impacts of COVID-19 on our needs. These capital market conditionsinternationally corporately-managed locations, including government mandated temporary store closures, limited store operating hours, restricted crowd levels and reduced customer traffic and consumer spending, such as those seen in the U.K. in 2020 and 2021, may affect the renewal or replacement of our credit agreement, which was originally enteredprofitability at these locations.

Additionally, we conduct business globally in fiscal 2000 and has been extended annually since then and currently expires December 31, 2018. Although we believe that our capital structure and credit facilities will provide sufficient liquidity, there canmany different jurisdictions with currencies other than U.S. dollars. Our results could be no assurance that our liquidity will not be affectednegatively impacted by changes or fluctuations in the accesscurrency exchange rates since we report our consolidated financial results in U.S. dollars. For example, we may purchase products in U.S. dollars but sell them to capital markets or that our accesscustomers in local currencies, which exposes us to capital will at all times be sufficient or at an acceptable cost to satisfy our needs.

foreign exchange risk, as described in “Our merchandise is manufactured by foreign manufacturers and we transact business in various foreign countries; therefore,countries, and 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.” below.  In addition, we could experience restrictions on the transfer of funds to and from foreign countries, including potentially negative tax consequences.

We rely on a few global supply chain 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 purchasedo not own or operate any factories that produce our plush products, clothing, shoes or accessories. For the past two years, we purchased nearly 80% of our merchandise from both domesticfour vendors. These vendors whoin turn contract for the production of merchandise with multiple manufacturing facilities, located primarily in China and Vietnam. Our relationships with our vendors generally are on a purchase order basis and do not provide a contractual obligation to provide adequate supply or acceptable pricing on a long-term basis. Our vendors could discontinue sourcing merchandise for us at any time. If any of our significant vendors were to discontinue their relationship with us, or if the factories with which they contract were to suffer a disruption in their production, we may be unable to replace the vendors in a timely manner, which could result in short-term disruption to our inventory flow or quality of the inventory as we transition our orders to new vendors or factories which could, in turn, disrupt our store operations and have an adverse effect on our business, financial condition and results of operations. Such disruptions may result from public health issues such as the current COVID-19 pandemic (or other future pandemics), weather related events, natural disasters, trade restrictions, tariffs, work stoppages or slowdowns, shipping capacity constraints, supply or shipping interruptions, or other factors beyond our control. Additionally, in the event of a significant price increase from these suppliers, we may not be able to find alternative sources of supply in a timely manner or raise prices to offset the increases, which could have an adverse effect on our business, financial condition and results of operations.

If we are unable to renew, renegotiate or replaceeffectively manage our store leases or enter into leases forinternational franchises, attract new stores on favorable terms,franchisees or if we violate any of the terms oflaws relating to our current leases,international franchises change, our growth and profitability could be harmed.adversely affected, and we could be exposed to additional liability.

As of January 30, 2021, there were 71 Build-A-Bear Workshop international franchised stores. We leasecannot ensure that our franchisees will be successful in identifying and securing desirable locations or in operating their stores. International markets frequently have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing operated markets, which impact the performance of these stores. Additionally, our franchisees may

experience financing, merchandising and distribution expenses and challenges that are different from those we encounter in our corporately-managed markets. The operations and results of our franchisees could be negatively impacted by the economic, public health (such as COVID-19), or political factors in the countries in which they operate or foreign currency fluctuations. These challenges, as well as others, could have a material adverse effect on our business, financial condition and results of operations.

The success of our franchising strategy depends upon our ability to attract and maintain qualified franchisees with sufficient financial resources to develop and grow their operations and upon the ability of those franchisees to successfully develop and operate their franchised stores. Franchisees may not operate stores in a manner consistent with our standards and requirements, may not hire and train qualified managers and other store personnel, may not operate their stores profitably and may not pay amounts due to us. As a result, our franchising operations may not be profitable. Moreover, our brand image and reputation may suffer. If franchisees perform below expectations, we may transfer those agreements to other parties, take over the operations directly or discontinue the franchise agreement. For example, in 2016, we consented to the sale of the franchise in South Africa to new owners. Furthermore, the interests of franchisees might sometimes conflict with our interests. For example, whereas franchisees are concerned with their individual business objectives, we are responsible for ensuring the success of the Build-A-Bear brand and all of our store locations. The majority of our store leases contain provisions for base rent plus percentage rent based on sales in excess of an agreed upon minimum annual sales level. A number of our leases include a termination provision which applies ifstores. In addition, we do not meet certain sales levels during a specified period, typicallyhave recently terminated franchise agreements covering Mexico, Thailand and Germany resulting in the third to fourth year and the sixth to seventh yearclosure of all stores in these territories.

The laws of the lease,various foreign countries in which may be at either the landlord’s option or ours. Furthermore, some of our leases contain various restrictions relating to change of control of our company. Our leases also subject us to risks relating tofranchisees operate as well as compliance with changing mall rules andU.S. laws affecting operations outside the exercise of discretion by our landlords on various matters withinU.S., such as the malls. We may not be able to maintain or obtain favorable locations in desirable malls. The terms of new leases may not be as favorable, which could cause an increase in store expenses negatively impacting overall profitability. If we execute termination rights, we may have expenses and charges associated with those closures that could negatively impact our profitability. Additionally, several large landlords dominate the ownership of prime malls, particularly in the United States and Canada, and because of our dependence on these landlords for a substantial number of our locations, any significant erosion in their financial conditions orForeign Corrupt Practices Act, governs our relationships with these landlordsour franchisees. These laws, and any new laws that may be enacted, may detrimentally affect the rights and obligations between us and our franchisees and could negatively affect our abilityexpose us to obtain and retain store locations. Further landlord consolidation may negatively impact our results of operations.additional liability.

Our leases in the United Kingdom and Ireland also typically contain provisions requiring rent reviews every five years in which the base rent that we pay is adjusted to current market rates. These rent reviews require that base rents cannot be reduced if market conditions have deteriorated but can be changed “upwards only.” We may be required to pay base rents that are significantly higher than we have projected. As a result of these and other factors, we may not be able to operate our European store locations profitably. If we are unable to do so, our results of operations and financial condition could be harmed and we may be required to record significant additional impairment charges.LEGAL, TECHNOLOGY AND INTELLECTUAL PROPERTY RISKS

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 andas well as damage to our reputation.

Information technology is a critically important part of our business operations. We depend on information systems to process transactions, manage inventory, operate our websites, manage consumer databases, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. There is a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. We may experience operational problems with our information systems as a result of system failures, system implementation issues, viruses, malicious hackers, sabotage, code anomalies, “Acts of God,” human error or other causes.

Our business involves the storage and transmission of consumers’ personal information, such as personal preferences and credit card information. We invest in industry-standard security technology to protect the Company’sour data and business processes against the risk of data security breaches and cyber-attacks. Our data security management program includes identity, trust, vulnerability and threat management business processes, as well as enforcement of standard data protection policies such as Payment Card Industry compliance. We measure our data security effectiveness through industry accepted methods and remediate critical findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification measures. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness. Internet privacy is a rapidly changing area and we may be subject to future requirements and legislation that are costly to implement and may negatively impact our results.

While we believe that our security technology and processes are adequate in preventing security breaches and in reducing cyber security risks, given the ever-increasing abilities of those intent on breaching cyber security measures and given our reliance on the security and other efforts of third-party vendors, the total security effort at any point in time may not be completely effective, and any such security breaches and cyber incidents could adversely affect our business. Failure of our systems, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to us, our employees, and those with whom we do business. In addition, due to COVID-19, our workforce is in a state of transition to a combination of remote work and flexible work schedules opening us up for cyber-security threats and potential breaches as a result of increased employee usage of

networks other than company-owned. Any security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential information could also severely damage our reputation, expose us to the risks of litigation and liability, and harm our business. While we carry insurance that would mitigate the losses to an extent, such insurance may be insufficient to compensate us for potentially significant losses.

We currently obtain and retain personal information about our website users, store shoppers and loyalty program members. Federal, state and foreign governments have enacted or may enact laws or regulations regarding the collection and use of personal information, with particular emphasis on the collection of information regarding minors. Such regulation may also include enforcement and redress provisions. We have a stringent, comprehensive privacy policy covering the information we collect from our guests and have established security features to protect our consumer database and websites. While we have implemented programs and procedures designed to protect the privacy of people, including children, from whom we collect information, and our websites are designed to be fully compliant with all applicable regulations including the Federal Children’s Online Privacy Protection Act, there can be no assurance that such programs will conform to all applicable laws or regulations. If we fail to fully comply, we may be subjected to liability and damage to our reputation. In addition, because our guest database primarily includes personal information of the parents of young children and young children frequently interact with our websites, we are potentially vulnerable to charges from parents, children’s organizations, governmental entities, and the media of engaging in inappropriate collection, distribution or other use of data collected from children. Additionally, while we have security features, our security measures may not protect users’ identities and our online safety measures may be questioned, which may result in negative publicity or a decrease in visitors to our sites. If site users act inappropriately or seek unauthorized contact with other users of the site, it could harm our reputation and, therefore, our business and we could be subject to liability. For example, the EU’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, and the California Consumer Privacy Act (“CCPA”), which became effective in January 2020, greatly increase the jurisdictional reach of EU and California law, respectively, and adds a broad array of requirements related to personal data, including individual notice and opt-out preferences and the public disclosure of significant data breaches. Additionally, violations of GDPR can result in fines calculated as a percentage of a company’s annual revenue and CCPA provides civil penalty violations, as well as a private right of action for data breaches. Other governments have enacted or are enacting similar data protection laws and are considering data localization laws that require data to stay within their borders. All of these evolving compliance and operational requirements impose significant costs and regulatory risks that are likely to increase over time.

We may notfail to renew, register or otherwise protect our trademarks or other intellectual property and may be able to evolve our store locations to align with market trendssued by third parties for infringement or to effectively manage our overall portfoliomisappropriation of storestheir proprietary rights, which could adversely affectbe costly, distract our ability to growmanagement and personnel and which could significantly harmresult in the diminution in value of our profitability.trademarks and other important intellectual property.

OurOther parties have asserted in the past, and may assert in the future, results will largely depend ontrademark, patent, copyright or other intellectual property rights that are important to our ability to optimize store productivity and profitability by strategically evolving our real estate portfolio to align with market trends while selectively opening new locations and systematically refreshing our store base. For example, our strategy includes a focus on tourist locations due to changing consumer preferences and declining traditional mall traffic and webusiness. We cannot be certain that this strategyothers will not seek to block the use of or seek monetary damages or other remedies for the prior use of our brand names or other intellectual property or the sale of our products or services as a violation of their trademark, patent or other proprietary rights. Defending any claims, even claims without merit, could be successful. Our ability to managetime-consuming, result in costly settlements, litigation or restrictions on our portfoliobusiness and damage our reputation.

In addition, there may be prior registrations or use of stores in future years, in desirable locations as well as operate stores profitably, particularly in multi-store markets, is a key factor in our ability to achieve sustained profitable growth. We cannot be certain when or whether desirable locations will become available, the number of Build-A-Bear Workshop stores that we can or will ultimately open, or whether any such new or relocated stores can be profitably operated. We may decide to close other storesintellectual property in the future. For example,U.S. or foreign countries for similar or competing marks or other proprietary rights of which we are not aware. In all such countries, it may be possible for any third-party owner of a national trademark registration or other proprietary right to enjoin or limit our expansion into those countries or to seek damages for our use of such intellectual property in January 2018,such countries. In the event a claim against us was successful and we closedcould not obtain a flagship store in the Downtown Disney® District at the Disneyland® Resort in Anaheim, California. This store had much larger annual sales than our typical mall-based stores. We believe that this store closure will have a short-term adverse impact on our revenues as we reposition our presence in the Los Angeles metropolitan area.

Additionally, in 2017 we operated 8 stores located within other retailers’ stores and as such are subjectlicense to the operational risks of these retailers, including but not limitedrelevant intellectual property or redesign or rename our products or operations to ineffective store operations, labor disputes and negative publicity. If other retailers in which we have stores are impacted by these factors, it could have a negative impact on our sales and operating performance.

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.

The success of our business depends upon the quality of associates throughout our organization and our ability to attract and retain qualified key employees. In June 2013, we hired a new Chief Executive Officer who replaced our retiring Founder and Chief Executive Bear. Since then, six other executive officers left the Company and four executive officers joined the Company. The success of our business depends on effective transition of these positions. During these transitions, organizational changes are likely to occur and we may not be able to retain key managers or associates. We may incur expenses related to the transition in these positions that could negatively impact the profitability of our business. The loss of certain key employees, our inability to attract and retain other qualified key employees or a labor shortage that reduces the pool of qualified candidates could have a material adverse effect onavoid infringement, our business, financial condition andor results of operations.operations could be harmed. Securing registrations does not fully insulate us against intellectual property claims, as another party may have rights superior to our registration, or our registration may be vulnerable to attack on various grounds.

We may suffer negative publicity or be sued if the manufacturers of our merchandise or of Build-A-Bear branded merchandise sold by our licenseesship any products that do not meet current safety standards or production requirements or if suchproducts are recalled or cause injuries.

Although we require our manufacturers to meet governmental safety standards, including food safety regulations for certain locations, and our product specifications as well as submitsubmitting our products for testing, we cannot control the materials used by, or the workmanship of, our manufacturers. Additionally, through our agreements, our licensees are required to ensure that their manufacturers meet applicable safety and testing standards. If any of these manufacturers ship merchandise that does not meet our required standards, we could in turn experience negative publicity or be sued.

Many of our products are used by small children and infants who may be injured from usage if age grading or warnings are not followed. We may decide or be required to recall products or be subject to claims or lawsuits resulting from injuries. For example, we have voluntarily recalled six products in the past nineten years due to possible safety issues. While our vendors have historically reimbursed us for certain related expenses, negative publicity in the event of any recall or if any children are injured from our products could have a material adverse effect on sales of our products and our business, and related recalls or lawsuits with respect to such injuries could have a material adverse effect on our financial position. Additionally, we could incur fines related to consumer product safety issues from the regulatory authorities in the countries in which we operate. Although we currently have liability insurance, we cannot assure you that it would cover product recalls or related fines, and we face the risk that claims or liabilities will exceed our insurance coverage. Furthermore, we may not be able to maintain adequate liability insurance in the future. While our licensing agreements typically indemnify us against financial losses resulting from a safety or quality issue from Build-A-Bear branded products sold by our licensees, our brand may be negatively impacted.

We may not be able to operate our international corporately-managedlocations profitably.

We currently operate locations in the United Kingdom, Canada, Ireland, Denmark and China. Our future success in international markets may be impacted by differences in consumer demand, regulatory and cultural differences, economic conditions, changes in foreign government policies and regulations, changes in trading status, compliance with U.S. laws affecting operations outside the U.S., such as the Foreign Corrupt Practices Act, as well as other risks that we may not anticipate. Brand awareness in international markets may be lower than in the U.S. and we may face higher labor and rent costs, as well as different holiday schedules. Although we have realized benefits from our operations in the United Kingdom and Ireland, we may be unable to continue to do so on a consistent basis. In 2016, we opened our first corporately-managed location in China and subsequently recognized an impairment charge on a substantial portion of the store’s assets. In February 2015, we converted a previously franchised store in Denmark into a corporately-managed location. In 2013 and 2014, we closed eight stores in Canada. In 2012, we recognized an impairment charge on all of the goodwill associated with our UK acquisition along with the store assets at certain store locations with poor operating results.

Additionally, we conduct business globally in many different jurisdictions with currencies other than U.S. dollars. Our results could be negatively impacted by changes or fluctuations in currency exchange rates since we report our consolidated financial results in U.S. dollars. In addition, we could experience restrictions on the transfer of funds to and from foreign countries, including potentially negative tax consequences.

We are subject to risks associated with technology and digital operations.

Our operations are subject to numerous technology related risks, including risks related to the failure of the computer systems that operate our point of sale and inventory systems, websites and mobile sites and their related support systems. We are also subject to risks related to computer viruses, telecommunications failures, and similar disruptions. Also, we may require additional capital in the future to sustain or grow our technological infrastructure and digital commerce capabilities.

Business risks related to technology and digital commerce include risks associated with the need to keep pace with rapid technological change, Internet security risks, risks of system failure or inadequacy, governmental regulation and legal uncertainties with respect to the Internet, and collection of sales or other taxes by additional states or foreign jurisdictions. If any of these risks materialize, it could have a material adverse effect on our business.

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 do not own or operate any factories that produce our skins, clothing, shoes or accessories. For the past three years, we purchased between 73% and 85% of our merchandise from four vendors. These vendors in turn contract for the production of merchandise with multiple manufacturing facilities, located primarily in China and, beginning in 2014, in Vietnam. Our relationships with our vendors generally are on a purchase order basis and do not provide a contractual obligation to provide adequate supply or acceptable pricing on a long-term basis. Our vendors could discontinue sourcing merchandise for us at any time. If any of our significant vendors were to discontinue their relationship with us, or if the factories with which they contract were to suffer a disruption in their production, we may be unable to replace the vendors in a timely manner, which could result in short-term disruption to our inventory flow or quality of the inventory as we transition our orders to new vendors or factories which could, in turn, disrupt our store operations and have an adverse effect on our business, financial condition and results of operations. Additionally, in the event of a significant price increase from these suppliers, we may not be able to find alternative sources of supply in a timely manner or raise prices to offset the increases, which could have an adverse effect on our business, financial condition and results of operations.

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.

Other parties have asserted in the past, and may assert in the future, trademark, patent, copyright or other intellectual property rights that are important to our business. We cannot assure you that others will not seek to block the use of or seek monetary damages or other remedies for the prior use of our brand names or other intellectual property or the sale of our products or services as a violation of their trademark, patent or other proprietary rights. Defending any claims, even claims without merit, could be time-consuming, result in costly settlements, litigation or restrictions on our business and damage our reputation.

In addition, there may be prior registrations or use of intellectual property in the U.S. or foreign countries for similar or competing marks or other proprietary rights of which we are not aware. In all such countries it may be possible for any third-party owner of a national trademark registration or other proprietary right to enjoin or limit our expansion into those countries or to seek damages for our use of such intellectual property in such countries. In the event a claim against us were successful and we could not obtain a license to the relevant intellectual property or redesign or rename our products or operations to avoid infringement, our business, financial condition or results of operations could be harmed. Securing registrations does not fully insulate us against intellectual property claims, as another party may have rights superior to our registration or our registration may be vulnerable to attack on various grounds.

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.

We rely on our sourcing personnel to select manufacturers with legal and ethical labor practices, but we cannot control the business and labor practices of our manufacturers. If one of these manufacturers violates labor laws or other applicable regulations or is accused of violating these laws and regulations, or if such a manufacturer engages in labor or other practices that diverge from those typically acceptable in the United States,U.S., we could in turn experience negative publicity, reputational harm, increased compliance and operating costs or be sued.

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 they may operate inefficiently.

The operation of our stores is dependent on our ability to distribute merchandise to locations throughout the United States, Canada, Europe and China in a timely manner. We own a 350,000-square-foot distribution center in Groveport, Ohio and rely on this warehouse to receive, store and distribute merchandise for the majority of our North America stores. To operate this location, our ability to meet our changing labor needs while controlling our costs is subject to external factors such as labor laws, regulations, unemployment levels, prevailing wage rates, and changing demographics. In addition, we rely on third parties to manage all of the warehousing and distribution aspects of our business on the West Coast of the United States and in Europe. Any significant interruption in the operation of the distribution centers due to natural disasters or severe weather, as well as events such as fire, accidents, power outages, system failures or other unforeseen causes could damage a significant portion of our inventory. These factors may also impair our ability to adequately stock our stores and could decrease our sales and increase our costs associated with our supply chain.

Our profitability could be adversely affected by fluctuations in petroleum products prices.

The profitability of our business depends to a certain degree upon the price of petroleum products, both as a component of the transportation costs for delivery of inventory from our vendors to our stores and as a raw material used in the production of our animal skins and stuffing. We are unable to predict what the price of crude oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers the increased costs that would result from higher petroleum prices. Therefore, any such increase could have an adverse impact on our business and profitability.

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.

As of December 30, 2017, there were 102 Build-A-Bear Workshop international franchised stores. We cannot ensure that our franchisees will be successful in identifying and securing desirable locations or in operating their stores. International markets frequently have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing operated markets, which impact the performance of these stores. Additionally, our franchisees may experience financing, merchandising and distribution expenses and challenges that are different from those we encounter in our existing markets. The operations and results of our franchisees could be negatively impacted by the economic or political factors in the countries in which they operate or foreign currency fluctuations. These challenges, as well as others, could have a material adverse effect on our business, financial condition and results of operations.

The success of our franchising strategy depends upon our ability to attract and maintain qualified franchisees with sufficient financial resources to develop and grow their operations and upon the ability of those franchisees to successfully develop and operate their franchised stores. Franchisees may not operate stores in a manner consistent with our standards and requirements, may not hire and train qualified managers and other store personnel, may not operate their stores profitably and may not pay amounts due to us. As a result, our franchising operations may not be profitable. Moreover, our brand image and reputation may suffer. When franchisees perform below expectations we may transfer those agreements to other parties, take over the operations directly or discontinue the franchise agreement. For example, in 2015, we terminated the franchise agreement in Scandinavia leading to the closure of stores in Norway and Sweden. In 2016, we consented to the sale of the South African franchise to new owners. Furthermore, the interests of franchisees might sometimes conflict with our interests. For example, whereas franchisees are concerned with their individual business objectives, we are responsible for ensuring the success of the Build-A-Bear brand and all of our stores.

The laws of the various foreign countries in which our franchisees operate as well as compliance with U.S. laws affecting operations outside the U.S., such as the Foreign Corrupt Practices Act govern our relationships with our franchisees. These laws, and any new laws that may be enacted, may detrimentally affect the rights and obligations between us and our franchisees and could expose us to additional liability.

Our business may be adversely impacted at any time by a significant variety of competitive threats.

We operate in a highly competitive environment characterized by low barriers to entry. We compete against a diverse group of competitors. Because we are primarily mall-based, we see our competition as those mall-based retailers that compete for prime mall locations, including various apparel, footwear and specialty retailers. As a retailer whose signature product is a stuffed animal that is typically purchased as a toy or gift, we also compete with big box retailers and toy stores, as well as manufacturers that sell plush toys. Since we offer our guests an experience as well as merchandise, we also view our competition as any company that competes for our guests’ time and entertainment dollars, such as movie theaters, restaurants, amusement parks and arcades. In addition, there are several small companies that operate “make your own” teddy bear and stuffed animal experiences in retail stores and kiosks. Although we believe that none of these companies currently offer the breadth and depth of the Build-A-Bear Workshop products and experience, we cannot assure you that they will not compete directly with us in the future.

Many of our competitors have longer operating histories, significantly greater financial, marketing and other resources, and greater name recognition. We cannot assure you that we will be able to compete successfully with them in the future, particularly in geographic locations that represent new markets for us. If we fail to compete successfully, our market share and results of operations could be materially and adversely affected.

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 expand our product assortment to include products manufacturedmanufactured by other companies. If sales of such products do not meet our expectations or are impacted by competitors’ pricing, we may have to take markdowns or employ other strategies to liquidate the product. If other companies do not meet quality or safety standards or violate any manufacturing or labor laws, we may suffer negative publicity and may not realize our sales plans.

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

We may from time to time engage in discussions and negotiations regarding acquisitions or other strategic transactions that could affect our financial condition, profitability or other aspects of our business. There can be no assurance that we will be able to identify suitable acquisition targets that we believe may complement our existing business. There can also be no assurance that if we acquire a business we will be successful in integrating it into our overall operations, or that any such acquired company will operate profitably or will not otherwise adversely impact our financial condition.

Risks Related to Owning Our Common Stock

Fluctuations in our operating results could reduce our cash flow, or trigger restrictions under our credit agreement, and we may be unable to repurchase shares at all or at the times or in the amounts we desire or the results of theour share repurchase program may not be as beneficial as we would like.

In August 2017,From time to time, we have repurchased shares under plans authorized by our Board of DirectorsDirectors. Currently, there is no authorized a $20 million share repurchase program. The program doesplan but one may be authorized in the future. Such programs generally do 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. If our cash flow decreases as a result of decreased sales, increased expenses or capital expenditures or other uses of cash, we may not be able to repurchase shares of our common stock at all or at times or in the amounts we desire. As a result, the results of theany share repurchase program may not be as beneficial as expected. In addition, our credit agreement restricts our ability to repurchase shares when certain liquidity conditions exist.

Fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline.

Retailers generally are subject to fluctuations in quarterly results. Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly due to a variety of factors, including:

If our future quarterly results fluctuate significantly or fail to meet the expectations of the investment community, then the market price of our common stock could decline substantially.

The limited public floatmarket price of our common stock is subject to volatility, which could attract the interest of activist shareholders.

During fiscal 2020, the price of our common stock fluctuated between $1.02 and trading volume for$6.78 per share, and traded as high as $9.01 per share in early fiscal 2021. The market price of our common stock may have an adverse impact and cause significant fluctuationbe significantly affected by a number of market price.

Historically, ownership of a significant portionfactors, including, but not limited to, actual or anticipated variations in our operating results or those of our outstanding sharescompetitors as compared to analyst expectations, changes in financial estimates by research analysts with respect to us or others in the retail industry, and announcements of commonsignificant transactions (including mergers or acquisitions, divestitures, joint ventures, stock has been concentrated in a small number of institutional stockholders. The members of our Board of Directors, officers andrepurchases or other members of management own stock acquired as a result of incentive compensation equity grantsstrategic initiatives) by us or otherwise. Consequently, our common stock has a relatively small float and low average daily trading volume, which could affect a stockholder’s ability to sell our stock or the price at which it can be sold.other similar companies. In addition, future salesthe equity markets have experienced price and volume fluctuations that affect the stock price of substantial amountscompanies in ways that have been unrelated to an individual company’s operating performance. The price of our common stock inmay continue to be volatile, based on factors specific to our company and industry, as well as factors related to the public market by those larger stockholders, orequity markets overall. Moreover, such volatility could attract the perception that these salesinterest of activist shareholders. Responding to activist shareholders can be costly and time-consuming, and the perceived uncertainties as to our future direction resulting from responding to activist strategies could occur, may adversely impactitself then further affect the market price and volatility of the stock and our stock could be difficult for a stockholder to liquidate.common stock.

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’stockholders’ best interests.

Our basic corporate documents and Delaware law contain provisions that might enable our management to resist a takeover. These provisions:

These provisions may:

limit the price that investors might be willing to pay in the future for shares ofimpact our common stock.financial condition.

20

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ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.

PROPERTIES

 

Stores

 

We lease all of our store locations. As of DecemberJanuary 30, 2017,2021, we operated 361354 retail stores located primarily in major malls throughout the United States,U.S., Canada, Puerto Rico, the United Kingdom,U.K., Ireland Denmark and China in our DTC segment.

 

Non-Store Properties

 

In addition to leasing all of our store locations, we own a warehouse and distribution center in Groveport, Ohio, which is utilized primarily by our DTC segment. The facility is approximately 350,000 square feet and includes our North American e-commerce fulfillment site. We also lease approximately 59,000 square feet forcenter. In June 2020, we moved our corporate headquarters into downtown St. Louis, Missouri which housesinto a 51,600 square foot building with a lease of eleven years commencing in June 2020. After the move of our corporate staff,headquarters, we continued to lease an approximately 9,250 square foot portion of our call centerprior headquarters with the lease commencing in July 2020 and our on-site training facilities. The lease was amended, effective January 3, 2018, with a one-year term.continuing through June 2023. In the United Kingdom, weU.K., we lease approximately 6,500 square feet for our regional headquarters in Slough, England under a lease that commenced in March 2016 with a term of 10 years. We also contract with a third-party warehouse in southern California to service our West Coast stores. The contract has a one-year term and is renewable. In Europe, we contract with a third-party distribution center in Selby, England under an agreement that ends in January 2025. This agreement contains clauses that allow for termination if certain performance criteria are not met. In Asia, we contract with a third-party distribution center in Shanghai, China which is currently on a month-to-month extension while negotiations for an agreement are on-going.

 

ITEM  3.

LEGAL PROCEEDINGS

 

From time to time, we are involved in ordinary routine litigation typical for companies engaged in our line of business,, including actions seeking to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. As of the date of this Annual Report on Form 10-K, we are not involved in any pending legal proceedings that we believe would be likely, individually or in the aggregate, to have a material adverse effect on our financial condition or results of operations.

 

ITEM  4.

MINE SAFETY DISCLOSURE

 

Not applicable.applicable.

 

12

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PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “BBW.” Our common stock commenced trading on the NYSE on October 28, 2004. The following table sets forth the high and low sale prices of our common stock for the periods indicated.

		Fiscal 2017								Fiscal 2016
		High				Low				High				Low
First Quarter		$	14.65			$	8.05			$	14.74			$	10.74
Second Quarter		$	11.90			$	8.25			$	14.52			$	12.28
Third Quarter		$	11.00			$	8.10			$	14.27			$	10.01
Fourth Quarter		$	10.05			$	7.25			$	15.85			$	10.35

 

As of March 9, 2018,April 12, 2021, the number of holders of record of the Company’s common stock totaled approximately 1,797.1,945.

 

PERFORMANCE GRAPH

The following performance graph compares the 60-month cumulative total stockholder return of our common stock, with the cumulative total return on the Russell 2000^® Index and an SEC-defined peer group of companies identified as SIC Code 5600-5699 (the “Peer Group”). The Peer Group consists of companies whose primary business is the operation of apparel and accessory retail stores. Build-A-Bear Workshop is not strictly a merchandise retailer and there is a strong interactive, entertainment component to our business which differentiates us from retailers in the Peer Group. However, in the absence of any other readily identifiable peer group, we believe the use of the Peer Group is appropriate.

The performance graph starts on December 29, 2012, and ends on December 29, 2017, the last trading day prior to December 30, 2017, the end of our fiscal 2017. The graph assumes that $100 was invested on December 29, 2012, in each of our common stock, the Russell 2000 Index and the Peer Group, and that all dividends were reinvested.

These indices are included only for comparative purposes as required by SEC rules and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock. They are not intended to forecast the possible future performance of our common stock.

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ISSUER PURCHASES OF EQUITY SECURITIES

 

 

Period		(a) Total Number of Shares (or Units) Purchased (1)				(b) Average Price Paid Per Share (or Unit) (2)				(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (3)				(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (3)
Oct. 1, 2017 – Oct. 28, 2017			174			$	8.59				-			$	19,002,247
Oct. 29, 2017 – Nov. 25, 2017			89			$	7.95				-			$	19,002,247
Nov. 26, 2017 – Dec. 30, 2017			401,400			$	9.14				401,400			$	15,334,448
Total			401,663			$	9.14				401,400			$	15,334,448

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(1)Period

Includes shares

(a) Total Number 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) Shares (or Units) Purchased

(b) Average Price Paid Per Share includes commissions. (or Unit)

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

(3)Nov. 1, 2020 – Nov. 28, 2020

-

$

-

-

$

-

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 SeptemberNov. 29, 2020 – Jan. 2, 2021

-

$

-

-

$

-

Jan. 3, 2021 – Jan. 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.2021

-

$

-

-

$

-

Total

-

$

-

-

$

-

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities during the past three years.

 

Dividend Policy

No dividends were paid in 2017, 2016 or 2015. We anticipate that we will retain any future earnings to support operations, to finance the growth and development of our business and to repurchase shares of our common stock from time to time and we do not expect, at this time, to pay cash dividends. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects and other factors that the Board of Directors may deem relevant. Additionally, under our credit agreement, we are prohibited from declaring dividends without the prior consent of our lender, subject to certain exceptions, as described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

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ITEM 6.

SELECTED FINANCIAL DATA

 

Throughout this Annual Report on Form 10-K, we refer to our fiscal years ended December 30, 2017, December 31, 2016, January 2, 2016, January 3, 2015 and December 28, 2013, as fiscal years 2017, 2016, 2015, 2014 and 2013, respectively. Through fiscal year 2017, our fiscal year consisted of 52 or 53 weeks and ends on the Saturday nearest December 31 in each year. The 2014 fiscal year included 53 weeks and fiscal years 2017, 2016, 2015, and 2013 included 52 weeks. All of our fiscal quarters presented in this Annual Report on Form 10-K included 13 weeks. When we refer to our fiscal quarters, or any three-month period ending as of a specified date, we are referring to the 13-week period prior to that date. On January 9, 2018, the Company's Board of Directors approved a change in the Company’s fiscal year-end, which previously ended on the Saturday closest to December 31, to the Saturday closest to January 31. See Note 16 – Subsequent Event to the Consolidated Financial Statements for additional information.Not applicable.

The following table sets forth, for the periods and dates indicated, our selected consolidated financial and operating data. The balance sheet data for fiscal 2017 and 2016 and the statement of operations and other financial data for fiscal 2017, 2016 and 2015 are derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The balance sheet data for fiscal 2015, 2014 and 2013, and the statement of operations and other financial data for fiscal 2014 and 2013 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. You should read our selected consolidated financial and operating data in conjunction with our consolidated financial statements and related notes and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K.

		Fiscal Year
		2017				2016				2015				2014				2013
		(Dollars in thousands, except share and per share data)
Statement of operations data:
Total revenues		$	357,866			$	364,204			$	377,694			$	392,354			$	379,069
Costs and expenses:
Cost of merchandise sold - retail			185,481				195,914				197,101				210,887				219,696
Cost of merchandise sold - commercial			3,412				2,253				1,375				945				1,042
Selling, general and administrative			152,653				157,174				159,612				163,262				158,397
Store preopening			2,496				3,549				1,851				1,183				2,311
Interest expense (income), net			11				5				(143	)			53				(259	)
Total costs and expenses			344,053				358,895				359,796				376,330				381,187
Income (loss) before income taxes			13,813				5,309				17,898				16,024				(2,118	)
Income tax expense (benefit)			5,897				3,932				(9,447	)			1,662				(6	)
Net income (loss)		$	7,916			$	1,377			$	27,345			$	14,362			$	(2,112	)
Income (loss) per common share:
Basic		$	0.50			$	0.09			$	1.61			$	0.82			$	(0.13	)
Diluted		$	0.50			$	0.09			$	1.59			$	0.81			$	(0.13	)
Shares used in computing common per share amounts:
Basic			15,572,045				15,442,086				16,642,269				16,908,001				16,465,138
Diluted			15,757,060				15,622,273				16,867,356				17,133,811				16,465,138

 

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		Fiscal Year (1)
		2017				2016				2015				2014				2013
		(Dollars in thousands, except per store and per square foot data)
Other financial data:
Retail gross margin ($) (2)		$	163,927			$	161,679			$	175,614			$	176,838			$	153,477
Retail gross margin (%) (2)			46.9	%			45.2	%			47.1	%			45.6	%			41.1	%
Capital expenditures (3)		$	18,073			$	28,118			$	24,388			$	10,890			$	19,362
Depreciation and amortization			16,165				16,171				16,419				18,128				19,216
Cash flow data:
Cash flows provided by operating activities		$	21,088			$	16,014			$	32,047			$	34,884			$	19,058
Cash flows used in investing activities		$	(17,763	)		$	(26,657	)		$	(25,146	)		$	(11,789	)		$	(19,362	)
Cash flows (used in) provided by financing activities		$	(4,775	)		$	(1,948	)		$	(26,390	)		$	(1,783	)		$	132
Store data:
Number of stores at end of period (4)
North America			301				285				269				265				263
Europe			59				60				60				59				60
China			1				1				-				-				-
Total stores			361				346				329				324				323
Square footage at end of period (5)
North America			733,894				749,197				719,535				725,942				735,605
Europe			81,101				85,900				85,908				84,789				86,859
China			1,750				1,750				-				-				-
Total square footage			816,745				836,847				805,443				810,731				822,464
Average net retail sales per store: (6)
North America		$	918			$	1,007			$	1,075			$	1,158			$	1,080
United Kingdom		£	744			£	783			£	781			£	809			£	755
Net retail sales per square foot:
North America (7)		$	343			$	371			$	394			$	409			$	381
United Kingdom (8)		£	523			£	547			£	551			£	567			£	525
Consolidated comparable sales
Change (%) (9)			(6.5	)%			(4.4	)%			1.0	%			1.7	%			4.9	%
Balance sheet data:
Cash and cash equivalents		$	30,445			$	32,483			$	45,196			$	65,389			$	44,665
Working capital (10)			40,366				27,187				28,870				45,313				30,353
Total assets			197,989				199,595				213,334				212,054				195,611
Total stockholders' equity			107,315				99,112				99,414				97,625				84,390

(1)	Fiscal 2017, 2016, 2015 and 2013 included 52 weeks; fiscal 2014 included 53 weeks.

(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.

(3)	Capital expenditures consist of leasehold improvements, furniture and fixtures, land, buildings, computer equipment and software purchases, as well as trademarks, intellectual property and deferred leasing fees.

(4)	Excludes our e-commerce sites. North American stores are located in the United States, Canada and Puerto Rico. In Europe, stores are located in the United Kingdom, Ireland, and beginning in 2015, Denmark.

(5)	Square footage for stores located in North America is leased square footage. Square footage for stores located in Europe and China is estimated selling square footage.

(6)	Average net retail sales per store represents net retail sales only from stores open throughout the entire period, excluding e-commerce locations, divided by the total number of such stores.

(7)	Net retail sales per square foot in North America represents net retail sales from stores open throughout the entire period in North America, excluding e-commerce location, divided by the total leased square footage of such stores.

(8)	Net retail sales per square foot in the United Kingdom represents net retail sales from stores open throughout the entire period in the United Kingdom, excluding e-commerce location, divided by the total selling square footage of such stores.

(9)

Consolidated comparable sales percentage changes are based on net retail sales, including e-commerce, and exclude the impact of foreign exchange. Store locations are considered comparable beginning in their thirteenth full month of operation. Comparable sales percentage changes for 2015 are based on net retail sales as compared to the 52-week period ended January 3, 2015.

(10)	Working Capital is defined as current assets less current liabilities.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Annual Report on Form 10-K.

 

COVID-19 Pandemic

In March 2020, the spread of COVID-19 was declared a global pandemic by the World Health Organization. We have been and continue to closely monitor the impact of COVID-19 on all facets of our business. We have taken decisive actions to protect the safety of our employees and customers and to manage the business throughout the fluid and challenging environment resulting from COVID-19. The pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including government mandated closures and orders to "shelter-in-place." The actions that governments around the world have taken to mitigate the spread of COVID-19 have resulted in a period of disruption, including temporary closure of our stores, limited store operating hours, reduced customer traffic and consumer spending and delays in manufacturing and shipping of products

In response to the government recommendations and for the health and safety of our employees and customers, on March 17, 2020 we announced the temporary closure of all corporately-managed stores in the United States, Canada, the United Kingdom, Denmark and Ireland. On March 26, 2020 we announced the temporary closure of our warehouse and e-commerce fulfillment center in Ohio which was subsequently reopened on April 1, 2020 following the review and reconfiguration of workflow and workspaces. Additionally, on March 26, 2020 we announced the furlough of over 90% of our workforce, effective March 29, 2020; reduced pay by 20% for the remaining employees; delayed payment of bonuses earned based on fiscal 2019 performance; and delayed the Company matching contribution to our 401(k) plan. During the second quarter of fiscal 2020, we reopened the majority of our stores with the remainder reopening in the third quarter and brought back our workforce from furloughs over the same period. Further, in the third quarter our compensation committee authorized the return of base salary amounts, the payment of 2019 performance bonuses in December 2020, and the matching contribution to our 401(k) plan in December 2020.

Disruptions continued thereafter, however, as certain stores were required to temporarily close either individually or as part of entire geographic region mandates in response to COVID-19. At the end of fiscal 2020, 47 of our stores in the United Kingdom and Ireland were closed as a result of government mandate. These stores are expected to open in the first quarter of fiscal 2021, however these reopenings are dependent on the lifting of restrictions. Due to the uncertainty of COVID-19 and the speed at which the pandemic continues to impact our markets, we are continuing to assess the situation, including government-imposed restrictions, market by market.

Our results of operations for the fiscal year ended January 30, 2021 were significantly impacted by the effects of COVID-19. Total revenues decreased $ 83.2 million or  25% for fiscal 2020 compared to fiscal 2019, but strategic investments made to enhance our omnichannel capabilities have enabled us to support increased e-commerce demand and strong guest engagement. In addition to decreased total revenue, our overall profitability also decreased as compared to the prior year. These developments have required us to recognize certain long-lived asset impairment charges. Further, in connection with the Coronavirus Aid, Relief, and Economic Securities Act and United Kingdom government programs, we recognized payroll subsidies as a reduction of Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). In addition, the United Kingdom government offered grants for businesses in the retail, hospitality and leisure sectors. These grants were applied for on a per-property basis to support businesses through the latest lockdown restrictions and were recorded as "other income" within the Selling, general and administrative line in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

Operations and financial performance are expected to be challenged as events continue to change, and we are unable to accurately predict the future impact that COVID-19 will have on our results of operations due to uncertainties including, but not limited to, additional periodic temporary reclosing of certain of our stores, additional periodic temporary restrictions on certain store operating hours and/or in-store capacity, the duration of potential future quarantines, "shelter-in-place" orders and other travel restrictions within the U.S. and other affected countries, the duration of the pandemic, the emergence of more dangerous variants of the virus, the duration, timing and severity of the impact on consumer spending, the timing and effectiveness of vaccine distribution, and how quickly and to what extent economic and operating conditions can return.

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Business Overview

In fiscal 2020 we leveraged our unique capabilities, including our supply chain expertise, flexible store operating model and ability to drive demand through our digital platforms. We provided customers with multiple options for how, when and where they shopped with us to ensure we satisfied their need for safety and convenience. Throughout the pandemic and across all the ways customers can shop, we adhered to safety protocols that limited store capacity, followed strict social distancing practices and used proper protective equipment, including requiring our employees to wear masks.

 ‌

The pandemic and the shift in customer buying behavior underscores the importance of our expanded multi-channel capabilities. In fiscal 2020 our ecommerce demand grew significantly compared to the prior year and we believe it is essential to provide options that let customers choose what works best for them. To best serve our customers during the pandemic, we had to be innovative and flexible. Early in the year, we quickly rolled out enhanced order fulfillment and pick-up across our stores in the United States and later in the year in the United Kingdom to provide our customers convenience when we were required by government mandates to close our stores in March 2020. Throughout the year, we accelerated initiatives to expand fulfillment options and were able to provide services that customers have come to expect like fast home delivery, in-store pick-up and curbside pick-up.

 ‌

As we look forward, the environment is still evolving, and our operating model and supporting cost structure are evolving as well. The pandemic has accelerated the evolution of retail and compelled us to change our operating model which we believe is in the best interests of our employees and customers. We have also expedited some planned strategic initiatives that we believe will allow us to emerge from this time stronger and better positioned for long-term success.

 

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 DecemberJanuary 30, 2017,2021, we operated 361354 stores globally and had 10271 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we sell productssold product on our company-owned e-commerce sites, third party marketplaces and franchisee sites and through third parties underretailer's wholesale agreements. There were also 56 locations operating through our "third-party retail" model in which we sell our products on a wholesale basis to other companies that then in turn execute our retail experience.

 

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 fees from other international operations under franchise agreements.

•

Direct to Consumer (“DTC”) – Corporately-managed retail stores located in the U.S., Canada, Puerto Rico, the U.K., 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 as well as product and fixture sales from other international operations under franchise agreements.

 

Selected financial data attributable to each segment for fiscal 2017, 20162020 and 2015,2019 are set forth in Note 15 — Segment Information to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

For a discussionOur consolidated net loss was $23.0 million in fiscal 2020 compared to net income of the key trends and uncertainties that have affected our revenues, income and liquidity, See the “Revenues,” “Costs and Expenses” and “Stores” subsections of this Overview, along with the “Risk Factors” and “Results of Operations.”

$0.3 million in fiscal 2019. We believe that we have an appealing retail storea concept that has broad demographic appeal which, for North American stores open for the entire year other than periods of temporary government-mandated closures, averaged net retail sales per store of $0.9$0.6 million and $0.8 million in fiscal 2017, $1.0 million2020 and 2019, respectively. With retail as a significant driver of our performance, in order to effectively measure our store operations, we use store contribution as the key performance metric. The diversification of our real estate portfolio and shift to smaller more flexible store formats may result in lower average store revenue but is expected to improve store contribution on a long-term basis. Consolidated store contribution as a percentage of net retail sales was 8.5% for fiscal 20162020 reflecting the negative impact of COVD-19, and $1.1 million in15.4% for fiscal 2015.2019. Consolidated store contribution consists of store location net retail sales less cost of product, marketing and store related expenses. Non-store general and administrative expenses are excluded as are our revenues and expenses associated with e-commerce sites locations not open for the full fiscal year and adjustments to deferred revenue related to gift card breakage and our loyalty program. See “Non-GAAP Financial Measures” for a reconciliation of store contribution to net income. ConsolidatedThe decrease in consolidated store contribution as a percentagepercent of net retail sales in fiscal 2020 was 15.7%, 15.9%primarily due to temporary store closures as a result of COVID-19 resulting in a decrease in retail gross margin as a percent of revenue of 470 basis-points. Specifically, warehouse and 18.2% for fiscal 2017, 2016 and 2015, respectively. Consolidated net incomedistribution costs increased as a percentage of total revenues was 2.2%, 0.4%, and 7.2% for fiscal 2017, 2016 and 2015, respectively.

The decrease in consolidated store contribution in fiscal 2017 wasrevenue primarily due to the revenue impact of declines in traditional mall traffic, which lowered consolidated comparable sales throughout the year and during the peak selling month of December. In contrast, consolidated net income increased primarily due to reduced selling, general and administrative expenses, an increase in gift card breakage revenue and lower store impairment charges taken in fiscal 2017 compared to fiscal 2016.

The decline in consolidated store contribution in fiscal 2016 was primarily the result of the decrease in consolidated comparable sales primarily in North America in the fourth quarter. Additionally, our store results were negatively impacted by the deleverage of fixed occupancy costs and the impact of currency fluctuations, particularly in Europe. The decline in fiscal 2016 followed three consecutive years of consolidated comparable sales increases and improved profitability from fiscal years 2013 through 2015.

In fiscal 2015, our results reflected the impact from the following activities as we updated existing stores and expanded our real estate portfolio with our new Discovery store design, opened our first ever value-driven outlet format stores, extended engagement with core consumer segments, expanded business with the teen-plus affinity and gift-giving segment, introduced new intellectual property collections and drove e-commerce sales while making investments in infrastructure and personnel.

 

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We expect 2018customer shipping costs resulting from increased sales from ecommerce. Additionally, occupancy costs increased as a percentage of revenue due to be another transitional year as key aspects ofexpense recognition under ASC 842 Leases when our longer-term strategies continue to be implemented. In January 2018, westores were temporarily closed a flagship store inand abatements or deferrals were negotiated from landlords for the Downtown Disney® District at the Disneyland® Resort in Anaheim, California. This store had much larger annual sales than our typical mall-based stores. We believe that this store closure will have a short-term adverse impact on our revenues as we reposition our presence in the Los Angeles metropolitan area. We are committed to the ongoing plan to address our aged store portfolio by diversifying locations and formats to focus on places where families go for entertainment, including tourist locations. We relaunched our web platform in the fourth quarter of fiscal 2017 which paves the way for increased omni-channel capabilities and the ability to connect more closely with consumers through a repositioned loyalty program which provides rich data to leverage in order to drive incremental sales. We also intend to increase consumer interest in store visits using brand connections to drive traffic, while building relevance and affinity among secondary targets and expanding our wholesale and corporate sales programs. Additionally, we expect to make adjustments to marketing programs to create synergy across channels and leverage entertainment content to extend brand interaction with “play beyond the plush”. For our global footprint, we expect to continue to expand and refine our franchise portfolio with the anticipated addition of new markets internationally. Through a combinationsame period. The effects of these strategiesabatements and our continued disciplineddeferrals on expense management, we remain focused on growing total revenues and improving profitability in 2018 and beyond.recognition are spread across the remainder of the lease term.

 

We ended fiscal 20172020 with no borrowings under our bank loancredit agreement and with $30.4$34.8 million in cash, and cash equivalents and restricted cash after investing $18.1$5.0 million in capital projects throughout the year. During 2017, we repurchased $4.7 millionWe did not repurchase any shares during fiscal 2020. Our prior stock repurchase authorization expired in sharesSeptember 2020 and our Board of our common stock.Directors has not authorized a new stock repurchase plan.

 

Following is a description and discussion of the major components of our statement of operations:

 

Revenues

 

Net retail sales:sales, commercial revenue and international franchising: Net retail sales, less discounts and excluding sales tax, are recognized at the time of sale. Merchandise returns have not been significant. For e-commerce sales, revenue is recognized at the time of shipment. We sell gift cards to our guests in our retail stores, through our e-commerce sites, and through select third parties. Revenues from gift cards are recognized at the time of redemption or breakage. Our guests use third-party credit cards, gift cards and cash to make purchases. We classify stores as new, comparable and non-comparable stores. Stores enter the comparable sales calculation in their thirteenth full month of operation. Our temporary and seasonal locations are not included in our comparable calculations, unless they are open for thirteen months. Non-comparable stores also result from a store relocation or remodel that results in a significant change in square footage or temporary closure. The net retail sales for a location with a significant change in square footage are excluded from comparable sales calculations until the thirteenth full month of operation after the date of the change. The net retail sales for a location with temporary closure are excluded from comparable sales calculations for each month or partial month that the location is closed.

In December 2015, we changed the manner in which we operated our U.S. gift card business by establishing a new legal entity in Virginia to issue and administer gift cards resulting in gift cards that are subject to different terms and conditions promulgated by different state laws. For gift cards issued in the United States prior to December 2015, we recorded income from unredeemed gift cards or breakage under the delayed recognition method which defers the recognition of breakage until the likelihood of redemption by a customer is considered remote. In fiscal 2015 and prior, this gift card breakage was recorded as an offset to selling, general and administration given its immateriality. For gift cards issued in the United States during and after December 2015, we began to recognize breakage revenue using the redemption recognition method based on historical redemption patterns, which results in breakage being recognized sooner, and recorded within net retail sales. In fiscal 2016 and 2017, breakage revenue for all unredeemed U.S. gift cards was recognized in net retail sales.

We have a loyalty program with a frequent shopper reward feature, the Build-A-Bear Workshop Bonus Club. Members of the program receive one point for every dollar or British pound sterling spent and receive awards after reaching certain point thresholds. On a quarterly basis, an estimate of the obligation relatedSee Note 3 — Revenue to the program, based on actual points and awards outstanding and historical point conversion and award redemption patterns, is recorded as an adjustment to the deferred revenue liability and net retail sales. See “Critical Accounting Estimates”consolidated financial statements for additional information regarding the accounting for gift card breakage and the deferred revenue related to our customer loyalty program.information.

Gift cards can be purchased and redeemed, and awards can be earned or redeemed at any of our store locations. Accordingly, we account for gift card breakage and changes in the deferred revenue account at the total company level only. Therefore, when we refer to net retail sales by location, such as comparable stores or new stores, these amounts do not include gift card breakage or any changes in deferred revenue.

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We use net retail sales per square foot and comparable sales as a performance measuresmeasure for our business. The following table details net retail sales per square foot for stores open throughout the fiscal year other than periods of temporary government-mandated closures, for the periods presented:

 

														Fiscal year ended
		Fiscal				Fiscal				Fiscal				January 30,				February 1,
Net retail sales per square foot		2017				2016				2015				2021				2020
North America (1)		$	343			$	371			$	394			$	234			$	343
United Kingdom (2)		£	523			£	547			£	551			£	199			£	405

 

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(1)

Net retail sales per square foot in North America represents net retail sales from stores open throughout the entire period in North America, excluding e-commerce sales, divided by the total leased square footageother than periods of temporary government-mandated closures, excluding e-commerce sales, divided by the total leased square footage of such stores.

(2)

Net retail sales per square foot in the United KingdomU.K. represents net retail sales from stores open throughout the entire period in the United Kingdom,U.K., other than periods of temporary government-mandated closures, excluding e-commerce sales, divided by the total selling square footage of such stores.

 

The percentage increase (or decrease) in comparable sales for the periods presented below is as follows:

 

		Fiscal				Fiscal				Fiscal
		2017				2016				2015
Comparable sales change (%) (1)
North America			(6.5	)%			(4.5	)%			(0.0	)%
Europe			(6.5	)%			(3.8	)%			4.8	%
Consolidated			(6.5	)%			(4.4	)%			1.0	%
Stores			(7.0	)%			(4.9	)%			0.5	%
E-commerce			2.8	%			7.2	%			11.8	%
Consolidated			(6.5	)%			(4.4	)%			1.0	%

(1)        Consolidated comparable sales percentage changes are based on net retail sales, including e-commerce, and exclude the impact of foreign exchange. Store locations are considered comparable beginning in their thirteenth full month of operation.

The decrease in consolidated comparable sales in 2017 was primarily attributable to the continued decline in traditional mall traffic throughout the year and during the peak selling month of December, as well as an unusually bad hurricane season in North America. Offsetting these impacts, our stores had increased conversion, or customers’ in-store acquisition rates, and higher dollars per transaction as compared to the prior year period as well as the benefit from e-commerce sales.

The decrease in consolidated comparable sales in 2016 was primarily attributable to a double-digit decline in North America in the fourth quarter. In addition to the impact of the overall reported declines in North American mall traffic in December, other significant drivers of the decrease included changes in media and marketing tactics, shifts in licensed product sales and the execution of unplanned promotional activities, a decrease in gift card redemptions and missed e-commerce sales in the fourth quarter due to the inability of our e-commerce systems to process the increased traffic to our site.

Commercial revenue: Commercial revenue includes the company’s transactions with other businesses, mainly through wholesale and licensing transactions. Revenue from wholesale product sales includes revenue from sales of merchandise to third parties that operate stores under licensing agreements. In addition, we have historically entered into a number of outbound licensing arrangements whereby third parties manufacture merchandise carrying the Build-A-Bear trademark and sell it to other retailers. Revenue from outbound licensing activities is generally based on a percentage of sales made by licensees to third parties and is recognized at the time of sale by the licensee.

Franchise fees: Typically, we receive an initial, one-time franchise fee for each master franchise agreement which is amortized to revenue over the initial term of the respective franchise agreement, which may extend for periods up to 25 years and include a renewal option if certain conditions are met. Master franchise rights are typically granted to a franchisee for an entire country or countries. Continuing franchise fees are based on a percentage of sales made by the franchisees’ stores and are recognized as revenue at the time of those sales as well as fees for sale of fixtures and equipment required to open and operate stores.  

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Costs and Expenses

 

Cost of merchandise sold - retail: and  Cost of merchandise sold is driven primarily by our retail gross margin:segment. Cost of merchandise sold – retail includes the cost of the merchandise, including royalties paid to licensors of third party branded merchandise; store occupancy cost, including store depreciation and store asset impairment charges;charges (See Note 5 — Property and Equipment, net to the consolidated financial statements for additional accounting information regarding store asset impairment); cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to customers. Retail gross margin is defined as net retail sales less the cost of merchandise sold - retail. For the commercial segment, cost of merchandise includes the cost of merchandise sold to third-party retailers on a wholesale basis for sale within their stores. For the franchise segment, cost of merchandise includes the sale of furniture, fixtures, and supplies to our franchise partners.

 

Selling, general and administrative expense:expense (“SGA”): These expenses include store payroll and benefits, advertising, credit card fees, store supplies and normal store pre-opening and closing expenses as well as central office general and administrative expenses, including costs for management payroll, benefits, incentive compensation, travel, information systems, accounting, insurance, legal and public relations. These expenses also include depreciation of central office assets as well as the amortization of intellectual property and other assets. Certain store expenses such as credit card fees historically have increased or decreased proportionately with net retail sales. In addition, bad debt expenses and accounts receivable related charges are recorded in SGA. See Note 5 — Property and Equipment, net to the consolidated financial statements for additional accounting information regarding store asset

 

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Preopening: These expenses include costs incurred prior

impairment. Additionally, as a result of COVID-19, governments enacted relief legislation and stimulus packages to store openings, remodelshelp combat the economic effects of the pandemic through such things as payroll expense reimbursement and relocations including certain store set-up, labor and hiring costs, rental charges, payroll, marketing, travel and relocation costs. Theybusiness grants, whose effects are expensed as incurred.recorded within SGA.

 

Stores

 

Corporately-managed locations:

 

The number of Build-A-Bear Workshop stores in the United States,U.S., Canada and Puerto Rico (collectively, North America), the United Kingdom,U.K., Ireland and Denmark (collectively, Europe) and China for the last threetwo fiscal years areis summarized as follows:

 

		North																Fiscal year ended
		America				Europe				China				Total				January 30, 2021																February 1, 2020
January 3, 2015			265				59				—				324
																		North																North
																		America				Europe				China				Total				America				Europe				China				Total
Beginning of period																			316				55				1				372				311				59				1				371
Opened			22				3				—				25				3				-				-				3				18				1				-				19
Closed			(18	)			(2	)			—				(20	)			(14	)			(7	)			-				(21	)			(13	)			(5	)			-				(18	)
January 2, 2016			269				60				—				329
Opened			29				5				1				35
Closed			(13	)			(5	)			—				(18	)
December 31, 2016			285				60				1				346
Opened			39				2				—				41
Closed			(23	)			(3	)			—				(26	)
December 30, 2017			301				59				1				361
End of period																			305				48				1				354				316				55				1				372

 

During 2017, we fiscal 2020, our retail business model continued to make improvementsevolve to an agedaddress changing shopping patterns by diversifying our locations, formats and geographies. We are updating our store portfolio by leveragingwith our Discovery format, which represented 40% of our store base as of January 30, 2021. During fiscal 2020, we halted many of our planned new store openings as a result of COVID-19 resulting in the opening of three stores, one Discovery, formats includingone concourse, and one temporary location which was closed prior to the concourse shopsend of the fiscal year. Through our third-party retail model, there were 56 stores in conjunctionoperation with relationships that included Carnival Cruise Line, Great Wolf Lodge Resorts, Landry's and Beaches Family Resorts, with select locations temporarily closed due to government mandates or self-imposed reductions in operating days, reduced operating hours and/or capacity restrictions and limitations. As in prior years, we operated in a number of other non-traditional locations as well as shop-in-shop arrangements within other retailers’ stores. In one location in the year, we deployed a temporary store which we deemed prudent and profitable. Temporary locations generally have lease terms of two to eighteen months. These specific sites are designed to capitalize on short-term opportunities. During fiscal 2020, we closed 21 stores as part of natural lease events or through negotiations with landlords as well as to focus on places where families go for entertainment, including tourist locations. We alsopart of COVID-19 related renegotiations. In the future, we 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. As of December 30, 2017, we operated 105 Discovery format stores, including 26 concourse shops.

We also operate in a number of other non-traditional locations, such as a ballpark and science center. Additionally, we operate shop-in-shop locations within other retailers’ stores. We also operate temporary stores, which generally have lease terms of six to eighteen months. These specific locations are designed to capitalize on short-term opportunities.

 

International Franchise Locations:

 

Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout and merchandise assortments as our corporately-managed stores. As of DecemberJanuary 30, 2017,2021, we had ninesix master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 1712 countries.

The number of international, franchised stores opened and closed for the periods presented below areis summarized as follows:

 

		Fiscal year
		2017				2016				2015				Fiscal year ended
														January 30, 2021				February 1, 2020
Beginning of period			92				77				73				92				97
Opened			27				22				10				8				32
Closed			(17	)			(7	)			(6	)			(29	)			(37	)
End of period			102				92				77				71				92

 

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TheAs of January 30, 2021, the distribution of franchised locations among these countries iswas as follows:

 

Australia		29
Mexico		17
Gulf States (1)		15
Germany (2)		1419
South Africa		14	18
ThailandIndia (2)			13
China (3)			11
Gulf States (4)			6
SingaporeChile		3
Turkey		3
China/Hong Kong		14
Total		102	71

 

	(1)	Australia master franchise agreement includes Singapore where there is not currently any open stores.
	(2)	India master franchise agreement includes Sri Lanka where there is not currently any open stores.
	(3)	China master franchise agreement includes Hong Kong.
	(1)(4)	Gulf States master franchise agreement includes Kuwait, Bahrain, Qatar and the United Arab Emirates which all have stores as well as Bahrain and Oman where we dothere are not currently have a store open

(2)

Germany master franchise agreement also includes Austria and Switzerland where stores have not yet opened open.

 

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 total market potential for approximately 300 international stores outside of the United States,U.S., Canada, the United Kingdom,U.K., Ireland and Denmark. In 2016, we began toWe source fixtures and other supplies for our franchisees from China which significantly reducedreduces the capital and loweredlowers the expenses required to open franchises. We are leveraging new formats that have been developed for our corporately-managed locations such as concourses and shop-in-shops with our franchisees. In 2017, we opened our first franchise in China. We expect to develop market expansion through both new and existing franchisees in 2018 and beyond.the future.

 

Results of Operations

 

20172020 Overview

 

We continuedThe COVID-19 pandemic had a profound impact on the retail industry and our business, particularly in our first and second quarters of fiscal 2020. In the first half of the year, we rapidly responded to make significant progress on key platformsthe onset of a global pandemic that forced a government-mandated temporary closure of all of our long-term strategic plan in 2017.corporately-operated stores as well as many third party and franchise locations. We maintainedtook immediate action to protect the commitmentfinancial well-being of the company including aggressive expense management and cash preservation while pivoting to position ourselves fordriving e-commerce demand even as our headquarters staff shifted to working remotely. As we moved into the future through the continued developmentsecond half and implementation ofstores reopened on a staggered basis as guidelines transitioned, our fourfocus turned to accelerating key strategic initiatives of channel evolution inclusive of international franchising, product expansion, brandto drive digital transformation and experience amplification and long-term profitability improvement. In 2017, we advanced our retail portfolio diversification strategy into 26 new concourse shop formats as well as tourist locations including a new location in New York City adjacent to the Empire State Building.evolve retail. In the fourth quartersecond half of 2017,the year, we earned revenues of $168.3 million compared to first half revenues of $87.0 million, a 94% increase. Consolidated gross profit increased by $66.2 million or 425% when comparing second half results to first half results and pre-tax income increased $45.1 million or 138% over the same period. The strong growth from our relaunched web platform pavede-commerce channel was the way for increased omni-channel capabilitiesmain contributor to revenue in the first half after the temporary store closures that occurred and supportedthe demand continued in the second half bolstering our second half revenue and profitability. Additionally, our focus on channel evolution and brand amplification. Regarding long-term profitability, we recorded our fourth straight year of net income and improved on the prior year’s results. However, our comparable sales decreased and were impacted negatively by the overall traffic declines at traditional mallsexpense management throughout the year including the critically important gift-buying monthsaw Selling, general and administrative expense decrease as a percentage of December. We are evolvingrevenue by 14%, contributing to our tactics to make the necessary adjustments to drive total revenue growth and to deliver sustained profit to enhance long-term shareholder value.second half profitability.

 

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The following table sets forth, for the periods indicated, selected statement of operationsoperations 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 and commercial revenue and immaterial rounding:

 

														Fiscal year ended
														January 30,				February 1,
		Fiscal 2017				Fiscal 2016				Fiscal 2015				2021				2020
Revenues:
Net retail sales			97.6	%			98.2	%			98.7	%			97.6	%			95.6	%
Commercial revenue			1.7				1.2				0.7				1.7				3.5
Franchise fees			0.7				0.6				0.6
International franchising															0.7				0.9
Total revenues			100.0				100.0				100.0				100.0				100.0
Costs and expenses:
Cost of merchandise sold - retail (1)			53.1				54.8				52.9				59.3				54.6
Store asset impairment															2.9				0.0
Cost of merchandise sold - commercial (1)			56.8				52.2				49.4				41.5				45.7
Cost of merchandise sold - international franchising (1)															55.9				89.7
Total cost of merchandise sold															61.8				54.6
Consolidated gross profit															38.2				45.4
Selling, general and administrative			42.7				43.2				42.3				46.1				44.9
Store preopening			0.7				1.0				0.5
Interest expense (income), net			0.0				0.0				(0.0	)
Total costs and expenses			96.1				98.5				95.3
Interest expense, net															0.0				0.0
(Loss) income before income taxes															(7.9	)			0.5
Income tax expense															1.1				0.4
Net (loss) income															(9.0	)			0.1
Income (loss) before income taxes			3.9				1.5				4.7
Income tax (benefit) expense			1.6				1.1				(2.5	)
Net income (loss)			2.2	%			0.4	%			7.2	%
Retail gross margin % (2)			46.9	%			45.2	%			47.1	%
Retail gross margin (2)															40.7	%			45.4	%

 

(1)

Cost of merchandise sold – retail and cost of merchandise sold – commercial areis expressed as a percentage of net retail sales andsales. Cost of merchandise sold – commercial revenue, respectively.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.

  

Fiscal Year Ended December 30, 2017January 30, 2021 Compared to Fiscal Year Ended December 31, 2016

Total revenues. Net retail sales were $349.4 million for fiscal 2017, compared to $357.6 million for fiscal 2016, a decrease of $8.2 million. The components of this decrease are as follows:

		Fiscal 2017
		(dollars in millions)
Decrease in comparable sales		$	(21.8	)
Increase from new stores			20.1
Impact of store closures			(7.8	)
Impact of foreign currency translation			(1.5	)
Change in deferred revenue estimates, including breakage			3.8
Decrease in non-comparable stores, primarily remodels and relocations			(1.0	)
		$	(8.2	)

In fiscal 2017, our estimate of deferred revenue increased net retail sales by $3.8 million compared to fiscal 2016 primarily due to breakage. The increase in breakage revenue was primarily the result of a larger gift card base, favorable historical redemption rates and changes in the estimate of liabilities for older gift cards. See “Critical Accounting Estimates Revenue Recognition” discussion for additional breakage discussion.

Commercial revenue was $6.0 million for fiscal 2017 compared to $4.3 million for fiscal 2016, an increase of $1.7 million. This increase was primarily due to the addition of new wholesale customers and growth in outbound licensing activity in 2017. Revenue from international franchise fees was $2.5 million for fiscal 2017 compared to $2.3 million for fiscal 2016. This $0.2 million increase was primarily the result of having more franchise locations in fiscal 2017.

Retail gross margin. Retail gross margin was $163.9 million in fiscal 2017 compared to $161.7 million in fiscal 2016, an increase of $2.2 million, or 1.4%. As a percentage of net retail sales, retail gross margin increased to 46.9% for fiscal 2017 from 45.2% for fiscal 2016, an increase of 170 basis points as a percentage of net retail sales. Retail gross margin improved primarily due to a $3.8 million increase in gift card breakage, cost efficiencies and the absence of a prior year $2.3 million store asset impairment charge.

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Selling, general and administrative. Selling, general and administrative expenses were $152.7 million for fiscal 2017 as compared to $157.2 million for fiscal 2016, a decrease of $4.5 million, or 2.9%. Selling, general and administrative expenses were lower primarily due to the absence of the charge associated with the prior year duty dispute in the UK, the positive impact of foreign currency translation and lower marketing expenses, partially offset by higher incentive compensation in fiscal 2017. As a percentage of total revenues, selling, general and administrative expenses were 42.7% for fiscal 2017, compared to 43.2% for fiscal 2016.

Store preopening. Store preopening expenses were $2.5 million in fiscal 2017 as compared to $3.5 million in fiscal 2016. The decrease was attributable to the lower number of new and remodeled Discovery format stores opened in fiscal 2017 as compared to fiscal 2016 as well as the reduced cost associated with concourse shop openings.

Interest expense (income), net. Interest expense, net of interest income, was flat for fiscal 2017 as compared to fiscal 2016.

Provision for income taxes. Income tax expense in fiscal 2017 was $5.9 million compared to income tax expense of $3.9 million in fiscal 2016. The 2017 effective rate of 42.7% differed from the statutory rate of 34% primarily due to the effect of the provisional tax charge of $1.4 million for the re-measurement of U.S. net deferred tax assets as a result of the enactment of the Tax Cuts and Jobs Act (P.L. 115-97, the “Act”) reducing the U.S. federal statutory rate to 21% effective JanuaryFebruary 1, 2018. The Act also includes provisions that may partially offset the benefit of such rate reduction, including the repeal of the deduction for domestic production activities and changes to the non-deductibility of certain covered employee compensation pursuant to IRC section 162(m). The international provisions of the Act, which generally establish a territorial-style system for taxing foreign-source income of domestic multinational corporations, are expected to have a negligible impact on the company. The 2016 effective rate of 74.1% differed from the statutory rate of 34% primarily due to the effect of establishing a full valuation allowance in certain foreign jurisdictions and other discrete tax adjustments.

Fiscal Year Ended December 31, 2016 Compared to Fiscal Year Ended January 2, 20162020

 

Total revenues. Net retail sales were $357.6$249.2 million for fiscal 2016,2020, compared to $372.7$323.5 million for fiscal 2015,2019, a decrease of $15.1 million.$74.3 million or 23.0%. The components of this decrease are as follows:

 

		Fiscal 2016
		(dollars in millions)
Decrease in comparable sales		$	(14.7	)
Increase from new stores			12.1
Impact of store closures			(11.1	)
Impact of foreign currency translation			(9.5	)
Change in deferred revenue estimates, including breakage			4.4
Increase in non-comparable stores, primarily remodels and relocations			3.7
		$	(15.1	)

		Fiscal year ended
		January 30, 2021
		(dollars in millions)
Impact from:
Existing stores		$	(97.2	)
E-commerce			30.3
New stores			3.1
Store closures			(7.6	)
Gift card breakage			(2.1	)
Foreign currency translation			0.4
Deferred revenue estimates			(1.2	)
		$	(74.3	)

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In fiscal 2016,The retail revenue decrease was driven primarily by temporary store closures, reductions in store operating days, fewer operating hours and capacity restrictions and limitations as a result of COVID-19 partially offset by increased e-commerce sales in North America and the United Kingdom resulting from our estimate of deferredpivot to digital sales due to the aforementioned temporary store closures.

Commercial revenue increased net retail sales bywas $4.4 million for fiscal 2020 compared to $11.9 million for fiscal 20152019, a decrease of $7.5 million primarily due to decreased sales volume from our commercial customers as a result of COVID-19, which we believe is principally because the third-party retail locations serviced by our commercial customers were either temporarily closed or operated under similar operating restrictions for our own stores (government-mandated or self-imposed reductions in operating days, reduced operating hours and/or capacity restrictions and limitations) for portions of the fiscal year.

Revenue from international franchising was primarily driven by $4.5$1.7 million of gift card breakage. The increase in breakage revenuefor fiscal 2020 compared to $3.2 million for fiscal 2019. This $1.5 million decrease was primarily the result of a higher gift card balance, and in the prior year, breakage revenue was recognized as an offset to selling, general and administrative expensestemporary store closures of franchise locations due to immateriality. See “Critical Accounting Estimates Revenue Recognition” discussion for additional breakage discussion.

Commercial revenue was $4.3 million for fiscal 2016 comparedgovernmentally-mandated restrictions and a reduction in new store openings resulting in a lower level of inventory and fixtures sales to $2.8 million for fiscal 2015, an increase of $1.5 million. This increase was primarily duefranchisees to the addition of new wholesale customers and growth in outbound licensing activity in 2016. Revenue from international franchise fees was $2.3 million for fiscal 2016 compared to $2.2 million for fiscal 2015. This $0.1 million increase was primarily the result of having more franchise locations open throughout the majority of the year.support these openings.

 

Retail gross margin. Retail gross margin was $161.7$101.4 million in fiscal 20162020 compared to $175.6$146.8 million in fiscal 2015,2019, a decrease of $13.9 million, or 7.9%.$45.4 million. As a percentage of net retail sales, retail gross margin decreased to 45.2%40.7% for fiscal 20162020 from 47.1%45.4% for fiscal 2015, a decrease of 1902019, or 470 basis points as a percentage of net retail sales. This declineSpecifically, warehouse and distribution costs increased as a percentage of revenue primarily due to increase customer shipping costs resulting from increased sales from our e-commerce channel. Additionally, occupancy costs increased as a percentage of revenue due to expense recognition under ASC 842 Leases when our stores were temporarily closed and abatements or deferrals were negotiated from landlords for the same period. The effects of these abatements and deferrals on expense recognition are spread across the remainder of each lease term.

Impairment of long-lived assets, including right-of-use assets. As a result of COVID-19, we experienced lower revenues, especially in margin wasthe first half of the fiscal year, and identified indicators of impairment for our store fleet. We performed undiscounted future cash flow analysis over the long-lived assets and right-of-use assets for the remaining useful life of the asset and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted future cash flows. We estimated fair values of these long-lived assets based on our discounted future cash flows or market rent assessments. Our analysis indicated that the carrying values of our long-lived assets exceeded their respective fair values. For fiscal 2020, we recognized long-lived asset impairment charges totaling $7.3 million, with approximately $3.8 million for right-of-use operating lease assets and $3.5 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, machinery and equipment, and construction-in-progress. These impairment charges were primarily attributable to deleverage on fixed occupancy expenses, including store asset impairmentsdriven by lower than projected revenues and the negative impacteffect of currency on margintemporary store closures. The majority of the impairment was recorded for assets associated with stores in North America and the United Kingdom partially offset by $4.4 million in gift card breakage.Kingdom.

 

Selling, general and administrative. Selling, general and administrative expenses were $157.2$117.6 million for fiscal 20162020 as compared to $159.6$152.0 million for fiscal 2015,2019, a decrease of $2.4 million, or 1.5%. As a percentage of total revenues, selling,$34.4 million. Selling, general and administrative expenses were 43.2% for fiscal 2016, comparedlower primarily due to 42.3% in fiscal 2015. Thelower labor costs from temporary store closures, salary reductions and employee furloughs due to COVID-19 as well as a decrease in dollars was primarily attributable to lower marketing expenses and incentive compensation partially offset by charges related to a duty dispute inspend throughout the UK, China start-up costs, and other costs associated with restructuring and a review of strategic alternatives. The decrease as a percentage of total revenues was driven by the deleverage of these expenses given the revenue decline in fiscal 2016 as compared to fiscal 2015.

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Store preopening. Store preopening expenses were $3.5 million in fiscal 2016 as compared to $1.9 million in fiscal 2015. The increase was attributable to the increase in the number of new and remodeled Discovery format stores opened in fiscal 2016 as compared to the prior year.

 

Interest expense (income), net. Interest expense, net of interest income, was $5,000decreased an immaterial amount for fiscal 2016. In2020 as compared to fiscal 2015, interest income, net of interest expense, was $0.1 million.2019.

 

Provision for income taxes. Income tax expense in fiscal 2016The provision for income taxes was $3.9 million compared to an income tax benefit of $9.4$2.8 million in fiscal 2015.2020 compared to $1.3 million in fiscal 2019. The 20162020 effective rate of 74.1%(13.9%) differed from the statutory rate of 34%21% primarily due to no tax benefit being recorded on the effect of establishingcurrent year pretax loss as a full valuation allowance has now been recorded globally.  Fiscal 2020 was also impacted by the $3.3 million valuation allowance recorded on the beginning balance of the net deferred tax assets in certain foreign jurisdictions and other discrete tax adjustments.jurisdictions.  The 20152019 effective tax rate of negative 52.8%83.0% differed from the statutory rate of 34%21% primarily due to the reversal of all of the valuation allowance on U.S. deferredrecorded in certain foreign jurisdictions and a $0.2 million tax assets at January 2, 2016.impact of equity awards.

 

Non-GAAP Financial Measures

 

We use the term “store contribution” throughout this Annual Report on Form 10-K. Store contribution consists of income (loss) before income tax expense, interest, general and administrative expense, excluding income from franchise and commercial activities and contribution from our e-commerce sites, locations, not openother than periods of temporary government-mandated closures, for the full fiscal year and adjustments to deferred revenue related to our loyalty program and gift card breakage. This term, as we define it, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We use store contribution as a measure of our stores’ operating performance.

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Store contribution should not be considered a substitute for net income, net income per store, cash flows provided by operating activities, cash flows provided by operating activities per store, or other income or cash flow data prepared in accordance with U.S. GAAP. Additionally, store-level performance measures are inherently limited in that they exclude certain expenses that are recurring in nature and are necessary to support the operation and development of our stores. We believe store contribution is useful to investors in evaluating our operating performance because it, along with the number of stores in operation, directly impacts our profitability.

 

The following table sets forth a reconciliation of store contribution to net income (loss) for our corporately-managed stores open throughout the entire period, located in the United States,U.S., Canada and Puerto Rico (“North(collectively “North America”); stores located in the United Kingdom,U.K., Ireland and Denmark (“Europe”(collectively “Europe”) and; beginning in 2017,; and China, for our consolidated store base (dollars in thousands). For fiscal 2020, corporately-managed stores included are those that were not newly opened or permanently closed in fiscal 2020. As our entire store fleet was temporarily closed during portions of the year due to COVID-19, no stores qualified as operating for the full year. For year-over-year comparison purposes such temporary closed stores were included in the below table. For fiscal 2019, corporately-managed stores included all stores open throughout the entire period.

 

		Fiscal 2017												Fiscal 2016
		North				Europe								North
		America				and China				Total				America				Europe				Total
Net income (loss)		$	8,246			$	(330	)		$	7,916			$	6,416			$	(5,039	)		$	1,377
Income tax expense (benefit)			5,425				472				5,897				4,976				(1,044	)			3,932
Interest expense (income)			13				(2	)			11				18				(13	)			5
General and administrative expense (1)			46,892				4,726				51,618				48,716				9,457				58,173
Contribution from other retail activities(2)			(11,777	)			329				(11,448	)			(8,450	)			305				(8,145	)
Other contribution (3)			(4,783	)			(1,092	)			(5,875	)			(5,113	)			(197	)			(5,310	)
Store contribution		$	44,016			$	4,103			$	48,119			$	46,563			$	3,469			$	50,032
Total revenues from external customers		$	294,285			$	63,581			$	357,866			$	296,784			$	67,420			$	364,204
Revenues from other retail activities (2)			(38,302	)			(5,511	)			(43,813	)			(34,291	)			(8,273	)			(42,564	)
Other revenues from external customers (4)			(7,237	)			(1,221	)			(8,458	)			(5,449	)			(1,162	)			(6,611	)
Store location net retail sales		$	248,746			$	56,849			$	305,595			$	257,044			$	57,985			$	315,029
Store contribution as a percentage of store location net retail sales			17.7	%			7.2	%			15.7	%			18.1	%			6.0	%			15.9	%
Total net income (loss) as a percentage of total revenues			2.8	%			(0.5	)%			2.2	%			2.2	%			(7.5	)%			0.4	%

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		Fiscal 2015
		North
		America				Europe				Total
Net income		$	24,472			$	2,873			$	27,345
Income tax expense (benefit)			(10,276	)			829				(9,447	)
Interest expense (income)			(40	)			(103	)			(143	)
General and administrative expense (1)			49,509				4,645				54,154
Contribution from other retail activities(2)			(2,301	)			(1,314	)			(3,615	)
Other contribution (3)			(6,980	)			-				(6,980	)
Store contribution		$	54,384			$	6,930			$	61,314
Total revenues from external customers		$	299,210			$	78,484			$	377,694
Revenues from other retail activities (2)			(26,549	)			(9,830	)			(36,379	)
Other revenues from external customers (4)			(4,979	)			-				(4,979	)
Store location net retail sales		$	267,682			$	68,654			$	336,336
Store contribution as a percentage of store location net retail sales			20.3	%			10.1	%			18.2	%
Total net income as a percentage of total revenues			8.2	%			3.7	%			7.2	%

		Fiscal 2020												Fiscal 2019
		North				Europe								North				Europe
		America				and China				Total				America				and China				Total
Net income (loss)			(24,256	)			1,273			$	(22,983	)		$	3,677			$	(3,416	)		$	261
Items excluded:
Income tax expense (benefit)			2,796				1				2,797				1,325				(25	)			1,300
Interest expense (income)			15				(5	)			10				24				(9	)			15
Store asset impairment			5,429				1,917				7,346				-				-				-
General and administrative expense (1)			41,972				2,657				44,629				50,566				3,653				54,219
Contribution from other retail activities (2)			(10,632	)			(4,126	)			(14,758	)			(6,244	)			(1,627	)			(7,871	)
Other contribution (3)			(1,247	)			(47	)			(1,294	)			(4,563	)			(274	)			(4,837	)
Store contribution		$	14,077			$	1,670			$	15,747			$	44,785			$	(1,698	)		$	43,087
Total revenues from external customers		$	216,809			$	38,501			$	255,310			$	290,883			$	47,660			$	338,543
Items excluded:
Revenues from other retail activities (2)			(43,951	)			(19,154	)			(63,105	)			(38,261	)			(5,400	)			(43,661	)
Other revenues from external customers (4)			(5,644	)			(457	)			(6,101	)			(13,860	)			(1,192	)			(15,052	)
Store location net retail sales		$	167,214			$	18,890			$	186,104			$	238,762			$	41,068			$	279,830
Store contribution as a percentage of store location net retail sales			8.4	%			8.8	%			8.5	%			18.8	%			(4.1	%)			15.4	%
Total net income (loss) as a percentage of total revenues			(11.2	%)			3.3	%			(9.0	%)			1.3	%			(7.2	%)			0.1	%

 

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(1)(1)

General and administrative expenses consistexpense consists primarily of non-store central office general and administrative functionsrelated expenses such as management payroll and related benefits,compensation, travel, information systems, accounting, purchasing and legal costs,costs. Additionally, non-store related depreciation of central office assets as well as theand amortization, of intellectual property and other assets, store closing and pre-opening expenses. Certainexpenses are included within general and administrative expense as well as certain intercompany charges are included in Europe. Further, general and administrative expenses include marketing costs, primarily payroll and related benefits expense, but exclude advertising expenses, which are included in Europe. General and administrative expenses also include a central office marketing department, primarily payroll and related benefits expense, but exclude advertising expenses, which are included in store contribution.

(2)(2)

Other retail activities are comprised primarily of our e-commerce sites, stores not open for the full year and adjustments to deferred revenue related to our loyalty program and gift card breakage.

Other retail activities are comprised primarily of our e-commerce sites, stores not open for the full year and adjustments to deferred revenue related to our loyalty program and gift card breakage.

(3)(3)

Other contribution includes franchising, commercial revenuesrevenue, international franchising and intercompany revenues andas well as all expenses attributable to the commercial and international franchising and commercial segments, excluding interest expense (income) and income tax expense (benefit). Interest expense (income) and income tax expense (benefit) related to franchising and commercial activities are included in their respective captions.

(4)	Other revenues from external customers are comprised of commercial revenue and international franchising and commercial revenues.

Seasonality and Quarterly Results

The following is a summary of certain unaudited quarterly results of operations data for each of the last two fiscal years.  

		Fiscal 2017																Fiscal 2016
		First				Second				Third				Fourth				First				Second				Third				Fourth
(Dollars in millions, except per share data)		Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				Quarter				Quarter
Total revenues		$	90.6			$	77.2			$	82.4			$	107.7			$	95.0			$	75.1			$	83.7			$	110.3
Consolidated gross profit			42.9				34.1				36.9				55.1				46.2				32.0				36.8				51.1
Retail gross margin(1)			41.7				32.5				35.6				54.1				45.5				31.2				35.4				49.6
Income tax expense (benefit)			1.8				(1.1	)			0.7				4.5				1.8				(1.9	)			1.0				3.2
Net income (loss)			2.8				(1.5	)			1.4				5.2				3.5				(4.3	)			1.8				0.3
Income (loss) per common share:
Basic			0.17				(0.10	)			0.09				0.34				0.22				(0.28	)			0.12				0.02
Diluted			0.17				(0.10	)			0.09				0.33				0.22				(0.28	)			0.11				0.02
Number of stores (end of quarter)			336				353				353				361				321				321				330				346

(1)	Retail gross margin represents net retail sales less cost of retail merchandise sold.franchising.

 

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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) fluctuations in the profitability of our stores; (2)increases or decreases in comparable sales and total revenues; (3) changes in general economic conditions and consumer spending patterns; (4) the timing and frequency of our marketing initiatives including national media appearances and other public relations events; (5) changes in foreign currency exchange rates; (6) seasonal shopping patterns and holiday and vacation schedules; (7) the timing of store closures, relocations and openings and related expenses; (8) the effectiveness of our inventory management; (9) changes in consumer preferences; (10) the continued introduction and expansion of merchandise offerings; (11) actions of competitors or mall anchors and co-tenants; (12) weather conditions; and (13) the impact of a 53rd week in our fiscal year, which occurs approximately every six years.

The timing of store openings, closures and remodels may cause fluctuations in quarterly results due to the changes in revenues and expenses associated with each store location. We typically incur most preopening costs for a new store, remodeled or relocated store in the three months immediately preceding the store’s opening. 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.

As a specialty retailer, our sales are historically highest in our fourth quarter, followed by the first quarter. The timing of holidays and school vacations can impact our quarterly results. We cannot ensure 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 opening, remodeling or reformatting of new stores,, installation and upgrades of information systems and working capital. Over the past several years, we have met these requirements through cash generated from operations. We have access to additional cash through a revolving line of credit that has been in place since 2000.

		Fiscal year ended
		January 30,				February 1,
		2021				2020
Net cash provided by operating activities		$	13,386			$	21,609
Net cash used in investing activities			(5,046	)			(12,384	)
Net cash used in financing activities			(114	)			(245	)
Effect of exchange rates on cash			(112	)			(140	)
Net increase in cash, cash equivalents and restricted cash		$	8,114			$	8,840

 

Operating Activities. Cash flows provided by operating activities were $21.1$13.4 million and $21.6 million in fiscal 2017, $16.0 million in fiscal 2016years 2020 and $32.0 million in fiscal 2015. Cash flows from operating activities increased in fiscal 2017 as compared to 2016 primarily due to an increase in net income and the timing of inventory payments, partially offset by the reduction in balances of gift cards and deposits.2019, respectively. Cash flows from operating activities decreased in fiscal 20162020 as compared to 20152019 primarily due to decreased store contributiondriven by the temporary closure of corporately managed retail stores and reduced operating hours in North America and the timingUnited Kingdom during periods of inventory receipts and payments.the fiscal year.

 

Investing Activities. Cash flows used in investing activities were $17.8$5.0 million and $12.4 million in fiscal 2017, $26.7 million in fiscal 2016years 2020 and $25.1 million in fiscal 2015.2019, respectively. Cash used in investing activities in 2017 relatedfiscal 2020 decreased as compared to fiscal 2019 primarily to the openingdriven by reductions in planned capital expenditures as a result of 41 new locations, the remodeling or relocation of 23 stores, and the continued installation and upgrades of central office information technology systems including the relaunched web platform. Cash used in investing activities in 2016 related primarily to the opening of 35 new locations, the remodeling or relocation of 24 stores, and the continued installation and upgrades of central office information technology systems, partially offset by the maturity of short-term investments. Cash used in investing activities in 2015 related primarily to the continued installation and upgrades of central office information technology systems, the opening of 25 new stores, the remodeling or relocation of eight stores and the net purchases of short-term investments.COVID-19.

 

Financing Activities. Financing activities used cash of $4.8 million, $1.9$0.1 million and $26.4$0.2 million in fiscal years 2017, 20162020 and 2015,2019, respectively. Borrowings under our credit facility and subsequent repayments totaled $4.0 million and $5.4 millionCash used in financing activities in fiscal years 2017 and 2016, respectively. In2020 decreased as compared to fiscal 2017, we had stock repurchases of $4.7 million including a $4.2 million use of cash plus an additional $0.5 million commitment to be settled2019, driven by less stock-based compensation vesting in fiscal 2018. In fiscal 2016 and 2015, we had stock repurchases of $1.5 million and $25.9 million, respectively. In fiscal 2017, 2016 and 2015,2020 compared to the exercises of employee stock options, net ofprior year resulting in the need for fewer shares usedwithheld for withholding tax payments related to vesting of restricted stock used cash of $0.5 million.taxes.

 

Capital Resources. As of DecemberJanuary 30, 2017,2021, we had a cash balance of $30.4$34.8 million, of which approximately one-third63% was domiciled outside ofwithin the United States. As noted above,

On August 25, 2020, we also haveentered into a line of credit, which we can use to finance capital expendituresRevolving Credit and working capital needs throughout the year.Security Agreement with PNC Bank, National Association, as agent. The bank lineagreement provides availabilityfor a senior secured revolving loan in aggregate principal amount of up to $35 million.$25,000,000 (subject to a borrowing base formula), which may be increased with the consent of the lenders by an amount not to exceed $25,000,000. Borrowings under the credit agreement are secured by our assetsbear interest at (a) a base rate determined under the agreement, or (b) the borrower's option, at a rate based on LIBOR, plus in either case a margin based on average undrawn availability as determined in accordance with the agreement. The agreement matures on August 25, 2025 (unless terminated earlier in accordance with its terms) and a pledge of 66% of our ownership interest in certain of our foreign subsidiaries.requires compliance with conditions precedent that must be satisfied prior to any borrowing. The credit agreement expires on December 31, 2018 andalso contains various restrictionsrepresentations, warranties and covenants that we consider customary for an asset-based credit facility. The agreement requires us to comply with one financial covenant, specifically, that we maintain availability (as determined in accordance with the agreement) at all times equal to or greater than the greater of (a) 12.5% of the loan cap and (b) $3,125,000 (subject to increase upon exercise of the increase option). The “loan cap” is the lesser of (1) $25,000,000 less the outstanding amount of loans and letters of credit under the agreement and (2) the borrowing base from time to time under the agreement. The agreement also contains various information and reporting requirements and provides for various fees customary for an asset-based lending facility. We anticipate the annual costs of maintaining the agreement, including interest and fees, will be between $500,000 and $600,000.  The agreement contains customary events of default, including without limitation events of default based on payment obligations, material inaccuracies of representations and warranties, covenant defaults, final judgments and orders, unenforceability of the agreement, material ERISA events, change in control, insolvency proceedings, and defaults under certain other obligations.

An event of default may cause the applicable interest rate and fees to increase by 2% until such event of default has been cured, waived, or amended. The agreement contains typical negative covenants, including, among other things, that the borrower will not incur indebtedness liens, guarantees, redemptions, mergers, acquisitionsexcept for permitted indebtedness or salemake any investments except for permitted investments, declare dividends or repurchase its stock except as permitted, acquire any subsidiaries except in connection with a permitted acquisition, or merge or consolidate with any other entity or acquire all or substantially all of the assets loans, transactions with affiliates and investments. It also prohibits us from declaring dividends withoutof any other company outside the bank’s prior consent, unless such paymentordinary course of dividends would not violate any termsbusiness.

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At the closing date of the credit agreement. We are also prohibited from repurchasing sharesagreement with PNC Bank, we had no outstanding indebtedness. As of January 30, 2021, our common stock unless such repurchaseborrowing base was slightly more than $19.8 million. As a result of shares would not violate any termsa $1.0 million letter of the credit agreement; we may not use the proceeds ofagainst 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 end of the fiscal year, $18.8 million was available for borrowing.

Additionally, on August 25, 2020, upon execution of the agreement with PNC Bank, we terminated our existing bank credit agreement)line with U.S. Bank, under the Fourth Amended and not exceedingRestated Loan Agreement, as amended. The former agreement with U.S. Bank provided for a maximum funded debtborrowing capacity of up to earnings before interest, depreciation and amortization ratio. In 2017, we amended the$10,000,000, subject to compliance with certain financial tests. The former credit agreement and aswould have matured on September 30, 2020. At the time of December 30, 2017: (i)termination, we did not have any outstanding borrowings under the agreement with U.S. Bank and we were in compliance with all covenants; (ii) there were no borrowingsthe amended covenants. The $1.0 million letter of credit that was outstanding under the lineagreement with U.S. Bank at the time of credit;termination was subsequently cancelled and (iii) therea replacement $1.0 million letter of credit was $35.0 million available for borrowingissued under the line of credit.credit agreement with PNC Bank.

 

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During the fiscal year, we renegotiated a large portion of Contents

our store lease portfolio resulting in a combination of rent reductions, deferments, and abatements in North America, the United Kingdom and Ireland. These negotiations have increased the percentage of leases with variable rent structures resulting in the increase in variable rent expense in fiscal 2020 compared to fiscal 2019. For these renegotiated leases, under ASC 842 Leases, we assessed if the renegotiated leases represented a new, separate contract or a modification of the existing lease.