UNITED STATES
SECURITIES AND EXCHANGEEXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
☒ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended |
OR
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to |
Commission file number: 001-32320
BUILD-A-BEAR WORKSHOP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 43-1883836 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer
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Identification No.) |
St. Louis, Missouri |
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(Address of Principal Executive Offices) | ( |
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(314) 423-8000 423-8000
(Registrant’sRegistrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
Common Stock, par value $0.01 per share | BBW | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large“large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Smaller reporting company ☒ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected to not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to SectionSection 13(a) of the Exchange Act. Act ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
There is no non-voting common equity. The aggregate market value of the common stock held by non-affiliatesnon-affiliates (based upon the closing price of $10.45$2.36 for the shares on the New York Stock Exchange on June 30, 2017)August 1, 2020) was $142.0$36.8 million as of June 30, 2017,August 1, 2020, the last business day of the registrant’s most recently completed second fiscal quarter.
As of March 9, 2018,April 12, 2021, there were 14,900,452 issuedwere 15,979,039issued and outstanding shares of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’sregistrant’s Proxy Statement for its MayJune 10, 20182021 Annual Meeting of Stockholders are incorporated herein by reference.
INDEX TO FORM 10-K
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Item 1B. | ||
Item 2. | ||
Item 3. | ||
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Item 5. | ||
Item 6. | ||
Item 7. |
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Item 7A. | ||
Item 8. | ||
Item 9. | Changes in and Disagreements | |
Item 9A. | ||
Item 9B. | ||
Item 10. | ||
Item 11. | ||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions and Director Independence | |
Item 14. | ||
Item 15. | ||
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:
our future financial performance;
• | our future financial performance, especially in light of the continuing effects of the global pandemic on our store operations; |
our anticipated operating strategies and future strategic expansion initiatives;
• | the sufficiency of our cash generated from operations and borrowings under our credit facilities; |
our future capital expenditures;
• | our anticipated operating strategies and future strategic expansion initiatives; |
our anticipated rate of store relocations, openings and closures; and
• | our future capital expenditures; |
• | our anticipated rate of store relocations, openings and closures; and |
our anticipated costs related to store relocations, openings and closures.
• | our anticipated costs related to store relocations, openings and closures. |
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.
BUSINESS |
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.
RISK FACTORS |
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:
• | create greater awareness and affinity of our brand, interactive shopping experience and products; |
• | convert consumer awareness into store and e-commerce site visits and product purchases; |
• | identify the optimal level of marketing spend and most efficient marketing channels; |
• | select the right geographic areas in which to market; |
• | determine the appropriate creative message and media mix for marketing programs locally, nationally and internationally; and |
• | effectively manage marketing costs (including creative and media) to maintain acceptable operating margins and return on marketing investment. |
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.
create greater awareness of our brand, interactive shopping experience and products;
convert consumer awareness into store visits and product purchases;
identify the most effective and efficient level of marketing spend;
select the right geographic areas in which to market;
determine the appropriate creative message and media mix for marketing expenditures both locally, nationally and internationally; and
effectively manage marketing costs (including creative and media) to maintain acceptable operating margins and return on marketing investment.
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:
the profitability of our stores;
increases or decreases in comparable sales;
increases or decreases in total revenues;
changes in general economic conditions and consumer spending patterns;
the timing and frequency of our marketing initiatives;
changes in foreign currency exchange rates;
seasonal shopping patterns;
the timing of store closures, relocations and openings and related expenses;
the effectiveness of our inventory management;
changes in consumer preferences;
the continued introduction and expansion of merchandise offerings;
actions of competitors or mall anchors and co-tenants;
weather conditions and natural disasters;
the timing and frequency of national media appearances and other public relations events; and
• | the profitability of our stores; |
• | increases or decreases in total revenues; |
• | changes in general economic conditions and consumer spending patterns; |
• | the timing and frequency of our marketing initiatives; |
• | changes in foreign currency exchange rates; |
• | seasonal shopping patterns; |
• | the timing of store closures, relocations and openings and related expenses; |
• | the effectiveness of our inventory management; |
• | changes in consumer preferences; |
• | the continued introduction and expansion of merchandise offerings including those associated with major motion pictures; |
• | actions of competitors or mall anchors and co-tenants; |
• | weather conditions and natural disasters; |
• | public health issues such as COVID-19 |
• | the timing and frequency of national media appearances and other public relations events; and |
• | the impact of a |
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:
restrict various types of business combinations with significant stockholders;
provide for a classified board of directors;
limit the right of stockholders to remove directors or change the size of the board of directors;
limit the right of stockholders to fill vacancies on the board of directors;
limit the right of stockholders to act by written consent and to call a special meeting of stockholders or propose other actions;
require a higher percentage of stockholders than would otherwise be required to amend, alter, change or repeal our bylaws and certain provisions of our certificate of incorporation; and
authorize the issuance of preferred stock with any voting rights, dividend rights, conversion privileges, redemption rights and liquidation rights and other rights, preferences, privileges, powers, qualifications, limitations or restrictions as may be specified by our board of directors.
• | restrict various types of business combinations with significant stockholders; |
• | provide for a classified board of directors; |
• | limit the right of stockholders to remove directors or change the size of the board of directors; |
• | limit the right of stockholders to fill vacancies on the board of directors; |
• | limit the right of stockholders to act by written consent and to call a special meeting of stockholders or propose other actions; |
• | require a higher percentage of stockholders than would otherwise be required to amend, alter, change or repeal our bylaws and certain provisions of our certificate of incorporation; and |
• | authorize the issuance of preferred stock with any voting rights, dividend rights, conversion privileges, redemption rights and liquidation rights and other rights, preferences, privileges, powers, qualifications, limitations or restrictions as may be specified by our board of directors. |
These provisions may:
• | discourage, delay or prevent a change in the control of our company or a change in our management, even if such change may be in the best interests of our stockholders; |
• | adversely affect the voting power of holders of common stock; and |
• | limit the price that investors might be willing to pay in the future for shares of our common stock. |
GENERAL RISKS
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 companymanagement 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. The loss of certain key employees, our inability to attract and retain other qualified key employees or a change inlabor shortage that reduces the pool of qualified candidates could have a material adverse effect on our management, even if such changebusiness, financial condition and results of operations.
We may be unsuccessful in the best interestsacquiring 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 stockholders;
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 affect the voting power of holders of common stock; and
limit the price that investors might be willing to pay in the future for shares ofimpact our common stock.financial condition.
UNRESOLVED STAFF COMMENTS |
Not applicable.
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.
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.
MINE SAFETY DISCLOSURE |
Not applicable.applicable.
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.
ISSUER PURCHASES OF EQUITY SECURITIES
Period | (a) Number of Shares (or Units) Purchased (1) | (b) Price Paid Per Share (or Unit) (2) | (c) Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (3) | (d) (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 |
|
| (a) Total Number of |
| (b) Average Price Paid Per Share | (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 |
| - | $ | - | - | $ | - | ||||||||||
| - | $ | - | - | $ | - | ||||||||||
Jan. 3, 2021 – Jan. 30, | - | $ | - | - | $ | - | ||||||||||
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.”
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 |
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 |
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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
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.
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.
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.
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 |
(1) | Net retail sales per square foot in North America represents net retail sales from stores open throughout the entire period in North America, |
(2) | Net retail sales per square foot in the |
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.
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
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 |
TheAs of January 30, 2021, the distribution of franchised locations among these countries iswas as follows:
Australia | ||||
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South Africa | 18 | |||
| 13 | |||
China (3) | 11 | |||
Gulf States (4) | 6 | |||
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Total | 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. | |
| Gulf States master franchise agreement includes Kuwait, |
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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.
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 |
(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.
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 | ) |
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.
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.
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 | % |
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 | % |
| General and administrative |
| 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 contribution includes |
(4) | Other revenues from external customers are comprised of commercial revenue and international |
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 |
|
|
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.
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.
Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America typically have a ten-yearshifted to shorter term and contain provisions for base rent plus percentage rent based on defined sales levels.leases to provide flexibility in aligning stores with market trends. Our leases typically require us to pay personal property taxes, our pro rata share of real property taxes of the shopping mall, our own utilities, repairs and maintenance in our store, a pro rata share of the malls’ common area maintenance and, in some instances, merchant association fees and media fund contributions. Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third or fourth year and sixth or seventh year of the lease, if a certain minimum sales volume is not achieved. Many leases contain incentives to help defray the cost of construction of a new store. Typically, a portion of the incentive must be repaid to the landlord if we choose to terminate the lease.lease prior to its contracted term. In addition, some of these leases contain various restrictions relating to change in control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases. Rents are invoiced monthly and paid in advance.
Our leases in the United KingdomU.K. and Ireland typically have terms of ten years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. We may also be required to make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are invoiced monthly and quarterly and paid in advance.
In fiscal 2018, we expect to spend approximately $15 million to $18 million on capital expenditures. Capital spending in fiscal 20172020 totaled $18.1$5.0 million, primarilywhich reflects previously committed investments in infrastructure to support the refresh and repositioning of storesour digital initiatives. Apart from these committed expenditures in our Discovery format and investment in infrastructure.
In February 2015 and July 2015, the Board of Directors adopted share repurchase programs, each authorizing the repurchase of $10 million of our common stock. In November 2015, the Board of Directors adopted a share repurchase program authorizing the repurchase of upresponse to $15 million of our common stock until March 31, 2016. These programs authorized usCOVID-19, we reduced capital expenditures during fiscal 2020 to purchase our common stock in the open market (including through 10b5-1 trading plans) or through privately negotiated transactions. The primary source of funding was cash on hand. The timing and amount of share repurchases depended on price, market conditions, applicable regulatory requirements, and other factors. Shares repurchased under these programs were subsequently retired. Under the programs approved in February 2015 and July 2015, we repurchased a total of approximately 1,224,000 shares at an average price of $16.32 per share for an aggregate amount of $20.0 million, and as a result, these programs had no further capacity. Under the program approved in November 2015, we repurchased a total of approximately 615,000 shares at an average price of $12.05 per share for an aggregate amount of $7.4 million. This program expired on March 31, 2016. maintenance levels.
In August 2017, our Board of Directors adopted a share repurchase program authorizing the repurchase of up to $20 million of our common stock. UnderFrom the date of the program approved in August 2017,approval through the program expiration on September 30, 2020, we repurchased a total of 513,7251.3 million shares at an average price of $9.08$8.75 per share for an aggregate amount of $4.7 million$11.2 million. No share repurchase program is currently authorized. In addition, our ability to repurchase shares is subject to satisfaction of conditions set forth in fiscal 2017. As of March 15, 2018, we had repurchased approximately 1.1 million shares at an average price of $8.86 per share for an aggregate amount of $10.0 million, leaving $10.0 million of availability under the 2017 Share Repurchase Programs.
We believe that cash generated from operations and borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for the near future. Our credit agreement expires on December 31, 2018.agreement.
Off-Balance Sheet Arrangements
None.None.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments include future minimum obligations under operating leases and purchase obligations. Our purchase obligations primarily consist of purchase orders for merchandise inventory. The future minimum payments for these obligations as of December 30, 2017 for periods subsequent to this date are as follows:
Payments Due by Fiscal Period as of December 30, 2017 | ||||||||||||||||||||||||||||
(Dollars in thousands) | Total | 2018 | 2019 | 2020 | 2021 | 2022 | Beyond | |||||||||||||||||||||
Operating lease obligations | $ | 233,896 | $ | 40,849 | $ | 34,041 | $ | 31,723 | $ | 29,477 | $ | 27,738 | $ | 70,068 | ||||||||||||||
Purchase obligations | 23,736 | 23,736 | - | - | - | - | ||||||||||||||||||||||
Total | $ | 257,632 | $ | 64,585 | $ | 34,041 | $ | 31,723 | $ | 29,477 | $ | 27,738 | $ | 70,068 |
Our total liability for unrecognized tax benefits under the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 740-10-25 was $0.7 million as of December 30, 2017. Management estimates it is reasonably possible that the amount of unrecognized tax benefits could decrease by as much as $0.6 million in the next twelve months as a result of the resolution of audits currently in progress involving issues common to multinational corporations and the lapsing of the statute of limitations. See Note 7 – Income Taxes to the Consolidated Financial Statements for additional information.Not applicable.
Inflation
We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. However, we can provide no assurance that our business will not be affected by inflation in the future.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitablyinevitably differ from our estimates. Such differences could be material to the financial statements.
We believe application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
Our accounting policies areare more fully described in Note 2 to our Consolidated Financial Statements,consolidated financial statements, which appear elsewhere in this Annual Report on Form 10-K. We have identified the following critical accounting estimates:
Long-Lived Assets
In accordance with ASC 360-10-35, we assess the potential impairment of long-lived assets, annually orwhich include property, plant and equipment and operating lease assets (subsequent to the adoption of ASC 842, Leases) when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset, or asset group, to expected future net cash flows generated by the asset, or asset group. If the carrying amount exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference.difference. For operating lease assets, we determine the fair value of the assets by comparing the contractual rent payments to estimated market rental rates. Fair value is calculated as the present value of estimated future cash flows for each asset group. The calculation of fair value could increase or decrease depending on changes in the inputs and assumptions used, such as changes in the financial performance of the asset group, future growth rate and discount rate.
For purposes of evaluating store assets for impairment, we have determined that each store location is an asset group.group, inclusive of the right-of-use asset attributable to each store. Factors that we consider important which could individually or in combination trigger an impairment review include, but are not limited to, the following: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (3) significant changes in our business strategies and/or negative industry or economic trends. We assess events and changes in circumstances or strategy that could potentially indicate that the carrying value of long-lived assets may not be recoverable as they occur. Due to the significance of the fourth quarter to individual store locations, we assess store performance annually,quarterly, using the full year’s results. We consider a historical and/or projected negative cash flow trend for a store location to be an indicator that the carrying value of that asset group may not be recoverable. Impairment charges related to this assessment are typically included in cost of merchandise sold – retail as a component of net income (loss) before income taxes in the DTC segment. See Note 4 - Leases and Note 6 - Property and Equipment, Net to our consolidated financial statements for further discussion.
Given the reductions in our revenues in our revenues and cash flows as a result of COVID-19, primarily in the first and second quarters of fiscal 2020, we identified triggering events that required us to assess the need for potential impairment charges. As a result of our 2017 review,these activities we determined that arecorded store would not be able to recover the carrying value of certain store assets through expected undiscounted cash flows over the remaining life of the related assets. Accordingly, we reduced the carrying value of the assets to fair value, calculated as the present value of estimated future cash flows for each asset group and recorded asset impairment charges of less than $0.1$7.3 million, in the fourth quarter of fiscal 2017, $2.3with approximately $3.8 million in fiscal 2016for right-of-use operating lease assets and which is included in cost of merchandise sold – retail. In order to evaluate the sensitivity of the fair value assumptions on store asset impairment, we applied a hypothetical decrease of 1% in the comparable stores sales trend$3.5 million for fixed assets including leasehold improvements and in margin. Based on the analysis performed as of December 30, 2017, the changes in our assumptions would not have resulted in a material difference in the calculated impairment charge. Impairment charges were $2.3 million in 2016fixtures, furniture and immaterial in 2015.fixtures, machinery and equipment, and construction-in-progress.
Additionally, wewe consider a more likely than not assessment that an individual location will close prior to the end of its lease term as a triggering event to review the store asset group for recoverability. These assessments are reviewed on a quarterly basis. When indicated, the carrying value of the assets is reduced to fair value, calculated as the estimated future cash flows for each asset group. Asset impairment charges resulting from these assessments totaled $0.1 million, $0.4 million and $0.3 million in 2017, 2016 and 2015, respectively, and are included in selling, general and administrative expenses as a component of income before income taxes in the DTC segment.
In the event that we decide to close any or all of these stores in the future, we may be required to record additional impairments,impairments, lease termination fees, severance and other charges. Impairment losses in the future are dependent on a number of factors such as site selection, and general economic trends, public health issues (such as the COVID-19 pandemic) and thus could be significantly different than historical results. The assumptions used in future calculations of fair value may change significantly which could result in further impairment charges in future periods.
purchase and approximately 75% of gift cards have been redeemed within the first twelve months. In addition, unredeemed gift cards or breakage revenue is recorded in proportion to the customer’s redemption pattern using an estimated breakage rate based on historical experience.
For certain qualifying transactions, a portion of revenue transactions are deferred for the obligation related to our loyalty program or when a material right in the form of a future discount is granted. In these transactions, the transaction price is allocated to the separate performance obligations based on the relative standalone selling price. The standalone selling price for the points earned for our loyalty program is estimated using the net retail value of the merchandise purchased, adjusted for estimated breakage based on historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. In regard to the consolidated balance sheet, contract liabilities for gift cards are classified as gift cards and customer deposits, and contract liabilities related to the loyalty program are classified as deferred revenue and other.
During 2020, we experienced lower redemptions of our gift cards as a result of COVID-19 for all periods of outstanding activated cards. The redemption patterns used to determine the gift card breakage rate, especially in the first year after gift card purchase, currently cards sold in 2019 and 2020, resulted in changes to the breakage rate. We do not believe that the redemption pattern experienced in fiscal 2020 reflects the pattern in the future and have adjusted the breakage rates to exclude certain current year activity.
See Note 3 - Revenue for additional information.
Revenue RecognitionLeases
Revenues from retail sales, netWe determine if an arrangement is a lease at inception. The fair value of discountsright-of-use assets and excluding sales tax,liabilities 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 customers in our retail stores, through our e-commerce sites, and through select third parties. We do not charge administrative fees on unused gift cards. Our gift cards issued in the United States do not have an expiration date. Beginning in 2016, gift cards issued in the United Kingdom expire 24 months from the activation date. A current liability is recorded upon purchase of a gift card, and revenue is recognized when the gift card is redeemed for merchandise. Revenue from various licensing and international franchising arrangements is recognized when earned in accordance with the terms of the underlying agreement, generally based upon the greater of the contractually earned or guaranteed minimum levels.
In December 2015, we established a new legal entity, Card Services, to issue and administer all gift cards in the United States. The escheatment requirements, of the jurisdiction where Card Services was established, differ from those that the Company has historically been subject to. Given the change in legal requirements for this new entity, we began to recognize breakage income on these unredeemed gift cards under the redemption recognition methodcommencement date based on historical redemption patternsthe present value of lease payments using a discounted cash flow analysis, considering market rent and asmarket discount rates, over the lease term for those arrangements where there is an identified asset and the contract conveys the right to control its use. Our lease term includes options to extend or terminate a component of net retail sales. For gift cards issued prior to December 2015, the Company recorded income from unredeemed gift cards under the delayed recognition method,lease only when the likelihood of redemption by a customerit is considered remote andreasonably certain that we are released from our legal obligation related to the gift cards. In the fourth quarter of 2017, we reviewed our historical redemption patterns and breakage rates and adjusted the breakage rates for current redemption patterns. Gift card redemption rates were lower in fiscal 2017 as compared to fiscal 2016 and less card redemptions resulted in a higher breakage percentage. We have no reason to believewill exercise that there will be a material change in the future estimates or assumptions we use to measure gift card breakage. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 100-basis point change in our gift card breakage rate as of December 30, 2017 would have resulted in a $0.5 million change in the gift card liability and net retail sales.
We have a customer loyalty program, Build-A-Bear Bonus Club. In North America, guests receive 1 point for every dollar spent and a $10 reward certificate for every 100 points earned in a twelve-month period. In the UK, guests receive a £5 certificate for every 50 points they earn. Points accumulate and expire after twelve months of inactivity. An estimate of the obligation related to the program, based on historical redemption patterns, is recorded as deferred revenue and a reduction of net retail sales.
We assess the adequacy of the deferred revenue liability based upon our review of point conversion and award redemption patterns at the end of each fiscal quarter. Due to the estimates involved in these assessments, adjustments to the historical rates are generally made no more often than annually in order to allow time for more definite trends to emerge. Based on this assessment at the end of fiscal 2017, we evaluated conversion patterns that resulted in updated rates used in our calculation of the liability. Due to an offsetting change in outstanding points and certificates as of the end of 2016, a $0.1 million adjustment was made to the fiscal 2017 liability. Based on this assessment at the end of fiscal 2016 and 2015, the deferred revenue liability was flat and adjusted downward by $0.1 million respectively, with a corresponding increase to net retail sales.option.
The calculationmajority of our leases do not provide an implicit rate and therefore, we estimate the incremental borrowing discount rate based on information available at lease commencement. The discount rates used are indicative of a synthetic credit rating based on quantitative and qualitative analysis and adjusted one notch higher to estimate a secured credit rating. For non-U.S. locations, a risk-free rate yield based on the currency of the deferred revenue liability could increase or decrease depending on changes inlease is used to estimate the inputs and assumptions used, specifically, expected conversion and redemption rates. In order to evaluate the sensitivity of the estimates used in the recognition of deferred revenue, we applied a hypothetical increase of 100 basis points in the conversion and redemption rates. Basedincremental borrowing rate. The weighted average risk-free rates were based on the analysis performed asTreasury BVAL rates curve in Bloomberg. Rates were developed for length of December 30, 2017, the changes in our assumptions would have resulted in a $0.1 million change in the deferred revenue liabilitylease term for each year 1 through 10 and net retail sales.for 12, 15, 20, 25, and 30-year terms.
Income Taxes
We recognize deferred tax assets resulting from tax credit carryforwards and deductible temporary differences between taxable income on our income tax returns and income before taxes under GAAP. Deferred tax assets generally represent future tax benefits to be received when these carryforwards can be applied against future taxable income or when expenses previously reported in our consolidated financial statements become deductible for income tax purposes. A deferred tax asset valuation allowance is required when some portion or all of the deferred tax assets may not be realized. We consider the weight of all available evidence, both positive and negative, in assessing the realizability of the deferred tax assets by each taxing jurisdiction. We consider the Company’sour ability to carry back itsour tax losses or credits for refunds, the availability of tax planning strategies and reversals of existing taxable temporary differences as well as projections of future taxable incomeincome. In the first quarter of fiscal 2020, as we had anticipated incurring a cumulative book loss in North America over the three-year period ended January 30, 2021, we evaluated the realizability of our North America deferred tax assets. We performed an analysis of all available positive and negative evidence. The three-year cumulative loss is a significant piece of negative evidence. ASC 740, Income Taxes, requires objective historical evidence be given more weight than subjective evidence, such as forecasts of future income. Accordingly, in the first quarter of fiscal 2020, we recorded a $3.3 million valuation allowance on our North America deferred tax assets. As we had incurred a cumulative book loss in the U.K. over the three-year period ended February 2, 2019, we evaluated the realizability of our UK deferred tax assets and, accordingly, in the fourth quarter of fiscal 2018, we recorded a $3.7 million valuation allowance on our U.K. deferred tax assets.
Significant judgment is required in evaluating our uncertain tax positions. We establish accruals for uncertainuncertain tax positions when we believe that the full amount of the associated tax benefit may not be realized. In the future, if we prevail in matters for which accruals have been established previously or pay amounts in excess of reserves, there could be an effect on our income tax provisions in the period in which such determination is made. Tax authorities regularly examine the Company’sour returns in the jurisdictions in which the Company doeswe do business. Management regularly assesses the tax risk of the company’sour return filing positions and believes itsour accruals for uncertain tax benefits are adequate as of DecemberJanuary 30, 20172021 and December 31, 2016.February 1, 2020.
On December 22, 2017, the Tax Cuts and Jobs Act (“Act”) was enacted, which significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Act permanently reduces the U.S. federal statutory tax rate to 21%, effective January 1, 2018. We recorded a provisional tax charge of $1.4 million for the re-measurement of our U.S. net deferred tax assets. The Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 30, 2017. Management does not anticipate a cost for this one-time deemed repatriation at this time. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Act require a company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Base-Eroding Anti-abuse Tax (“BEAT”) provisions of the Act assess tax on certain payments made by a U.S. company to a related foreign company. Management does not expect the impact of GILTI or BEAT will be material to the consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. We have recognized the provisional tax impacts related to the tax charge for the revaluation of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the year ended December 30, 2017. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act. In accordance with SAB 118 the financial reporting impact of the Act will be completed and any adjustment will be recorded to income tax expense in fiscal 2018.
Recent Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies for additional information.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risks relate primarily to changes in interest rates, and we bear this risk in two specific ways. First, our revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, our results of operations and our cash flows can be impacted by changes in interest rates. Outstanding balances under our credit facility bear interest at LIBOR plus 1.8%. Our borrowings during fiscal 2017 were limited to a short period during the middle of the fourth quarter. Accordingly, a 100-basis point change in interest rates would result in no material change to our annual interest expense. The second component of interest rate risk involves the investment of excess cash in short term, investment grade interest-bearing securities. If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations. We had no such investments as of December 30, 2017.
We conduct operations in various countries, which expose us to changes in foreign exchange rates. The financial results of our foreign subsidiaries and franchisees may be materially impacted by exposure to fluctuating exchange rates. Reported sales, costs and expenses at our foreign subsidiaries, when translated into U.S. dollars for financial reporting purposes, can fluctuate due to exchange rate movement. While exchange rate fluctuations can have a material impact on reported revenues, costs and expenses, and earnings, this impact is principally the result of the translation effect and does not materially impact our short-term cash flows.
Although we enter into a significant amount of purchase obligations outside of the U.S., these obligations are settled primarily in U.S. dollars and, therefore, we believe we have only minimal exposure at present to foreign currency exchange risks for our purchase obligations. However, because our foreign subsidiaries also purchase their inventory in U.S. dollars, we are exposed to some risk when their functional currencies fluctuate relative to the U.S dollar. We estimate that the significant movement in the British pound sterling relative to the U.S. dollar in fiscal 2017 had a negative impact on our revenues of approximately $1.9 million as compared to fiscal 2016. This is separate from the transactional impact of the change in rates that is a component of selling, general and administrative expenses. Historically, we have not hedged our currency risk.
We do not engage in financial transactions for trading or speculative purposes.Not applicable.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and schedules are listed under Item 15(a)(1) and filed as part of this Annual Report on Form 10-K.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC’s rules and forms and is accumulated and communicated to management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing evaluation, our management, including the President and Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of DecemberJanuary 30, 2017,2021, the end of the period covered by this Annual Report.
It should be noted that our management, including the President and Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of DecemberJanuary 30, 2017.2021. Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. All internal control systems have inherent limitations, including the possibility of circumvention and overriding the control. Accordingly, even effective internal control can provide only reasonable assurance as to the reliability of financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
In making its evaluation, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013 framework). Based upon this evaluation, our management has concluded that our internal control over financial reporting as of DecemberJanuary 30, 20172021 is effective.
Our independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of our internal control over financial reporting, as stated in its report which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal 20172020 fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Build-A-Bear Workshop, Inc.
We have audited Build-A-Bear Workshop, Inc. and Subsidiaries’ internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Build-A-Bear Workshop, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 30, 2017 and December 31, 2016, the related consolidated statements of income, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 30, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated March 15, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 15, 2018
OTHER INFORMATION |
None.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information concerning directors, appearing in the sections titled “Directors,” “The Board of Directors and its Committees,” and “Committee Charters, Corporate Governance Guidelines, Business Conduct Policy and Code of Ethics” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement (the “Proxy Statement”) to be filed with the SEC in connection with our Annual Meeting of Stockholders scheduled to be held on MayJune 10, 2018,2021, is incorporated by reference in response to this Item 10.
Business Conduct Policy
The Board of Directors has adopted a Business Conduct Policy applicable to our directors, officers and employees, including all executive officers. The Business Conduct Policy has been posted in the Investor RelationsRelations section of our corporate website at http://ir.buildabear.com. We intend to satisfy the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Business Conduct Policy on our website.
The information appearing in the sections titled “Committee Charters, Corporate Governance Guidelines, Business Conduct Policy and Code of Ethics” in the Proxy Statement is incorporated by reference in response to this Item 10.
Executive Officers and Key Employees
Sharon Price John, 54,57, was appointed to the Board of Directors on June 3, 2013, in connection with her employment as Chief Executive Officer and Chief President Bear of the Company. Effective March 2016, she now holds the title of President and Chief Executive Officer. From January 2010 through May 2013, Ms. John served as President of Stride Rite Children’s Group LLC, a division of Wolverine World Wide, Inc., which designs and markets footwear for children. From 2002 through 2009, she held positions of broadened portfolio and increased responsibility at Hasbro, Inc., a multinational toy and board game company, including as General Manager & Senior Vice President of its U.S. Toy Division from 2006 to 2008 and General Manager & Senior Vice President of its Global Preschool unit from June 2008 through 2009. Ms. John also founded and served as Chief Executive Officer of Checkerboard Toys, served as Vice President, U.S. Toy Division with VTech Industries, Inc., and served in a range of roles at Mattel, Inc. She started her career in advertising, overseeing accounts such as Hershey’s and the Snickers/M&M Mars business. Ms. John serves on the Board of Directors of Jack in the Box Inc., a publicly traded restaurant company.
Eric Fencl, 5855,, joined Build-A-Bear Workshop in July 2008 as Chief Bearrister—General Counsel. Effective October 2015, heMr. Fencl now holds the title of Chief Administrative Officer, General Counsel and Secretary. Prior to joining the Company, Mr. Fencl was Executive Vice President, General Counsel and Secretary for Outsourcing Solutions Inc., a national accounts receivable management firm from August 1998 to June 2008. From September 1990 to August 1998, heMr. Fencl held legal positions at Monsanto Company, McDonnell Douglas Corporation and Bryan Cave LLP.Leighton Paisner LLP (formerly known as Bryan Cave LLP). Mr. Fencl began his career as an auditor with Arthur Young & Company.
J. Christopher Hurt, 5551,, joined Build-A-Bear Workshop in April 2015 as Chief Operations Officer. Effective June 2020, he now holds the title of Chief Operations and Experience Officer. Prior to joining the Company, Mr. Hurt was at American Eagle Outfitters, Inc. from 2002 to April 2015 in various senior leadership roles of increasing responsibility, including Senior Vice President, North America and Vice President/General Manager—Factory, Canada, Mexico Retail from 2011 to April 2015, and East Zone Vice President and Regional Director from 2002 to 2011. Before joining American Eagle Outfitters, Mr. Hurt held positions of increasing responsibility at companies including Polo Ralph Lauren and The Procter & Gamble Company.
Jennifer Kretchmar, 44,48, joined Build-A-Bear Workshop in August 2014 as Chief Product Officer and Innovation Bear. EffectiveIn March 2016, she became Chief Merchandising Officer and, effective June 2020, she now holds the title of Chief Digital and Merchandising Officer. Ms. Kretchmar serves on the Board of Directors of Mace Security International, Inc., a publicly traded personal security company. Prior to joining the Company, Ms. Kretchmar was Senior Vice President of Product and Brand Management with the Stride Rite Children’s Group of Wolverine World Wide, Inc. where since 2004 she was responsible for the global product creation strategy for a diverse portfolio of children’s footwear brands, including Stride Rite, Sperry Top- Sider®, Saucony®, Keds®, Merrell®, Robeez®, Jessica Simpson® and Hush Puppies®. Before joining Stride Rite, Ms. Kretchmar held positions of increasing responsibility at The Timberland Company, Goldbug, and the United States Department of Agriculture Foreign Service.
Voin Todorovic, 43,46, joined Build-A-Bear Workshop in September 2014 as Chief Financial Officer. Prior to joining the Company, Mr. Todorovic was employed at Wolverine World Wide, Inc., a leading global footwear and apparel company, where since September 2013 heMr. Todorovic served as the head of finance and operations for its Lifestyle Group, which includes a portfolio of iconic brands such as Sperry Top-Sider®, Hush Puppies®, Keds®, and Stride Rite®. From 2011 to 2013 heMr. Todorovic was Vice President—Finance and Administration of the Stride Rite Children’s Group business, operating in wholesale, direct to consumer and international franchising, and from 2010 to 2011 heMr. Todorovic was Vice President of the Performance + Lifestyle Group. Prior to his tenure at Wolverine World Wide he held positions of increasing responsibility at Collective Brands, Inc. and Payless ShoeSource.
EXECUTIVE COMPENSATION |
The information contained in the sections titled “Executive Compensation” and “Board of Directors Compensation” in the Proxy Statement is incorporated herein by reference in response to this Item 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information contained in the section titled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference in response to this Item 12.
Equity Compensation Plan Information
(c) | (c) | |||||||||||||||||||||||
Number of securities | Number of securities | |||||||||||||||||||||||
(a) | (b) | remaining available for | (a) | (b) | remaining available for | |||||||||||||||||||
Number of securities to | Weighted-average | future issuance under equity | Number of securities to | Weighted-average | future issuance under equity | |||||||||||||||||||
be issued upon exercise of | exercise price of | compensation plans | be issued upon exercise of | exercise price of | compensation plans | |||||||||||||||||||
outstanding options, | outstanding options, | (excluding securities | outstanding options, | outstanding options, | (excluding securities | |||||||||||||||||||
Plan category | warrants and rights | warrants and rights | reflected in column (a)) | warrants and rights | warrants and rights | reflected in column (a)) | ||||||||||||||||||
Equity compensation plans approved by security holders | 791,567 | $ | 9.67 | 984,758 | 805,701 | $ | 9.96 | 568,523 | ||||||||||||||||
Total | 791,567 | $ | 9.67 | 984,758 | 805,701 | $ | 9.96 | 568,523 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information contained in the section titled “Related Party Transactions” in the Proxy Statement is incorporated herein by reference in response to this Item 13.
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information contained in the sectionssections titled “Principal Accountant Fees” and “Policy Regarding Pre-Approval of Services Provided by the Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference in response to Item 14.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
The financial statements and schedules set forth below are filed on the indicated pages as part of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Build-A-Bear Workshop, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Build-A-Bear Workshop, Inc. and Subsidiaries (collectively, the Company) as of DecemberJanuary 30, 20172021 and December 31, 2016,February 1, 2020, the related consolidated statements of income,operations and comprehensive income (loss), stockholders’stockholders' equity and cash flows for each of the threetwo years in the period ended DecemberJanuary 30, 2017,2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at DecemberJanuary 30, 20172021 and December 31 2016,February 1, 2020, and the results of its operations and its cash flows for each of the threetwo years in the period ended DecemberJanuary 30, 2017,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition - gift card breakage
Description of the Matter | As described in Note 3, for the Company’s gift cards, revenue is deferred for single transactions until redemption. The unredeemed gift cards or breakage revenue is recorded in proportion to the customer’s redemption pattern using an estimated breakage rate based on historical experience. The Company recognized $3.7 million in breakage revenue in 2020. |
Auditing the Company’s breakage revenue related to unredeemed gift cards was complex and judgmental due to the complexity of the model and the subjectivity related to the judgments that are made by the Company to estimate the breakage rate. Additionally, due to the magnitude of the Company’s liability for gift cards, changes in expected future redemption patterns could result in significant variations in the amount of breakage revenue recognized. | ||
How We Addressed the Matter in Our Audit | We performed audit procedures that included, among others, evaluating the methodologies, assessing the judgments and testing the completeness and accuracy of the historical data used by the Company in its determination of the breakage rate. In addition, we performed sensitivity analyses over the breakage rate to evaluate the impact changes in breakage rates had on breakage revenue recorded. |
Impairment of store assets
Description of the Matter | As discussed in Note 2, whenever facts and circumstances indicate that the carrying value of long-lived assets and right-of-use operating lease assets may not be recoverable, the carrying value of those assets is reviewed for potential impairment. If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. During the year ended January 30, 2021, the Company recognized 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. Auditing the Company’s store asset impairment analysis, including right of use operating lease assets, is complex and judgmental due to the estimation required in determining the estimated future cash flows over the remaining useful life of the long-lived assets used to assess recoverability of the store assets (undiscounted) and determining the fair value of the store assets (discounted). The significant assumptions used include estimated future cash flows directly related to the future operation of the stores (including revenue). The significant assumptions used in determining the fair value of the right of use operating lease assets include the market rent for the remaining lease term of the related stores. These assumptions are subjective in nature and are affected by expectations about future market or economic conditions. | |
How We Addressed the Matter in Our Audit | We performed audit procedures which included, among other procedures, inspecting the Company’s analysis of historical results to determine if contrary evidence existed as to the completeness of the population of potentially impaired retail stores. Additionally, we evaluated the significant assumptions discussed above used to project the undiscounted and discounted cash flows and to estimate fair value of the right of use operating lease assets. For example, we compared the significant assumptions used by the Company to historical results, current industry and economic trends, changes in the Company’s business model, and other relevant factors. We performed sensitivity analyses of the significant assumptions used by the Company to evaluate the changes in the fair value of the assets of the individual retail stores that would result from changes in the underlying assumptions. We involved our valuation specialists to assist in our evaluation of the fair value estimates specific to evaluating the estimated market rental rates of the individual store leases by comparing them to market rates from comparable leases and available market data. |
/s/ Ernst & Young LLP
We have served as the Company‘sCompany’s auditor since 2011.
St. Louis, Missouri
March April 15, 2018 2021
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
Deccember 30, | Deccember 31, | |||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 30,445 | $ | 32,483 | ||||
Inventories | 53,136 | 51,885 | ||||||
Receivables | 13,302 | 12,939 | ||||||
Prepaid expenses and other current assets | 13,346 | 12,737 | ||||||
Total current assets | 110,229 | 110,044 | ||||||
Property and equipment, net | 77,751 | 74,924 | ||||||
Deferred tax assets | 6,381 | 8,256 | ||||||
Other intangible assets, net | 995 | 1,721 | ||||||
Other assets, net | 2,633 | 4,650 | ||||||
Total Assets | $ | 197,989 | $ | 199,595 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 18,942 | $ | 27,861 | ||||
Accrued expenses | 15,189 | 15,897 | ||||||
Gift cards and customer deposits | 33,926 | 37,070 | ||||||
Deferred revenue and other | 1,806 | 2,029 | ||||||
Total current liabilities | 69,863 | 82,857 | ||||||
Deferred rent | 17,906 | 15,438 | ||||||
Deferred franchise revenue | 1,208 | 565 | ||||||
Other liabilities | 1,697 | 1,623 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at December 30, 2017 and December 31, 2016 | - | - | ||||||
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 15,515,960 and 15,856,927 shares, respectively | 155 | 159 | ||||||
Additional paid-in capital | 68,962 | 68,001 | ||||||
Accumulated other comprehensive loss | (11,562 | ) | (12,727 | ) | ||||
Retained earnings | 49,760 | 43,679 | ||||||
Total stockholders' equity | 107,315 | 99,112 | ||||||
Total Liabilities and Stockholders' Equity | $ | 197,989 | $ | 199,595 |
See accompanying notes to consolidated financial statements.
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
Fiscal Year | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues: | ||||||||||||
Net retail sales | $ | 349,408 | $ | 357,593 | $ | 372,715 | ||||||
Commercial revenue | 6,007 | 4,312 | 2,783 | |||||||||
Franchise fees | 2,451 | 2,299 | 2,196 | |||||||||
Total revenues | 357,866 | 364,204 | 377,694 | |||||||||
Costs and expenses: | ||||||||||||
Cost of merchandise sold - retail | 185,481 | 195,914 | 197,101 | |||||||||
Cost of merchandise sold - commercial | 3,412 | 2,253 | 1,375 | |||||||||
Selling, general and administrative | 152,653 | 157,174 | 159,612 | |||||||||
Store preopening | 2,496 | 3,549 | 1,851 | |||||||||
Interest expense (income), net | 11 | 5 | (143 | ) | ||||||||
Total costs and expenses | 344,053 | 358,895 | 359,796 | |||||||||
Income before income taxes | 13,813 | 5,309 | 17,898 | |||||||||
Income tax (benefit) expense | 5,897 | 3,932 | (9,447 | ) | ||||||||
Net income | $ | 7,916 | $ | 1,377 | $ | 27,345 | ||||||
Income per common share: | ||||||||||||
Basic | $ | 0.50 | $ | 0.09 | $ | 1.61 | ||||||
Diluted | $ | 0.50 | $ | 0.09 | $ | 1.59 | ||||||
Shares used in computing common per share amounts: | ||||||||||||
Basic | 15,572,045 | 15,442,086 | 16,642,269 | |||||||||
Diluted | 15,757,060 | 15,622,273 | 16,867,356 |
See accompanying notes to consolidated financial statements.
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Fiscal Year | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net income | $ | 7,916 | $ | 1,377 | $ | 27,345 | ||||||
Foreign currency translation adjustment | 1,165 | (2,756 | ) | (1,273 | ) | |||||||
Comprehensive income (loss) | $ | 9,081 | $ | (1,379 | ) | $ | 26,072 |
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS |
(Dollars in thousands, except share data) |
January 30, | February 1, | |||||||
2021 | 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash, cash equivalents and restricted cash | $ | 34,840 | $ | 26,726 | ||||
Inventories, net | 46,947 | 53,381 | ||||||
Receivables, net | 8,295 | 11,526 | ||||||
Prepaid expenses and other current assets | 10,111 | 7,117 | ||||||
Total current assets | 100,193 | 98,750 | ||||||
Operating lease right-of-use asset | 104,825 | 126,144 | ||||||
Property and equipment, net | 52,973 | 65,855 | ||||||
Deferred tax assets | 0 | 3,411 | ||||||
Other assets, net | 3,381 | 3,102 | ||||||
Total Assets | $ | 261,372 | $ | 297,262 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 17,901 | $ | 15,680 | ||||
Accrued expenses | 17,551 | 16,536 | ||||||
Operating lease liability short term | 32,402 | 30,912 | ||||||
Gift cards and customer deposits | 19,029 | 20,231 | ||||||
Deferred revenue and other | 2,445 | 2,605 | ||||||
Total current liabilities | 89,328 | 85,964 | ||||||
Operating lease liability long term | 101,462 | 119,625 | ||||||
Deferred franchise revenue | 920 | 1,325 | ||||||
Other liabilities | 2,354 | 1,717 | ||||||
Stockholders' equity: | ||||||||
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at January 30, 2021 and February 1, 2020 | 0 | 0 | ||||||
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 15,930,958 and 15,205,981 shares, respectively | 159 | 152 | ||||||
Additional paid-in capital | 72,822 | 70,633 | ||||||
Accumulated other comprehensive loss | (12,615 | ) | (12,079 | ) | ||||
Retained earnings | 6,942 | 29,925 | ||||||
Total stockholders' equity | 67,308 | 88,631 | ||||||
Total Liabilities and Stockholders' Equity | $ | 261,372 | $ | 297,262 |
See accompanying notes to consolidated financial statements. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
AND COMPREHENSIVE INCOME (LOSS) |
(Dollars in thousands, except share and per share data) |
Fiscal year ended | ||||||||
January 30, | February 1, | |||||||
2021 | 2020 | |||||||
Revenues: | ||||||||
Net retail sales | $ | 249,210 | $ | 323,491 | ||||
Commercial revenue | 4,426 | 11,892 | ||||||
International franchising | 1,674 | 3,160 | ||||||
Total revenues | 255,310 | 338,543 | ||||||
Costs and expenses: | ||||||||
Cost of merchandise sold - retail | 147,783 | 176,652 | ||||||
Store asset impairment | 7,346 | 0 | ||||||
Cost of merchandise sold - commercial | 1,837 | 5,432 | ||||||
Cost of merchandise sold - international franchising | 935 | 2,836 | ||||||
Total cost of merchandise sold | 157,901 | 184,920 | ||||||
Consolidated gross profit | 97,409 | 153,623 | ||||||
Selling, general and administrative expense | 117,585 | 152,047 | ||||||
Interest expense, net | 10 | 15 | ||||||
(Loss) income before income taxes | (20,186 | ) | 1,561 | |||||
Income tax expense | 2,797 | 1,300 | ||||||
Net (loss) income | $ | (22,983 | ) | $ | 261 | |||
Foreign currency translation adjustment | (601 | ) | (60 | ) | ||||
Comprehensive (loss) income | $ | (23,584 | ) | $ | 201 | |||
(Loss) income per common share: | ||||||||
Basic | $ | (1.54 | ) | $ | 0.02 | |||
Diluted | $ | (1.54 | ) | $ | 0.02 | |||
Shares used in computing common per share amounts: | ||||||||
Basic | 14,923,304 | 14,711,334 | ||||||
Diluted | 14,923,304 | 14,759,810 |
See accompanying notes to consolidated financial statements. |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands)
|
Accumulated | ||||||||||||||||||||
Additional | other | |||||||||||||||||||
Common | paid-in | comprehensive | Retained | |||||||||||||||||
stock | capital | income (loss) | earnings | Total | ||||||||||||||||
Balance, February 2, 2019 | $ | 150 | $ | 69,088 | $ | (12,018 | ) | $ | 37,094 | $ | 94,314 | |||||||||
Stock-based compensation | 0 | 1,793 | 0 | 0 | 1,793 | |||||||||||||||
Shares issued under employee stock plans | 2 | (248 | ) | 0 | 0 | (246 | ) | |||||||||||||
Adoption of new accounting standard | 0 | 0 | 0 | (7,431 | ) | (7,431 | ) | |||||||||||||
Other | 0 | 0 | (1 | ) | 1 | 0 | ||||||||||||||
Other comprehensive loss | 0 | 0 | (60 | ) | 0 | (60 | ) | |||||||||||||
Net income | 0 | 0 | 0 | 261 | 261 | |||||||||||||||
Balance, February 1, 2020 | $ | 152 | $ | 70,633 | $ | (12,079 | ) | $ | 29,925 | $ | 88,631 | |||||||||
Stock-based compensation | 0 | 1,811 | 0 | 0 | 1,811 | |||||||||||||||
Shares issued under employee stock plans | 7 | 378 | 0 | 0 | 385 | |||||||||||||||
Other comprehensive loss | 0 | 0 | (536 | ) | 0 | (536 | ) | |||||||||||||
Net income | 0 | 0 | 0 | (22,983 | ) | (22,983 | ) | |||||||||||||
Balance, January 30, 2021 | $ | 159 | $ | 72,822 | $ | (12,615 | ) | $ | 6,942 | $ | 67,308 |
See accompanying notes to consolidated financial statements. |
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands)
|
Fiscal year ended | ||||||||
January 30, | February 1, | |||||||
2021 | 2020 | |||||||
Cash flows provided by operating activities: | ||||||||
Net (loss) income | $ | (22,983 | ) | $ | 261 | |||
Adjustments to reconcile net income to | ||||||||
net cash provided by operating activities: | ||||||||
Depreciation and amortization | 13,292 | 13,705 | ||||||
Share-based and performance-based stock compensation | 1,525 | 2,877 | ||||||
Impairment of right-of-use assets and fixed assets | 7,346 | 0 | ||||||
Deferred taxes | 3,388 | (318 | ) | |||||
Provision for doubtful accounts | 538 | (83 | ) | |||||
Loss/(Gain) on disposal of property and equipment | 262 | (7 | ) | |||||
Change in assets and liabilities: | ||||||||
Inventories, net | 6,785 | 5,053 | ||||||
Receivables, net | 2,747 | (805 | ) | |||||
Prepaid expenses and other assets | (2,063 | ) | 5,839 | |||||
Accounts payable and accrued expenses | 4,028 | (2,439 | ) | |||||
Operating leases | 201 | (490 | ) | |||||
Gift cards and customer deposits | (1,209 | ) | (1,369 | ) | ||||
Deferred revenue | (471 | ) | (615 | ) | ||||
Net cash provided by operating activities | 13,386 | 21,609 | ||||||
Cash flows used in investing activities: | ||||||||
Purchases of property and equipment | (5,046 | ) | (12,384 | ) | ||||
Net cash used in investing activities | (5,046 | ) | (12,384 | ) | ||||
Cash flows used in financing activities: | ||||||||
Shares returned for taxes withheld related to restricted stock awards | (114 | ) | (245 | ) | ||||
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 | ||||||
Cash, cash equivalents and restricted cash, beginning of period | 26,726 | 17,886 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 34,840 | $ | 26,726 | ||||
Reconciliation of cash, cash equivalents and restricted cash (1) | ||||||||
Cash and cash equivalents | $ | 33,142 | $ | 25,057 | ||||
Restricted cash from long-term deposits | 1,698 | 1,669 | ||||||
Total cash, cash equivalents and restricted cash | $ | 34,840 | $ | 26,726 | ||||
Net cash paid (received) during the period for income taxes | $ | 41 | $ | (1,800 | ) | |||
(1) See cash, cash equivalents and restricted cash in Note 2 - Summary of Significant Accounting Policies for further discussion.
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(1) | Description of Business and Basis of Preparation |
Build-A-Bear Workshop, Inc. and subsidiaries (collectively, the “Company”) is a multi-channel retailer of plush animals and related products. The Company began operations in October 1997. The Company sells its products through its 354 corporately-managed locations operated primarily in leased mall locations in the U.S., Canada, China, Ireland, and the U.K. along with its e-commerce sites. With the exception of China, operations in foreign countries where the Company does not have corporately-managed locations are through franchise agreements.
The Company’s consolidated financial statements have been prepared in accordance U.S. GAAP. Certain amounts in prior fiscal periods have been reclassified to conform to current year presentation with no impact to the consolidated statement of operations and comprehensive income (loss) (e.g., store preopening is included within selling, general and administrative and store impairment is disclosed separately from cost of merchandise sold - retail).
(2) |
For each accounting topic that is addressed in its own note, the description of the accounting policy may be found in the related note. The Company’s other significant accounting policies applied in the preparation of the accompanying consolidated financial statements are as follows: Principles of Consolidation The accompanying consolidated financial statements include the accounts of Build-A-Bear Workshop, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts are eliminated in consolidation. Fiscal Year The Company operates on a 52- or 53-week fiscal year ending on the Saturday closest to January 31. The periods presented in these financial statements are fiscal 2020 (52 weeks ended January 30, 2021) and fiscal 2019 (52 weeks ended February 1, 2020). References to years in these financial statements relate to fiscal years or year ends rather than calendar years. Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents include cash and short-term highly liquid investments with an original maturity of three months or less held in both domestic and foreign financial institutions. In addition, the Company has long-term deposits at multiple institutions to satisfy contractual terms with one landlord in China and the UK Customs Authority (unrelated to the matter discussed in Note 10 - Commitments and Contingencies). The Company also has deposits from franchisees under contractual agreements which are refundable. The long-term and franchisee deposits are considered restricted cash and disclosed within the supplemental disclosure within the condensed consolidated statement of cash flows. The change in the balance of these deposits from fiscal 2019 to fiscal 2020 is the result of the foreign currency remeasurement of the British Pound. The majority of the Company’s cash and cash equivalents exceed federal deposit insurance limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk on cash and cash equivalents. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined on an average-cost basis. Inventory includes supplies of $2.8 million and $3.2 million as of January 30, 2021 and February 1, 2020, respectively. A reserve for estimated shortage is accrued throughout the year based on detailed historical averages. The inventory reserve was $1.0 million and $0.8 million as of January 30, 2021 and February 1, 2020, respectively. 46 Receivables Receivables consist primarily of amounts due to the Company in relation to tenant allowances, wholesale and corporate product sales, franchisee royalties and product sales, certain amounts due from taxing authorities and licensing revenue. The Company assesses the collectability of all receivables on an ongoing basis by considering its historical credit loss experience, current economic conditions, and other relevant factors. Based on this analysis, the Company has established an allowance for doubtful accounts of $7.4 million and $6.3 million as of January 30, 2021 and February 1, 2020, respectively. The Company's receivable balance as of January 30, 2021 also included expected reimbursement of expenses through COVID-19 related government programs from taxing authorities for payroll paid to employees who were paid while not providing services to the Company of $1.2 million covering both the United States and the United Kingdom. Additionally, the January 30, 2021, receivables balance included $0.8 million related to business grants received from the United Kingdom government for businesses in the retail, hospitality and leisure sectors. Refer to the "Government Grant" policy below for further discussion of the effects of such grants on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). Property and Equipment Property and equipment consist of leasehold improvements, furniture and fixtures, computer equipment and software, building and land and are stated at cost. Leasehold improvements are depreciated using the straight-line method over the shorter of the useful life of the assets or the life of the lease which is generally ten years. Furniture and fixtures and computer equipment are depreciated using the straight-line method over the estimated service lives ranging from three to seven years. Computer software includes certain costs, including internal payroll costs incurred in connection with the development or acquisition of software for internal use and is amortized using the straight-line method over a period of three to five years. New store construction deposits are recorded at the time the deposit is made as construction-in-progress and reclassified to the appropriate property and equipment category at the time of completion of construction, when operations of the store commence. Maintenance and repairs are expensed as incurred and improvements are capitalized. Gains or losses on the disposition of fixed assets are recorded upon disposal. Leases The majority of the Company's leases relate to retail stores and corporate offices. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Most retail store leases have an original term of five to ten-year base period and the term can be extended on a lease-by-lease basis with additional terms that are typically much shorter than the original lease term giving the Company lease optionality. The renewal options are not included in the measurement of the right of use assets and right of use liabilities unless the Company is reasonably certain to exercise the optional renewal periods. Some leases also include early termination options, which can be exercised under specific conditions. Additionally, the Company may operate stores for a period of time on a month-to-month basis after the expiration of the lease term. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property. These incentives reduce the right-of-use asset related to the lease and are amortized through the right-of-use asset as reductions of expense over the lease term. The Company's leases typically contain rent escalations over the lease term and the Company recognizes expense for these leases on a straight-line basis over the lease term. The Company recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the lease as part of the lease right-of-use asset. Some of the Company's leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the store’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. For leases entered into or reassessed after the adoption of the new standard, the Company has elected the practical expedient allowed by the standard to account for all fixed consideration in a lease as a single lease component. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed operating costs such as common area maintenance and utilities. 47 Most of the Company’s leases do not provide a readily available implicit interest rate. Therefore, the Company estimates the incremental borrowing discount rate based on information available at lease commencement. The discount rates used are indicative of a synthetic credit rating based on quantitative and qualitative analysis and adjusted one notch higher to estimate a secured credit rating. For non-U.S. locations, a risk-free rate yield based on the currency of the lease is used to adjust the estimate of the incremental borrowing rate. Other Assets Other assets consist primarily of the non-current portion of prepaid income taxes and deferred costs related to franchise agreements, financing agreements, and film production. Deferred franchise costs are initial costs related to the Company’s franchise agreements that are deferred and amortized over the life of the respective franchise agreement. Deferred financing costs are the initial issuance costs and fees incurred in obtaining the Company's new credit agreement. The Company had no outstanding borrowings at the beginning of the facility, therefore these costs and fees were recorded as a deferred asset and will be amortized over the length of the five-year agreement. Film production costs include capitalizable direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization, or fair value. Film production costs are expensed over the applicable product life cycle based on the ratio of the current period's revenues to estimated remaining total revenues (Ultimate Revenues) for each production and assessed for impairment. Long-lived Assets Whenever facts and circumstances indicate that the carrying value of a long-lived asset (asset group) and right-of-use operating lease assets may not be recoverable, the carrying value of those assets is reviewed for potential impairment. If this review indicates that the carrying value of the asset (asset group) will not be recovered, as determined based on projected undiscounted cash flows related to the asset (asset group) over its remaining life, the carrying value of the asset (asset group) is reduced to its estimated fair value. The Company typically performs an annual assessment of its store assets in the DTC segment, based on operating performance and forecasts of future performance. For the purposes of evaluating store assets for impairment, the Company has determined that each store location is an asset group, inclusive of the right-of-use asset attributable to each store. As a result of COVID-19, the Company experienced lower than projected revenues and identified indicators of impairment for its store fleet during fiscal 2020. The Company performed the recoverability test for these assets by comparing the estimated undiscounted future cash flows over the remaining useful life of the asset (asset group) to the carry value of the asset (asset group) and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted future cash flows for the remaining useful life of the respective assets. An impairment charge was recognized to the extent the carrying value exceeded the fair value of the asset (asset group). The Company estimated fair values of these long-lived assets based on its discounted future cash flows for the remaining useful life of the asset. The Company's analysis indicated that the carrying values of certain of its long-lived assets exceeded their respective fair values determined by discounted future cash flow analysis or market rent assessment. For operating lease assets, the Company determines the fair value of the assets by comparing the contractual rent payments to estimated market rental rates. An individual asset within an asset group is not impaired below its estimated fair value. As a result, for the period ending January 30, 2021, the Company recognized 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 charges are recorded in Store asset impairment within the Consolidated Statement of Operations and Comprehensive Income (Loss). These impairment charges were primarily driven by lower than projected revenues, the effect of temporary store closures, and the decline in market rents. The majority of the impairment was recorded for assets associated with stores in North America and the United Kingdom. The Company recorded total impairment charges for fiscal 2019 of $5.9 million on right-of-use assets into retained earnings as a result of the adoption of ASC 842, Leases. The determination of estimated market rent used in the fair value estimate of the Company’s operating lease assets included within the respective store asset group requires significant management judgment. Changes in these estimates could have a significant impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge. The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses including market rents, and market conditions. 48 Revenue See Note 3 — Revenue for additional accounting information. Cost of Merchandise Sold 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 (See the "Long-lived Assets" policy above discussion regarding the impairment of long-lived assets); cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to customers. Cost of merchandise sold - commercial includes the cost of the merchandise, including royalties paid to licensors of third-party branded merchandise; cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to customers. Selling, General, and Administrative Expenses Selling, general, and administrative expenses include store payroll and related benefits, advertising, credit card fees, store supplies and store closing costs, as well as central office management payroll and related benefits, travel, information systems, accounting, insurance, legal, and public relations. It also includes depreciation and amortization of central office leasehold improvements, furniture, fixtures, and equipment. In addition, bad debt expenses and accounts receivable related charges are recorded. Further, it includes store preopening expenses which represent costs incurred prior to store openings, remodels and relocations including certain store set-up, labor and hiring costs, rental charges, payroll, marketing, travel and relocation costs. Advertising The costs of advertising and marketing programs are charged to operations in the first period the program takes place. Advertising expense was $8.1 million and $12.2 million for fiscal years 2020 and 2019, respectively. Government Grants As a result of the COVID-19 pandemic, governments enacted relief legislation and stimulus packages to help combat the economic effects of the pandemic through such things as payroll expense reimbursement and business grants. Due to the nature of these grants relating to income, they can be presented in one of two ways: (1) a credit in the income statement under a general heading such as "other income" or (2) as a reduction to the related expense. The Company applied for reimbursement of payroll expenses in certain jurisdictions through COVID-19 related government programs for payroll paid to employees who were paid while not providing services to the Company and for business grants from the United Kingdom government for businesses in the retail, hospitality and leisure sectors. The payroll reimbursement programs require the Company to apply to the government for reimbursement of wages based on the applicable laws and programs within each jurisdiction. Through review of and application to these programs, the Company believes it qualified and continues to qualify for such reimbursement and expects that the expenses will be reimbursed. As a result, the Company recorded a reduction to expenses of $4.2 million for fiscal 2020 related to these wages within the Selling, general and administrative line in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). Regarding business grants in the United Kingdom for businesses in the retail, hospitality and leisure sectors, the grants were applied for on a per-property basis to support businesses through the latest lockdown restrictions as a result of the pandemic. These grants did not relate to specific expenses incurred by the Company and were therefore recorded as "other income" of $0.8 million within the Selling, general and administrative line in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
Income Taxes
Income taxes are accounted for using a balance sheet approach known as the liability method. The liability method accounts for deferred income taxes by applying the rate, based on enacted tax law, that will be in effect in the period in which the temporary differences between the book basis and the tax basis of assets and liabilities reverse or are settled. Deferred taxes are reported on a jurisdictional basis.
49 Tax positions are reviewed at least quarterly and adjusted as new information becomes available. The recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These estimates of future taxable income inherently require significant judgment. To the extent it is considered more likely than not that a deferred tax asset will be not recovered, a valuation allowance is established.
The Company
Income Per Share
Under the two-class method,
Stock-Based Compensation
The Company has share-based compensation plans covering certain management groups and its Board of Directors. The Company accounts for share-based payments utilizing the fair value recognition provisions of ASC 718. The Company recognizes compensation cost for equity awards over the requisite service period for the entire
Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and foreign currency translation adjustments.
Deferred Compensation Plan
The Company maintains a Deferred Compensation Plan for the benefit of certain management employees. The investment funds offered to the participant generally correspond to the funds offered in the
Fair Value of Financial Instruments
For purposes of financial reporting, management has determined that the fair value of financial instruments, including cash,
50 Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The assumptions used by management in future estimates could change significantly due to changes in circumstances, including, but not limited to, challenging economic conditions. Accordingly, future estimates may change significantly. Significant items subject to such estimates and assumptions include the calculation of revenue from gift card breakage, valuation of long-lived assets, including deferred income tax assets, and the determination of deferred revenue under the Company’s customer loyalty program.
Sales Tax Policy
The
Foreign Currency
Assets and liabilities of the
Recent Accounting Pronouncements – Adopted in the current year
Recent Accounting Pronouncements – Pending adoption In June 2016, the FASB issued ASU No.2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions and reasonable and supportable forecasts. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as the credit quality. As the Company is currently filing as a Smaller Reporting Company, this ASU is not effective until the fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements. In December 2019, the FASB issued ASU No.2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, 51 In March 2020 and January 2021, the
In November 2020, the SEC issued Rule 33-10890, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information.” Registrants are required to apply the amended rules for their first fiscal year ending on or after August 9, 2021 and could be early adopted in its entirety as of February 10, 2021. This rule is effective for the Company's Annual Report on Form 10-K for the year ended January 29, 2022. The rule modernized, simplified and enhanced financial statement disclosures required by Regulation S-K. The Company will adopt this rule for its Annual Report on Form 10-K for the year ended January 29, 2022. We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not expect the future adoption of any such pronouncements will have a material impact on our financial condition or the results of our operations.
Nearly all of the Company’s revenue is derived from retail sales (including e-commerce sites) and is recognized when control of the merchandise is transferred to the customer. The Company accounts for revenue in accordance with Topic 606. The Company's disaggregated revenue is fully disclosed as net sales to external customers by reporting segment and by geographic area (See Note 15 — Segment Information for additional information). The Company's direct-to-consumer reporting segment represents nearly 98% of consolidated revenue. The majority of these sales transactions are single performance obligations that are recorded when control is transferred to the customer. The following is a description of principal activities from which the Company generates its revenue, by reportable segment. The Company’s direct-to-consumer segment includes the operating activities of corporately-managed stores, other retail-delivered operations and online sales. Direct-to-consumer revenue is recognized when control of the merchandise is transferred to the customer and for the Company’s online sales, control generally transfers upon delivery to the customer. Revenue is measured as the amount of consideration, including any discounts or incentives, the Company expects to receive in exchange for transferring the merchandise. Product returns have historically averaged less than one-half of one percent due to the interactive nature of sales, where consumers customize their own stuffed animal. The Company has elected to exclude from revenue all collected sales, value add and other taxes paid by its customers. For the Company’s gift cards, revenue is deferred for single transactions until redemption including any related gift card discounts. Historically, most gift card redemptions have occurred within three years of acquisition and approximately 75% of gift cards have been redeemed within the firsttwelve months. In addition, unredeemed gift cards or breakage revenue is recorded in proportion to the customer’s redemption pattern using an estimated breakage rate based on historical experience. Breakage rates are calculated annually at the end of the fiscal year and are used to record gift card breakage over the next fiscal year until the annual breakage rate update is performed. In regard to the consolidated balance sheet, During 52 For certain qualifying transactions, a portion of revenue transactions are deferred for the obligation related to The Company’s commercial segment includes transactions with other businesses and are mainly comprised of licensing the Company’s intellectual properties for third-party use and wholesale sales of merchandise, supplies and fixtures. Revenue for wholesale sales is recognized when control of the merchandise or fixtures is transferred to the customer, which generally occurs upon delivery to the customer. The license agreements provide the customer with highly interrelated rights that are not distinct in the context of the contract and, therefore, have been accounted for as a single performance obligation and recognized as licensee sales occur. If the contract includes a guaranteed minimum, the minimum guarantee is recognized as licensee sales occur over the guarantee term until such time as royalties earned through licensee sales exceed the minimum guarantee. The Company classifies these guaranteed minimum contract liabilities as deferred revenue and other on the consolidated balance The Company’s international franchising segment includes the activities with franchisees who operate store locations in certain countries and
The Company also incurs expenses directly related to the startup of new franchises, including finder’s fees, legal and travel costs as well as expenses related to its ongoing support of the franchisees, predominantly travel and employee compensation. Accordingly, the Company’s policy is to capitalize the finder’s fee, an incremental cost, and expense all other costs as incurred. Additionally, the Company amortizes these capitalized costs into expense in the same pattern as the development fee's recording of revenue as described previously.
The table below presents information related to the lease costs for operating leases for the full year ended February 1, 2020 (in thousands).
53
The table below presents supplemental cash flow information related to leases for the full year ended
As of January 30, 2021, the weighted-average remaining operating lease term was 4.8 years and The Company incurred impairment charges during fiscal 2020 of $3.8 million against right-of-use operating lease assets. The Company recorded total impairment charges for fiscal 2019 of $5.9 million on right-of-use assets in retained earnings as a result of the adoption of ASC 842, Leases. During the fiscal year, the Company renegotiated the majority of its store lease portfolio resulting in a combination of rent reductions, deferments, and abatements. These negotiations have increased the percentage of leases with variable rent structures to one-third of its North American fleet, which is intended to increase flexibility in an environment with expected high sales volatility and provide a natural hedge against potential sales declines. For these renegotiated leases, under ASC842, the Company assessed if the renegotiated leases represented a new, separate contract or a modification of the existing lease. The Company concluded all renegotiated leases represented a modification of terms of each existing agreement. As such, the Company remeasured the lease liability and decreased the carrying amount of the right-of-use asset in proportion to the modification of the existing lease. Undiscounted cash flows The table below reconciles the undiscounted cash flows for each of the firstfive years and total remaining years to the operating lease liabilities recorded on the balance sheet (in thousands).
As of January 30, 2021, the Company had additional executed leases that have not yet commenced for two retail locations with operating lease liabilities totaling $1.7 million that will commence in 2021 with lease terms ranging from five to ten years. 54
Prepaid expenses and other current assets consist of the following (in thousands):
(1) Prepaid occupancy consists of prepaid expense related to non-lease components. (2) Other consists primarily of prepaid expense related to IT maintenance contracts and software as a service
Property and equipment,
For fiscal
In the event that costs. In
Accrued expenses consist of the following (in thousands):
(1) Accrued rent and related expenses consist of accrued costs associated with non-lease components. For fiscal 2020 and 2019, defined contribution expense was $0.8 million and $0.7 million, respectively, included within Accrued wages, bonuses and related expenses.
The
The components of the
56 The provision for income taxes was $2.8 million in fiscal 2020 compared to $1.3 million in fiscal 2019. The 2020 effective rate of (13.9%) differed from the statutory rate of 21% primarily due to no tax benefit being recorded on the current year pretax loss as a full valuation allowance has been recorded globally. The 2019 effective rate of 83.0% differed from the statutory rate of 21% primarily due to the valuation allowance recorded in certain foreign jurisdictions and the $0.2 million tax impact of equity awards.
Temporary differences that gave rise to deferred tax assets and liabilities are as follows (in thousands):
57 As of January 30, 2021, the Company had gross net operating loss (NOL) carryforwards of approximately $15.5 million, most of which relate to the U.K. where NOLs have no expiration date. The Company also had tax credit carryforwards of $2.3 million, most of which related to the US, with credit carryforward periods of 10-20 years and with expirations beginning in fiscal 2021.
The Company continues to assert its investments in foreign subsidiaries are permanent in duration and it is not practical to estimate the income tax liability on the outside basis differences.
As of
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Management estimates it is reasonably possible that the amount of unrecognized tax benefits
The following tax years remain open in the
The Company also files tax returns in various other international jurisdictions and numerous states for which various tax years are subject to examination and currently involved in audits.
58 The agreement provides for a senior secured revolving loan in aggregate principal amount of up to $25,000,000 (subject to a borrowing base formula), which Borrowings under the agreement bear 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 the average undrawn availability as determined in accordance with the agreement. The agreement matures on August 25, 2025 (unless terminated earlier in accordance with the terms thereof) and requires compliance with conditions precedent that must be satisfied prior to any borrowing. The agreement also contains various representations, warranties and covenants that the Company considers customary. The agreement requires the Company to comply with one financial covenant, specifically, that the Company 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. The Company anticipates 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 except for permitted indebtedness or make 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 of any other company outside the ordinary course of business. 59 At the closing date of the agreement and the end of the fiscal year, the Company had 0 outstanding indebtedness under the agreement. As of January 30, 2021, the Company's borrowing base was slightly more than $19.8 million under the agreement. As a Additionally, on August 25, 2020, upon execution of the agreement with PNC Bank, the Company terminated its existing bank credit line with U.S. Bank, under the Company’s Fourth Amended and Restated Loan Agreement, as amended. The former agreement with U.S. Bank National Association ("U.S. Bank") provided for a maximum borrowing capacity of up to $10,000,000, subject to compliance with certain financial tests. The former credit agreement would have matured on As part of obtaining the new credit agreement, the Company incurred approximately $0.6 million of issuance costs and
The Company leases its retail stores and corporate offices under agreements which expire at various dates through
In the normal course of business, the Company is subject to
Assessments made by the
60
The Company uses the two-class method to compute basic and diluted earnings per common share. In periods of net loss, no effect is given to the
In calculating diluted earnings per share for fiscal
On
61
The following table is a summary of the balance and activity for the Plans related to stock options for the periods presented:
There were no options granted during fiscal 2020 or 2019. The expense recorded related to options granted
The total grant date fair value of options exercised in both fiscal
The Company granted restricted stock awards that vest over a
62 In fiscal
In fiscal
In fiscal
The following table summarizes the changes in outstanding shares of common stock for fiscal
Four vendors, each of whose primary manufacturing facilities are located in Asia, accounted for approximately
The
Following is a summary of the financial information for the Company’s reporting segments (in thousands):
64 The
For purposes of this table only:
(a)(2) Financial Statement Schedules Schedule II – Valuation
(1) Other deferred tax asset valuation allowance represents reserves utilized, ASC842 adoption, and the impact of currency translation (2) Other receivables allowance for doubtful accounts represent uncollectible accounts written off, recoveries and the impact of currency translation
65
The following is a list of exhibits filed as a part of the Annual Report on Form 10-K:
67
68
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101.INS |
| Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
| Inline XBRL Extension Calculation Linkbase Document |
101.DEF |
| Inline XBRL Extension Definition Linkbase Document |
101.LAB |
| Inline XBRL Extension Label Linkbase Document |
101.PRE |
| Inline XBRL Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| BUILD-A-BEAR WORKSHOP, INC. | |||||
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| (Registrant) | |||||
Date: |
| By: | /s/ Sharon John | ||||
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| Sharon John | |||
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| President and Chief Executive Officer | |||
| By: | /s/ Voin Todorovic | |||||
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| Voin Todorovic | |||
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| Chief Financial Officer |
KNOW ALL MENPERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sharon John and Voin Todorovic, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign the Annual Report on Form 10-K of Build-A-Bear Workshop, Inc. (the “Company”) for the fiscal year ended DecemberJanuary 30, 20172021 and any other documents and instruments incidental thereto, together with any and all amendments and supplements thereto, to enable the Company to comply with the Securities Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures | Title | Date | ||
/s/ Craig Leavitt | Non-Executive Chairman |
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Craig Leavitt | ||||
/s/ Maxine Clark | Director |
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Maxine Clark | ||||
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/s/ | Director |
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George Carrara | ||||
/s/ | Director |
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/s/ Sharon John | Director and President and Chief Executive Officer |
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Sharon John | (Principal Executive Officer) | |||||
/s/ Voin Todorovic | Chief Financial Officer |
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Voin Todorovic | (Principal Financial and Accounting Officer) |
63