BUILD-A-BEAR WORKSHOP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Notice Regarding Forward-Looking Statements The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, and we undertake no obligation to update these statements except as required by the federal securities laws. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, as filed with the SEC, and include the following: ● any uncertainty or decline in general global economic conditions, caused by inflation, rising interest rates, geo-political conflicts, or other external factors, 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; ● consumer interests can 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 depend upon the shopping malls and tourist locations in which our stores are located to attract guests. Continued or further volatility in retail consumer traffic could adversely affect our financial performance and profitability; ● our profitability could be adversely affected by fluctuations in petroleum products prices; ● our business may be adversely impacted at any time by a variety of significant competitive threats; ● global or regional health pandemics or epidemics could negatively impact our business, financial position and results of operations; ● 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; ● 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; ● failure to successfully execute our omnichannel and brand expansion strategy and the cost of our investments in e-commerce and digital transformation may materially adversely affect our financial condition and profitability; ● we are subject to risks associated with technology and digital operations; ● we may not be able to evolve our store locations over time to align with market trends, successfully diversify our store formats and business models in accordance with our strategic goals or otherwise effectively manage our overall portfolio of stores which could adversely affect our ability to grow and could significantly harm our profitability; ● 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 U.S. and Europe may be required to close and operations may experience disruptions or may operate inefficiently; ● we rely on a few global supply chain vendors to supply substantially all of our materials and merchandise, and significant price increases or any disruption in their ability to deliver materials and merchandise could harm our ability to source products and supply inventory to our stores; ● we may not be able to operate our international corporately-managed locations profitably; ● our merchandise is manufactured by foreign manufacturers and we transact business in various foreign 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; ● if we are unable to effectively manage our international partner-operated locations, attract new partners or if the laws relating to our international partners change, our growth and profitability could be adversely affected, and we could be exposed to additional liability; ● we are subject to a number of risks related to disruptions, failures or security breaches of our information technology infrastructure. If we improperly obtain or are unable to protect our data or violate privacy or security laws or expectations, we could be subject to liability as well as damage to our reputation; ● we may fail to renew, register or otherwise protect our trademarks or other intellectual property and have been sued by third parties for infringement or misappropriation of their proprietary rights, which could be costly, distract our management and personnel and result in the diminution in value of our trademarks and other important intellectual property; ● we may suffer negative publicity or be sued if the manufacturers of our merchandise or of Build-A-Bear branded merchandise sold by our licensees ship any products that do not meet current safety standards or production requirements or if such products are recalled or cause injuries; ● we may 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 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 suffer negative publicity and damage to our reputation if we do not continue to evolve environmental, social, and governance initiatives in a timely manner; ● fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; ● fluctuations in our operating results could reduce our cash flow, or trigger restrictions under our credit agreement, cause us to be unable to repurchase shares at all, at the times or in the amounts we desire, cause the results of our share repurchase program may not be as beneficial as we would like, or cause us to discontinue our quarterly dividend program; ● our relatively low market capitalization can cause the market price of our common stock to become volatile; ● our certificate of incorporation and bylaws and Delaware law contain provisions that may prevent or frustrate attempts to replace or remove our current management by our stockholders, even if such replacement or removal may be in our stockholders’ best interests; ● we may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team; ● we may be unsuccessful in acquiring businesses or engaging in other strategic transactions, which may negatively affect our financial condition and profitability. 16 Table of Contents Business Overview Build-A-Bear Workshop, Inc. a Delaware corporation, was formed in 1997 as a mall-based, experiential specialty retailer. Build-A-Bear has evolved to become a beloved multi-generational brand focused on its mission to “add a little more heart to life” where guests of all ages make their own “furry friends” in celebration and commemoration of life moments. Guests create their own stuffed animals by participating in the stuffing, dressing, accessorizing, and naming of their own teddy bears and other plush toys. We believe the hands-on and interactive nature of our experience locations, our personal service model and engaging digital shopping experiences result in guests forming an emotional connection with our brand, which differentiates it in the marketplace. Over the last 27 years, Build-A-Bear has become a brand with high consumer awareness, positive affinity, and strong retail influence by leveraging our brand strength to grow our brick-and-mortar retail footprint beyond traditional malls through a range of store sizes, formats and locations including tourist destinations. We are also growing through our websites, which focus on gift-giving, collectible merchandise, and licensed products. In addition to growing our corporately-managed store and e-commerce footprint, we are also growing through third-party operated and franchised stores, particularly for our international expansion. Our ongoing digital transformation, which touches our e-commerce business, consumer loyalty program and digital marketing and content, has led to omni-channel growth over the past several years. Build-A-Bear's pop-culture appeal has played a key role in growing our total addressable market beyond children by adding teens and adults with entertainment and sports licensing, collectible and gifting offerings, as well as by introducing new products and adding categories beyond plush. We primarily operate through a vertical retail channel with corporately-managed stores that feature a unique combination of experience and product in which guests can “make their own stuffed animals.” We also operate e-commerce sites that focus on gift-giving, collectible merchandise and licensed products that appeal to consumers that have an affinity for characters from a range of entertainment, sports, art, and gaming properties. Our retail stores also act as mini distribution centers that provide efficient omnichannel support for our growing digital demand. The primary consumer target for our brick-and-mortar locations is families with children, while our e-commerce sites focus on collectors and gift givers that are primarily tweens, teens and adults. Additionally, we offer products in non-plush consumer categories via outbound licensing agreements with leading manufacturers. Our strategy includes leveraging our brand strength to continue to strategically evolve our brick-and-mortar retail footprint beyond traditional malls with a versatile range of formats and locations including tourist destinations, expand into international markets primarily via our partner-operated and franchise store models, and grow our e-commerce business. By leveraging our brand strength and owned intellectual properties through the creation of engaging short-form and long-form content for kids and adults, we endeavor to develop a circle of continuous engagement to increase purchase occasions and to continue to broaden the consumer base beyond children by adding tweens, teens and adults with entertainment and sports licensing, plus collectible and gifting offerings. As of May 4, 2024, we had 357 corporately-managed stores globally and 4 seasonal locations, 97 partner-operated locations operating through our "third-party retail" model in which we sell our products on a wholesale basis to other companies that execute our retail experience, and 77 international franchised stores, all under the Build-A-Bear Workshop brand. In addition to these stores, we sell products on our company-owned e-commerce sites and third-party marketplace sites, our franchisees sell products through sites that they manage as well as other third-party marketplace sites and other parties sell products on their sites under wholesale agreements. 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 U.S., Canada, the U.K., and Ireland and two e-commerce sites; • Commercial – Transactions with other businesses, mainly comprised of wholesale product sales to third-party retailers and licensing our intellectual property, including entertainment properties, for third-party use; and • International franchising – Royalties as well as products and fixtures sales from other international operations under franchise agreements. Selected financial data attributable to each segment for the thirteen weeks ended May 4, 2024 and April 29, 2023 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Business Update Build-A-Bear Workshop offers interactive entertainment experiences via both physical and e-commerce engagement, targeting a range of consumer segments and purchasing occasions through digitally-driven, diversified omnichannel capabilities. We operate a vertical retail channel with stores that feature a unique combination of experience and product in which guests can "make their own stuffed animals" by participating in the stuffing, dressing, accessorizing, and naming of their teddy bears and other stuffed animals. We also operate e-commerce sites that focus on gift-giving, collectible merchandise and licensed products that appeal to consumers that have an affinity for characters from a range of licensed properties. Over the last 26 years, Build-A-Bear has become a brand with high consumer awareness and positive affinity. We believe there are opportunities to leverage this brand strength, pop-culture status and multi-generational appeal and generate incremental revenue and profits through licensing our intellectual properties through content and entertainment development for kids and adults while also offering products at wholesale and in non-plush consumer categories through outbound licensing agreements with leading manufacturers. We seek to provide outstanding guest service and experiences across all channels and touch points including our retail locations, our e-commerce sites, our mobile sites and apps as well as traditional, digital and social media. We believe the hands-on and interactive nature of our experience locations, our personal service model and engaging digital shopping experiences result in guests forming an emotional connection with our brand which has multi-generational appeal that captures today’s zeitgeist including desire for engaging experiences, personalization and “DIY” while being recognized as trusted, giving, and a part of pop culture. We believe that the initiatives and investments that were put in place prior to the pandemic, and in many cases, we accelerated during the pandemic, are driving improved results, as we delivered growth in total revenues and profit in fiscal 2023. To continue to drive revenue and profit growth, we remain focused on our strategic priorities, which are centered primarily on three key areas: • The global expansion of our unique experience locations. During fiscal 2023, we opened a net 37 Build-A-Bear Workshop retail experience locations, through a combination of corporately-managed, third-party operated, and franchise business models. In fiscal 2024, we expect net new unit growth of at least 50 locations in North America and internationally through our three store business models. We have made a concerted effort to shift to non-traditional locations, including family-centric tourist and hospitality sites, as well as partner-operated and franchise locations, and now have more than 35% of total stores in non-traditional settings. While tourist sites have been and will remain a critical part of our location expansion strategy, recent research data supports our opportunity to reengage in profitable expansion in traditional locations on a more localized level, particularly given the numerous and flexible corporate store models we have developed in the past few years. We also continue to develop innovative experiences to expand our brand reach, including Build-A-Bear vending machines, also known as ATMs or automatic teddy machines. • Accelerate our comprehensive digital transformation. In addition to growing our e-commerce channel, this includes our marketing and loyalty programs, including our Count Your Candles offer, and content and entertainment initiatives, such as our first-ever animated theatrical film in 2023 “Glisten and the Merry Mission.” Our digital transformation is designed to elevate our business efficiency, integrate our customer communications to acquire new customers and increase purchase occasions, and expand our total addressable market by reaching beyond our core kid base and to continue to acquire new tween, teen and adult consumers by new offerings including gifting and personalization programs. Our 2023 e-commerce sales, inclusive of softness during the year, have tripled since 2018, which was prior to the implementation of key digital initiatives. In early 2024, we created a new position of Chief Customer & Digital Officer to further align our operating structure with our digital strategy. • Drive profitable growth through investment initiatives while maintaining a commitment to return capital to shareholders. As corporate store operating margins have remained robust from higher levels of revenue combined with disciplined expense management, particularly considering recent inflationary pressures, wage increases and supply chain challenges, and as we continue to evolve our real estate portfolio with new locations and formats, plus shift to asset-light business models, the company’s cash flows have meaningfully improved. This higher-level of cash flows has been used to increase support for key initiatives to deliver long-term profitable growth, while also returning capital to shareholders through dividends and share repurchases. The Company returned capital to shareholders through two special dividends paid December 27, 2021, and April 6, 2023, totaling $42 million, through share repurchases from a $25 million stock repurchase program that was adopted in November 2021, and through a $50 million stock repurchase program announced in August 2022. The Company announced a new dividend program on March 13, 2024, declaring an initial quarterly cash dividend of $0.20 per share that was paid in April 2024 totaling $2.9 million. 17 Table of Contents Retail Stores: Corporately-Managed Locations: The table below sets forth the number of Build-A-Bear Workshop corporately-managed stores in North America and Europe for the periods presented: Thirteen weeks ended May 4, 2024 April 29, 2023 North America Europe Total North America Europe Total Beginning of period 320 39 359 312 38 350 Opened - 1 1 - - - Closed (3 ) - (3 ) - (1 ) (1 ) End of period 317 40 357 312 37 349 As of May 4, 2024, 51% of our corporately-managed stores were in an updated Discovery format. We also expect to close certain stores in accordance with natural lease events as an ongoing part of our real estate management and day-to-day operational plans. The future of our retail store fleet may include expansion into more non-traditional locations, including concourse format shops and by expansion in other locations outside of traditional malls. Third-Party Retail Locations: The number of third-party retail locations opened and closed for the periods presented below is summarized as follows: Thirteen weeks ended May 4, 2024 April 29, 2023 Beginning of period 92 70 Opened 5 - Closed - - End of period 97 70 Through our third-party retail model, there were 97 stores in operation at the end of the first quarter of 2024 with relationships that included Carnival Cruise Line, Great Wolf Lodge Resorts, Landry's and Girl Scouts of the USA. The third-party retail model is capital light for us, with the partner company building out and operating the workshops including providing the real estate location and covering the cost of labor and inventory, which is purchased on a wholesale basis. These locations are heavily-weighted to the hospitality industry, which allow us to further advance our focus on experience location expansion in non-traditional and tourist areas, as well as shop-in-shop arrangements within other retailers’ stores. International Franchise Stores: Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our corporately-managed stores. As of May 4, 2024, we had 5 master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 8 countries. The number of franchised stores opened and closed for the periods presented below are summarized as follows: Thirteen weeks ended May 4, 2024 April 29, 2023 Beginning of period 74 68 Opened 3 1 Closed - (6 ) End of period 77 63 In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements. We source fixtures and other supplies for our franchisees from China which significantly reduces the capital and lowers 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. 18 Table of Contents Results of Operations The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to cost of merchandise sold being expressed as a percentage of net retail sales, commercial revenue, international franchising, respectively, as well as immaterial rounding: BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Thirteen weeks ended May 4, April 29, 2024 2023 Revenues: Net retail sales 94.0 % 93.3 % Commercial revenue 5.2 5.6 International franchising 0.8 1.1 Total revenues 100.0 100.0 Costs and expenses: Cost of merchandise sold - retail (1) 45.8 45.4 Cost of merchandise sold - commercial (1) 42.3 50.2 Cost of merchandise sold - international franchising (1) 70.4 69.9 Total cost of merchandise sold 45.8 45.9 Consolidated gross profit 54.2 53.9 Selling, general and administrative 41.5 38.0 Interest (income) expense, net (0.4 ) (0.1 ) Income before income taxes 13.1 16.1 Income tax expense 3.1 4.0 Net income 10.0 12.2 Retail Gross Margin (2) 54.2 % 54.6 % (1) Cost of merchandise sold – retail is expressed as a percentage of net retail sales. Cost of merchandise sold – commercial is expressed as a percentage of commercial revenue. Cost of merchandise sold – international franchising is expressed as a percentage of international franchising revenue. (2) Retail gross margin represents net retail sales less cost of merchandise sold - retail; retail gross margin percentage represents retail gross margin divided by net retail sales. Thirteen weeks ended May 4, 2024 compared to thirteen weeks ended April 29, 2023 Total revenues. Consolidated revenues decreased 4.4%, primarily driven by a 6.9% decrease in North America and partially offset by a 14.1% increase in Europe. Although a decline was expected as a result of economic uncertainty and business volatility from our ongoing marketing and website transitions, the impacts were greater than expected, with web demand (online orders fulfilled from either the Company’s warehouse or its stores) being a significant contributor to our total revenue decline. Additionally, the decrease also resulted from the expected negative timing due to the calendar shift (53rd week shift) along with a decrease in commercial revenue due to timing of product shipments to wholesale customers compared to the same period prior year. Net retail sales for the thirteen weeks ended May 4, 2024 were $107.9 million, compare d to $112.1 mi llion for the thirteen weeks ended April 29, 2023, a decrease of $4.2 million, or 3.8% , compared to the prior year period. The components of this decrease are as follows (dollars in thousands): Thirteen weeks ended May 4, 2024 Impact from: Existing stores $ (1,853 ) Digital sales (2,431 ) 53rd week shift (2,067 ) New stores 1,497 Store closures (350 ) Gift card breakage 197 Foreign currency translation 391 Other 388 Total Change $ (4,228 ) The retail revenue decrease was primarily the result of a decline in web demand resulting in decrease sales through existing stores and our webstore and expected negative timing due to the calendar shift (53 rd week shift). Additionally, we experience small declines in both traffic and dollars per transaction impacting retail revenue for the fiscal quarter. The decline in web demand continued into the second quarter and is expected to have a negative impact on sales made through our existing stores and webstore. Commercial revenue was $6.0 million for the thirteen weeks ended May 4, 2024 compared to $6.7 million for the thirteen weeks ended April 29, 2023. The $0.7 million decrease is primarily the result of timing of product shipments to wholesale customers compared to the same period prior year. International franchising revenue was $0.9 million for the thirteen weeks ended May 4, 2024 compared to $1.3 million for the thirteen weeks ended April 29, 2023. The change is the result of the timing of product shipments. Retail gross margin. Retail gross margin dollars decreased $2.7 million to $58.5 million from $61.2 million for the thirteen weeks ended April 29, 2023. The retail gross margin rate decreased 40 basis points compared to the prior year primarily driven by higher freight and occupancy costs offset by a decrease in merchandise cost compared to the fiscal 2023 first quarter. 19 Table of Contents Selling, general and administrative. SG&A expenses were $47.6 million, or 41.5% of consolidated revenue, for the thirteen weeks ended May 4, 2024, compared to $45.6 million, or 38.0% of consolidated revenue, for the thirteen weeks ended April 29, 2023. The increase in overall expense was driven by higher wage rates, expense timing and general inflationary pressures. Interest income, net. Interest income was $426,000 for the thirteen weeks ended May 4, 2024 compared to interest income of $76,000 for the thirteen weeks ended April 29, 2023. The increase in interest income compared to the prior year is the result of the Company's cash management strategy to invest cash on-hand in short-term, highly liquid investments. Provision for income taxes . Income tax expense was $3.6 million with a tax rate of 23.8% for the thirteen weeks ended May 4, 2024, as compared to $4.7 million with a tax rate of 24.5% for the thirteen weeks ended April 29, 2023. In the first quarter of fiscal 2024, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In the fourth quarter of fiscal 2023, the Company reversed the valuation allowance on deferred tax assets expected to be realized in the U.K. In the first quarter of fiscal 2024, the Company remains in a full valuation in certain other foreign jurisdictions. In the first quarter of fiscal 2023, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense. In addition, the Company remained in a full valuation in certain foreign jurisdictions, including the UK. 20 Table of Contents Earnings before Interest, Taxes, Depreciation, and Amortization We believe that earnings before interest, taxes, depreciation, and amortization ("EBITDA") provides meaningful information about our operational efficiency by excluding the impact of differences in tax jurisdictions and structures, debt levels, and capital investment. Additionally, this measure is the metric used for portions of the Company's incentive compensation structure. This measure is not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is income before income taxes, or pre-tax income. EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other companies. The following table sets forth, for the periods indicated, the components of EBITDA (dollars in millions): Thirteen weeks ended May 4, 2024 April 29, 2023 Income before income taxes (pre-tax) $ 15,029 $ 19,353 Interest income, net (426 ) (76 ) Depreciation and amortization expense 3,658 3,080 Earnings before interest, taxes, depreciation, and amortization $ 18,261 $ 22,357 EBITDA for the thirteen weeks ended May 4, 2024 decreased $4.1 million, or 18.3% to $18.3 million from $22.4 million for the thirteen weeks ended April 29, 2023. The decrease in EBITDA is driven by an increase in SG&A expenses due to higher wages, expense timing, and general inflationary pressures coupled with a slight decrease in retail gross margin. Seasonality and Quarterly Results Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including, but not limited to: (1) changes in general economic conditions (including as a result of the pandemic) and consumer spending patterns; (2) changes in store operations in response to the pandemic apart from its effect on the general economy, including temporary store closures required by local governments; (3) increases or decreases in our existing store and e-commerce sales; (4) fluctuations in the profitability of our stores; (5) the timing and frequency of the sales of licensed products tied to major theatrical releases (including the cancellation or delay of such releases due to the pandemic or other external factors) and our marketing initiatives, including national media and other public relations events; (6) changes in foreign currency exchange rates; (7) the timing of new store openings, closings, relocations and remodeling and related expenses; (8) changes in consumer preferences; (9) the effectiveness of our inventory management; (10) the actions of our competitors or mall anchors and co-tenants; (11) seasonal shopping patterns and holiday and vacation schedules; (12) disruptions in store operations due to civil unrest; and (13) weather conditions. The timing of store closures, relocations, remodels, openings and re-openings may result in fluctuations in quarterly results based on the revenues and expenses associated with each store location. Expenses related to store closings are typically incurred in stages: when the decision is made to close the store typically associated with a lease event such as an expiration or lease triggered clause; when the closure is communicated to store associates; and at the time of closure. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening. Because our retail operations include toy products which have sales that historically peak in relation to the holiday season as part of our revenue model, our sales have historically been highest in our fourth quarter. The timing of holidays and school vacations can impact our quarterly results. We cannot provide assurance that this will continue to be the case. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years. For example, the 2023 fiscal fourth quarter was 14 weeks. Liquidity and Capital Resources As of May 4, 2024, we had a consolidated cash balance of $38.2 million, 83% of which w as domiciled within the U.S. Historically, our cash requirements have been primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, investments in information technology infrastructure and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations. Additionally, during 2024 we have used cash on-hand to invest in short-term, highly liquid investments with original maturities of three months or less resulting in interest income of $0.4 million during the thirteen weeks ended May 4, 2024 A summary of our operating, investing and financing activities is shown in the following table (dollars in thousands): Thirteen weeks ended May 4, April 29, 2024 2023 Net cash provided by operating activities $ 10,365 $ 18,786 Net cash used in investing activities (2,430 ) (3,065 ) Net cash used in financing activities (13,978 ) (25,103 ) Effect of exchange rates on cash (51 ) 3 Decrease in cash, cash equivalents, and restricted cash $ (6,094 ) $ (9,379 ) Operating Activities. Cash provided by operating activities decreased $8.4 million for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023. This decrease in cash from operating activities was primarily driven by decreased sales volume, resulting in lower net income, coupled with an increase in cash spent on inventory purchases. Investing Activities. Cash used in investing activities decreased $0.6 million for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023. This decrease in cash used in investing activities was primarily driven by lower spending on capital expenditures related to information technology projects. Financing Activities. Cash used in financing activities decreased $11.1 million for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023. This decrease in cash used in financing activities was driven primarily by the payment in 2023 fiscal first quarter of a special cash dividend of $22.1 million compared to a quarterly dividend of $2.9 million in the 2024 fiscal first quarter. This was partially offset by an in crease in repurchases of our common stock during the thirteen weeks ended May 4, 2024. 21 Table of Contents Capital Resources: We have a revolving credit and security agreement with PNC Bank, as agent, that provides for a secured revolving loan in aggregate principal of up to $25.0 million, subject to a borrowing base formula. As of May 4, 2024, borrowings under the agreement would bear interest at (a) a base rate determined under the agreement, or (b) the borrower's option, at a rate based on SOFR, plus in either case a margin based on average undrawn availability as determined in accordance with the agreement. As of May 4, 2024, our borrowing base was $25.0 million. As a result of a $250 ,000 letter of credit outstanding against the line of credit, approximately $24.7 million was available for borrowing as of May 4, 2024. We had no outstanding borrowings as of May 4, 2024. Most of our corporately-managed retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America tend to be shorter term leases to provide flexibility in aligning stores with market trends. During fiscal 2023 and into fiscal 2024, lease extensions began to have longer terms as we have secured longer contracts with more favorable terms. 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 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 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 U.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. Business rates also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are invoiced monthly or quarterly and paid in advance. 22 Table of Contents Capital spending through the thirteen weeks ended May 4, 2024 totaled $2.4 million for information technology projects and new store openings, and we expect to spend approximately $18 to $20 million on capital expenditures in fiscal 2024 . Total inventory at quarter end was $64.0 million, a decrease of $2.5 million or 4% from the end of the fiscal 2023 first quarter. We are comfortable with the level and composition of our inventory. We have various contractual or other obligations, including operating lease commitments and obligations under deferred compensation plans. As of May 4, 2024, we had purchase obligations totaling approximately $82.4 million, of whi ch $24.4 million are due in the next 12 months. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months. We utili zed $9.2 million in cash to repurchase 343,406 shares during the thirteen weeks ended May 4, 2024 compared to using $3.1 million in cash to repurchase 132,385 shares during the thirteen weeks ended April 29, 2023. Since the end of the first fiscal quarter, we utilized $3.8 million in cash to repurchase 131,419 shares leaving $13.2 million available under the current $50.0 million stock repurchase program adopted on August 31, 2022. Off-Balance Sheet Arrangements None. Inflation Global inflation is well above recent levels and global interest rates have risen in an effort to curb inflation. The impact of inflation on the Company's business operations was seen throughout fiscal 2023 and continued to adversely affect our business in fiscal 2024, mainly through rising store labor costs. However, we continue to take mitigating actions, such as select strategic price increases on highly sought-after products and leveraging distribution costs. We expect the inflationary pressures experienced thus far in fiscal 2024 to continue throughout the rest of fiscal 2024, specifically through wage increases. We continue to monitor the impact of inflation on our business operations on an ongoing basis and may need to adjust our prices further to mitigate the impacts of changes to the rate of inflation during 2024 or in future years. Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results. Inflationary pressures may be exacerbated by higher transportation costs due to war and other geopolitical conflicts, such as the current Russia-Ukraine conflict, tension between China and Taiwan, and the Israel-Hamas conflict. We cannot provide an estimate or range of impact that such inflation may have on our future results of operations. However, if we are unable to recover the impact of these costs through price increases to our guests, or if consumer spending decreases as a result of inflation, our business, results of operations, financial condition and cash flows may be adversely affected. In addition, ongoing inflation in product costs may result in lower gross margin rates if we elect to maintain higher inventory reserves to mitigate anticipated higher costs. Critical Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates, including those related to long-lived assets, leases, revenue recognition and income taxes, are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates. Our critical accounting policies and estimates are discussed in and should be read in conjunction with our Annual Report on Form 10-K for the year ended February 3, 2024 as filed with the SEC on April 18, 2024, which includes audited consolidated financial statements for our 2023 and 2022 fiscal years. There have been no material changes to the critical accounting estimates disclosed in the 2023 Form 10-K. 23 Table of Contents Recent Accounting Pronouncements See Note 1 to the Condensed Consolidated Financial Statements — Basis of Presentation — Recent Accounting Pronouncements – Adopted in the Current Year as disclosed in our Annual Report on Form 10-K for the year ended February 3, 2024 as filed with the SEC on April 18, 2024. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk as disclosed in our Annual Report on Form 10-K for the year ended February 3, 2024 as filed with the SEC on April 18, 2024.