What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-09-12 compared with 2024-06-13 · 112 added, 60 removed, 240 unchanged (42% of the section changed)

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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.

Guests create their own stuffed animals by participating in the stuffing, dressing, accessorizing, and naming of their own teddy bears and other plush toys based on the Company’s own intellectual property and in conjunction with a variety of best-in-class licenses.

The hands-on and interactive nature of our more than 500 company-owned, partner-operated and franchise experience locations around the world, combined with Build-A-Bear’s pop-culture appeal, often fosters a lasting and emotional brand connection with consumers, and has enabled the Company to expand beyond its retail stores to include e-commerce sales on www.buildabear.com and non-plush branded consumer categories via out-bound licensing agreements with leading manufacturers, as well as the creation of engaging content via Build-A-Bear Entertainment (a subsidiary of Build-A-Bear Workshop, Inc.).

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.

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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.

As of August 3, 2024, we had 361 corporately-managed stores globally and 6 seasonal locations, 107 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 80 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.

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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.

Selected financial data attributable to each segment for the thirteen and twenty-six weeks ended August 3, 2024 and July 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

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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.

During the first half of fiscal 2024, we opened a net 23 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.

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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.

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, through a $50 million stock repurchase program announced in August 2022, and through a new Board-approved $100 million stock repurchase program announced in September 2024.

Furthermore, the Company announced the initiation of a quarterly dividend program on March 13, 2024, and during the first and second quarters of fiscal 2024, the Company declared cash dividends of $0.20 per share, totaling $2.9 million and $2.7 million, respectively.

Additionally, the Board of Directors declared a quarterly cash dividend of $0.20 per share on the issued and outstanding common stock of the company, which will be paid on October 10, 2024 , to all stockholders of record as of September 26, 2024 .

Retail Stores:

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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

April 29, 2023

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August 3, 2024

July 29, 2023

North America

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End of period

As of May 4, 2024, 51% of our corporately-managed stores were in an updated Discovery format.

As of August 3, 2024, 47% 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.

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The number of third-party retail locations opened and closed for the periods presented below is summarized as follows:

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April 29, 2023

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August 3, 2024

July 29, 2023

Beginning of period

End of period

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.

Through our third-party retail model, there were 107 stores in operation at the end of the second quarter of 2024 with relationships that included Carnival Cruise Line, Great Wolf Lodge Resorts, Landry's and Girl Scouts of the USA.

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.

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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.

As of August 3, 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:

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April 29, 2023

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August 3, 2024

July 29, 2023

Beginning of period

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Thirteen weeks ended

Twenty-six weeks ended

Net retail sales

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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

Thirteen weeks ended August 3, 2024 compared to thirteen weeks ended July 29, 2023

Total revenues.

Consolidated revenues increased 2.4%, primarily driven by a $2.3 million or 47% increase in Commercial revenue when compared to fiscal second quarter 2023.

The increase was due to higher sales from our wholesale customers that was driven by new wholesale customers and opening 31 third-party retail stores since the second quarter of 2023.

Net retail sales for the thirteen weeks ended August 3, 2024 were $103.5 million, compare d to $103.5 mi llion for the thirteen weeks ended July 29, 2023.

The components of the similar performance are as follows (dollars in thousands):

Thirteen weeks ended

August 3, 2024

Digital sales

53rd week shift

Gift card discounts

Store closures

Existing stores

Gift card breakage

Foreign currency translation

The flat retail revenue performance was primarily the result of a decline in web demand offset by sales from new stores and the impact of the calendar shift (53 rd week shift).

Thus far in third quarter, web demand has improved due a stronger product launch schedule and improved organic search results, as well as improved store performance driven by higher store conversion.

Commercial revenue was $7.3 million for the thirteen weeks ended August 3, 2024 compared to $5.0 million for the thirteen weeks ended July 29, 2023.

The $2.3 million increase is primarily due to increased sales volume from our wholesale accounts through our partner-operated third-party retail model.

International franchising revenue was $1.0 million for the thirteen weeks ended August 3, 2024 compared to $0.8 million for the thirteen weeks ended July 29, 2023.

The change is primarily the result of the timing of product shipments.

Retail gross margin.

Retail gross margin dollars increased $0.1 million to $55.8 million from $55.7 million for the thirteen weeks ended July 29, 2023.

The retail gross margin rate increased 10 basis points compared to the prior year primarily driven by lower merchandise and freight costs offset by an increase in occupancy costs compared to the fiscal 2023 second quarter.

Selling, general and administrative.

SG&A expenses were $49.2 million, or 44.0% of consolidated revenue, for the thirteen weeks ended August 3, 2024, compared to $48.3 million, or 44.2% of consolidated revenue, for the thirteen weeks ended July 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 $188,000 for the thirteen weeks ended August 3, 2024 compared to interest income of $167,000 for the thirteen weeks ended July 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 $2.8 million with a tax rate of 23.8% for the thirteen weeks ended August 3, 2024, as compared to $2.1 million with a tax rate of 20.4% for the thirteen weeks ended July 29, 2023.

In the second quarter of fiscal 2024 and 2023, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense.

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.

The Company remains in a full valuation in certain other foreign jurisdictions.

Twenty-six weeks ended August 3, 2024 compared to twenty-six weeks ended July 29, 2023

Total revenues.

Consolidated revenues decreased 1.2%, primarily driven by a 3.9% decrease in North America and partially offset by a 19.7% 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.

Additionally, the decrease also resulted from the expected negative timing due to the calendar shift (53rd week shift).

Net retail sales for the twenty-six weeks ended August 3, 2024 were $211.3 million, compare d to $215.6 mi llion for the twenty-six weeks ended July 29, 2023, a decrease of $4.2 million, or 2.0% , compared to the prior year period.

The components of this decrease are as follows (dollars in thousands):

Thirteen weeks ended

Existing stores

Twenty-six weeks ended

August 3, 2024

Digital sales

53rd week shift

Existing stores

Gift card discounts

Store closures

53rd week shift

Gift card breakage

Foreign currency translation

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.

The retail revenue decrease was primarily the result of a decline in web demand, decreased sales through existing and closed stores as well as the 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 2024 first half.

Thus far in third quarter, web demand has improved due a stronger product launch schedule and improved organic search results, as well as improved store performance driven by higher store conversion.

Commercial revenue was $13.3 million for the twenty-six weeks ended August 3, 2024 compared to $11.7 million for the twenty-six weeks ended July 29, 2023.

The $1.6 million increase is primarily the result of timing of product shipments to wholesale customers compared to the same period prior year.

International franchising revenue was $1.9 million for the twenty-six weeks ended August 3, 2024 compared to $2.0 million for the twenty-six weeks ended July 29, 2023.

The change is primarily 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.

Retail gross margin dollars decreased $2.6 million to $114.3 million from $116.9 million for the twenty-six weeks ended July 29, 2023.

The retail gross margin rate decreased 20 basis points compared to the prior year primarily driven by higher occupancy costs offset by a decrease in merchandise and warehousing and distribution costs compared to the fiscal 2023 first half.

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.

SG&A expenses were $96.8 million, or 42.7% of consolidated revenue, for the twenty-six weeks ended August 3, 2024, compared to $94.0 million, or 41.0% of consolidated revenue, for the twenty-six weeks ended July 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.

Interest income was $614,000 for the twenty-six weeks ended August 3, 2024 compared to interest income of $243,000 for the twenty-six weeks ended July 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.

Income tax expense was $6.3 million with a tax rate of 24.0% for the twenty-six weeks ended August 3, 2024, as compared to $6.9 million with a tax rate of 23.1% for the twenty-six weeks ended July 29, 2023.

In the first half of fiscal 2024 and 2023, 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.

The Company remains in a full valuation in certain other foreign jurisdictions.

Earnings before Interest, Taxes, Depreciation, and Amortization

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August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Income before income taxes (pre-tax)

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Earnings before interest, taxes, depreciation, and amortization

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.

EBITDA for the thirteen weeks ended August 3, 2024 increased $1.5 million, or 10.7% to $15.0 million from $13.5 million for the thirteen weeks ended July 29, 2023.

The increase was driven by gross profit driven by increased commercial margins partially offset by higher SG&A expenses.

EBITDA for the twenty-six weeks ended August 3, 2024, decreased $2.6 million, or 7.4%, to $33.3 million from $35.9 million for the twenty-six weeks ended July 29, 2023.

The decrease in EBITDA was driven by an increase in SG&A expenses due to higher wages, expense timing, and general inflationary pressures coupled with a decrease in retail gross margin.

Seasonality and Quarterly Results

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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.

As of August 3, 2024, we had a consolidated cash balance of $25.2 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

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 $0.6 million during the thirteen weeks ended August 3, 2024

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

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Net cash provided by operating activities

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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.

Cash provided by operating activities decreased $19.4 million for the twenty-six weeks ended August 3, 2024, as compared to the twenty-six weeks ended July 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.

Cash used in investing activities decreased $0.4 million for the thirteen weeks ended August 3, 2024, as compared to the twenty-six weeks ended July 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.

Cash used in financing activities decreased $9.4 million for the twenty-six weeks ended August 3, 2024, as compared to the twenty-six weeks ended July 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 quarterly dividends of $2.7 million and $2.9 million paid in the fiscal first and second quarters of 2024.

This was partially offset by an in crease in repurchases of our common stock during the twenty-six weeks ended August 3, 2024.

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.

As of August 3, 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 August 3, 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 August 3, 2024.

We had no outstanding borrowings as of August 3, 2024.

Most of our corporately-managed retail stores are located within shopping malls and all are operated under leases classified as operating leases.

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Rents are invoiced monthly or quarterly and paid in advance.

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.

Capital spending through the twenty-six weeks ended August 3, 2024 totaled $5.7 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 $67.0 million, an increase of $0.6 million or 1% from the end of the fiscal 2023 second 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.

As of August 3, 2024, we had purchase obligations totaling approximately $103.3 million, of whi ch $30.2 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.

We utili zed $18.2 million in cash to repurchase 685,027 shares during the twenty-six weeks ended August 3, 2024, compared to using $11.1 million in cash to repurchase 526,706 shares during the twenty-six weeks ended July 29, 2023.

Since the end of the second fiscal quarter, we utilized $2.0 million in cash to repurchase 73,274 shares leaving $5.9 million available under the August 2022 Stock Repurchase Program.

On September 11, 2024, we announced that our Board of Directors terminated the August 2022 Stock Repurchase Program and authorized a new share repurchase program of up to $100 million.

The primary source of funding for the share repurchase program is expected to be cash on hand.

The timing and amount of share repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors.

The program authorizes us to repurchase shares through September 30, 2028 , does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time without prior notice.

Shares repurchased under the program will be subsequently retired.

We believe that the multi-year, multi-million dollar share buy-back program is reflective of the strong confidence that the Board of Directors has in the future of the Company.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis