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Item 7. Management’s Discussion and Analysis

2025-04-17 compared with 2024-04-18 · 92 added, 36 removed, 290 unchanged (31% of the section changed)

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Business Overview

Build-A-Bear Workshop, Inc.

a Delaware corporation, was formed in 1997 as a mall-based, experiential specialty retailer where children and their families could create their own stuffed animals by participating in the stuffing, fluffing, dressing, accessorizing, and naming of their own teddy bears and other plush toys.

Build-A-Bear Workshop, Inc., a Delaware corporation, was formed in 1997 as a mall-based, experiential specialty retailer where children and their families could create their own stuffed animals by participating in the stuffing, fluffing, 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.

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Selected financial data attributable to each segment for fiscal 2024, 2023 and 2022 are presented in Note 15 — Segment Information to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Our year-over-year results discussed below are impacted by an additional week in fiscal 2023 as it was a 53-week period compared to the 52-week period for fiscal 2022.

Our consolidated net income was $52.8 million in fiscal 2023 compared to net income of $48.0 million in fiscal 2022.

Our year-over-year results discussed below are impacted by fiscal 2024 and fiscal 2022 being 52-week periods compared to fiscal 2023 which had an additional week because it was a 53-week period.

Our consolidated net income was $51.8 million in fiscal 2024 compared to net income of $52.8 million in fiscal 2023 and $48.0 million in fiscal 2022.

We believe that we have a concept that has broad demographic appeal which, for North American stores open for the entire year averaged net retail sales per store of $1.2 million in fiscal 2024, 2023 and 2022.

We ended fiscal 2024 with no borrowings under our credit agreement and with $27.8 million in cash, cash equivalents and restricted cash after investing $19.3 million in capital projects throughout the year.

On August 31, 2022, we announced that our Board of Directors authorized a share repurchase program of up to $50.0 million, and during fiscal 2023, we had utilized $20.5 million in cash to repurchase 896,603 shares under the stock buyback program, leaving $26.1 million authorized outstanding.

On March 13, 2024, we announced that our Board of Directors approved a new quarterly dividend program to evolve its strategic use of capital and declared an initial quarterly dividend of $0.20 per share paid on April 11, 2024 to all shareholders of record as of March 28, 2024.

From the end of fiscal 2023 through April 15, 2024, the Company utilized $5.1 million to repurchase $201,198 shares under the stock buyback program, leaving $21.0 million authorized outstanding.

In fiscal 2024 the company utilized $31.0 million in cash to repurchase 1,021,004 shares.

During the year, the Company repurchased shares under two separate stock repurchase programs.

The company repurchased 758,301 shares utilizing $20.2 million in cash under the Company's $50.0 million stock repurchase program that was authorized by its Board of Directors on August 31, 2022 (the "August 2022 Stock Repurchase Program").

On September 11, 2024, the Company announced that its Board of Directors terminated the August 2022 Stock Repurchase Program and authorized a new share repurchase program of up to $100 million (the “September 2024 Stock Repurchase Program”).

The company repurchased 262,703 shares utilizing $10.8 million in cash under the September 2024 Stock Repurchase Program.

From the end of fiscal 2024 through April 14, 2025, the Company utilized $4.2 million to repurchase 108,503 shares under the stock buyback program, leaving $85.0 million available under the September 2024 Stock Repurchase Program.

On March 13, 2024, we announced that our Board of Directors approved a new quarterly dividend program to evolve its strategic use of capital.

During fiscal 2024, the company declared and paid quarterly dividends totaling $11.0 million.

Additionally, the Board of Directors declared a quarterly cash dividend of $0.22 per share on the issued and outstanding common stock of the company, which was paid on April 10, 2025, to all stockholders of record as of March 27, 2025.

Recent Events and Trends Regarding Tariffs and International Trade

Since we import the vast majority of our products from vendors outside the U.S., we face uncertainty and risks related to tariffs and other trade policies that could negatively impact our Company.

Tariffs and other non-tariff trade practices can adversely affect our business in multiple ways including increased costs of our products.

While we have taken steps since 2020 to diversify our supply chain and reduce China sourcing by shifting primarily to Vietnam, we remain subject to substantial potential exposure to tariffs.

Specifically, the latest tariffs implemented by the U.S.

would have significant impact on our cost structure and product margins.

Additionally, the uncertainty about trade policy, tariff rates, and other changes in practices affecting international trade, including whether such tariffs or other measures will be withdrawn, or modified in the future, makes it difficult for us to operate optimally.

Depending on the level and longevity of the tariff disruption, we will continue to adjust our pricing while monitoring the impact of inflation and consumer confidence, on both a micro and macro basis.

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

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and Canada (collectively, North America) and the U.K.

and Ireland (collectively, Europe) for the last two fiscal years is summarized as follows:

and Ireland (collectively, Europe) for the last three fiscal years is summarized as follows:

Fiscal year ended

February 1, 2025

February 3, 2024

January 28, 2023

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We are updating our store portfolio with our Discovery format, which represented 52% of our store base as of February 1, 2025.

During fiscal 2023, we executed 9 planned new store openings in North America, with six being opened under the Discovery format, one of which was in a tourist site.

During fiscal 2024, we executed eight planned net new store openings in North America, with seven being opened under the Discovery format.

Temporary locations generally have lease terms of two to eighteen months.

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February 1, 2025

February 3, 2024

January 28, 2023

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February 1, 2025

February 3, 2024

January 28, 2023

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In response to a variety of external pressures including changes in consumer shopping habits resulting in the rapid rise of the digital economy and shifting mall traffic patterns, we remained focused on accelerating and expanding our key initiatives by investing in and executing plans to improve operations and profitability.

We believe that the majority of our positive performance was driven by the disciplined execution of our strategic initiatives, including leveraging our financial management to invest in growth initiatives, to contribute to a 3.9% increase in total revenue to $486.1 million in fiscal 2023.

We believe that the majority of our positive performance was driven by the disciplined execution of our strategic initiatives, including leveraging our financial management to invest in growth initiatives, to contribute to an increase in total revenue of $10.3 million in fiscal 2024.

We ended the year with cash and cash equivalents of $27.8 million with no outstanding borrowings on our credit facility.

During fiscal 2023, the Company returned over $42 million to shareholders through $20.5 million in share repurchases and $22.0 million special dividend.

During fiscal 2024, the Company returned $42.0 million to shareholders through $31.0 million in share repurchases and $11.0 million in dividends.

The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of total revenues, except where otherwise indicated.

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retail gross margin percentage represents retail gross margin divided by net retail sales.

Fiscal Year Ended February 3, 2024 Compared to Fiscal Year Ended January 28, 2023

Fiscal 2023 was impacted by an additional week as it was a 53-week period, which is compared to 52 weeks in fiscal 2022.

Fiscal Year Ended February 1, 2025 Compared to Fiscal Year Ended February 3, 2024

Fiscal 2024 had 52 weeks compared to fiscal 2023 which was impacted by an additional week as it was a 53-week period.

Total revenues.

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Store closures

Gift card discounts

Foreign currency translation

Gift card breakage

The retail revenue increase was primarily the result of an increase in sales from corporately-operated retail locations through growth in the number of transactions, as our traffic outpaced national retail traffic data, and the opening of a net nine new corporately-managed locations in the fiscal year.

The increased sales were partially offset by impact of the 53rd week in 2023 and a decrease in web demand for the year.

Commercial revenue was $31.4 million for fiscal 2024 compared to $25.4 million for fiscal 2023, an increase of $6.0 million or 23.5%, primarily due to increased sales volume from our commercial accounts through our third-party retail model.

Revenue from international franchising was $4.7 million for fiscal 2024 compared to $4.5 million for fiscal 2023.

This $0.2 million or 3.4% increase was primarily due to having more stores in operation in 2024 compared to the same period in 2023.

Retail gross margin .

Retail gross margin was $253.1 million in fiscal 2024 compared to $249.3 million in fiscal 2023, an increase of $3.8 million or 1.5%.

As a percentage of net retail sales, retail gross margin increased to 55.0% for fiscal 2024 from 54.7% for fiscal 2023, or 30 basis points as a percentage of net retail sales.

The increase in gross margin was the result of lower merchandise and freight costs partially offset by higher occupancy expenses.

Selling, general and administrative .

Selling, general and administrative expenses were $206.2 million or 41.5% of consolidated revenue for fiscal 2024 as compared to $199.0 million or 40.9% of consolidated revenue for fiscal 2023.

The increase in overall expense was driven by higher store-level wages due to minimum wage increases and higher outside services.

These higher expenses were partially offset by decreased advertising expense.

Interest expense (income) , net.

For fiscal 2024, we had $0.9 million of interest income compared to $0.9 million of interest income in fiscal 2023.

Provision for income taxes.

The provision for income taxes was $15.4 million in fiscal 2024 compared to $13.5 million in fiscal 2023.

The 2024 effective rate of 22.9% differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the benefit of the foreign-derived intangible income (FDII) deduction.

The 2023 effective rate of 20.4% differed from the statutory rate of 21% primarily due to the reversal of the valuation allowance in the U.K.

partially offset by state income tax expense.

Fiscal Year Ended February 3, 2024 Compared to Fiscal Year Ended January 28, 2023

Fiscal 2023 was impacted by an additional week as it was a 53-week period, which is compared to 52 weeks in fiscal 2022.

Total revenues.

Net retail sales were $

456.2 million for fiscal

2023, compared to $

446.2 million for

, an increase

million or 2.2%,

compared to the prior year.

The compon ents of this increase are as follows:

Fiscal year ended

February 3, 2024

(dollars in millions)

Store closures

Gift card discounts

Gift card breakage

Foreign currency translation

Existing stores

The retail revenue increase was primarily the result of the 53rd week in the fiscal year, new store openings, and an increase in gift card breakage recorded, partially offset by a decrease in digital sales.

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Selling, general and administrative expenses were $199.0 million or 40.9% of consolidated revenue for fiscal 2023 as compared to $183.9 million or 39.3% of consolidated revenue for fiscal 2022.

The increase in overall expense was driven by higher store-level wages due to inflation and the addition of talent and other investments to support growth, including an advertising expense incre ase of $ 4.7 million or 23.9% compared to fiscal 2022.

The increase in overall expense was driven by higher store-level wages due to inflation and the addition of talent and other investments to support growth, including an advertising expense increase of $4.7 million or 23.9% compared to fiscal 2022.

Interest expense (income), net.

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February 1, 2025

February 3, 2024

January 28, 2023

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Earnings before interest, taxes, depreciation, and amortization

EBITDA for fiscal 2023 was $79.1 million, compared to $74.4 million for fiscal 2022, an increase of $4.7 million compared to the prior year period.

The overall increase in EBITDA was driven by lower freight expense, leverage of warehouse costs, and the impact of the 53rd week in fiscal 2023.

EBITDA for fiscal 2024 was $81.1 million, compared to $79.1 million for fiscal 2023 and $74.4 million in fiscal 2022.

The increase of $2.0 million in fiscal 2024 was driven by retail and commercial margins partially offset by higher SG&A expenses.

The increase in fiscal 2023 was driven by lower freight expense, leverage of warehouse costs, and the impact of the 53rd week in fiscal 2023.

Liquidity and Capital Resources

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Operating Activities.

Cash flows provided by operating activities were $64.3 million and $47.3 million in fiscal years 2023 and 2022, respectively.

Cash flows provided by operating activities were $47.1 million, $64.3 million and $47.3 million in fiscal years 2024, 2023 and 2022, respectively.

Cash flows from operating activities decreased in fiscal 2024 as compared to fiscal 2023 primarily driven by increased cash spent on inventory purchases in the second half of fiscal 2024 in anticipation of the uncertainty in cost due to potential tariffs, higher accounts receivable resulting from higher commercial revenue and decreased payables and accrued expenses.

Cash flows from operating activities increased in fiscal 2023 as compared to fiscal 2022 primarily driven by a decrease in cash spent on inventory purchases and increased sales volume, resulting in higher net income.

Investing Activities .

Cash flows used in investing activities were $18.3 million and $13.6 million in fiscal years 2023 and 2022, respectively.

Cash used in investing activities in fiscal 2023 increased as compared to fiscal 2022 primarily driven by an increase in spending on capital expenditures related to information technology projects and new store openings.

Cash flows used in investing activities were $19.3 million, $18.3 million and $13.6 million in fiscal years 2024, 2023 and 2022, respectively.

The increases in cash used in investing activities when comparing fiscal 2024 to fiscal 2023 and fiscal 2023 to fiscal 2022 were primarily driven by an increased spending on capital expenditures related to information technology projects and new store openings.

Financing Activities .

Financing activities used cash of $43.9 million in fiscal 2023 compared to $25.1 million in fiscal 2022.

Financing activities used cash of $44.2 million in fiscal 2024, $43.9 million in fiscal 2023 and $25.1 million in fiscal 2022.

Cash used in financing activities in fiscal 2024 increased slightly when compared to fiscal 2023 due to increased stock repurchases offset by lower dividends.

Cash used in financing activities in fiscal 2023 increased as compared to fiscal 2022, driven primarily by the repurchases of our common stock for $20.5 million throughout fiscal 2023 and dividends paid of $22.1 million.

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As of February 3, 2024, we had a borrowing base of $25.0 million.

As a result of a $250,000 letter of credit against the line of credit at the end of fiscal 2023, approximately $24.7 million was available for borrowing.

A s of February 1, 2025, we had no outstanding borrowings.

During fiscal 2023, we utilized $20.5 million in cash to repurchase 896,603 shares under the $50.0 million program authorized by our Board of Directors in August 31, 2022 .

As of April 15, 2024, we have repurchased a total of $26.9 million to purchase 1,149,018 shares, leaving $19.6 million available.

During the first quarter of fiscal 2024, our Board of Directors declared an initial quarterly dividend of $0.20 per share paid on April 11, 2024 to all shareholders of record as of March 28, 2024.

As of February 3, 2024 , we had restricted cash of $0.4 million compared to $0.5 million as of January 28, 2023, resulting in an immaterial difference in activity.

During fiscal 2024, we utilized $31.0 million in cash to repurchase 1,021,004 shares under the both the August 2022 Stock Repurchase Program and September 2024 Stock Repurchase Program.

Since the end of fiscal 2024 through April 14, 2025, the Company utilized $4.2 million to repurchase 108,503 shares under the stock buyback program, leaving $85.0 million available under the September 2024 Stock Repurchase Program.

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

Additionally, the Board of Directors declared a quarterly cash dividend of $0.22 per share on the issued and outstanding common stock of the Company, which was paid on April 10, 2025, to all stockholders of record as of March 27, 2025.

As of February 1, 2025 , we had restricted cash of $0.4 million c ompared to $0.4 million as of February 3, 2024 and $0.5 million as of January 28, 2023.

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

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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.

and Ireland typically have terms of five or ten years and generally contain a provision whereby every third or fifth year we have the opportunity to exit the lease (the ‘break clause’).

The leases typically provide the lessee with the first right for renewal at the end of the lease.

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We have no off-balance sheet arrangements as of February 1, 2025.

The impact of higher inflation on the Company's business operations was seen throughout fiscal 2022 and continued to adversely affect our business in fiscal 2023, mainly through rising store labor costs.

The impact of inflation on the Company's business operations was seen throughout fiscal 2022 and 2023.

Inflation 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 in fiscal 2024 to continue into fiscal 2025, specifically through wage increases and tariffs on inventory purchases.

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.

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for the three-year period ending with fiscal 2023, the implementation of tax planning strategies, and projections of future taxable income.

The Company maintains a valuation allowance in certain other foreign jurisdictions.

Changes in the valuation allowance in fiscal 2023 primarily related to the U.K.

valuation reversal, balance sheet adjustments and functional currency fluctuations.

The Company maintains a valuation allowance in fiscal year 2023 and 2024 in certain other foreign jurisdictions.

Changes in the valuation allowance in fiscal 2024 are primarily related to functional currency fluctuations.

Significant judgment is required in evaluating our uncertain tax positions.

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Tax authorities regularly examine the Company’s returns in the jurisdictions in which the Company does business.

Management regularly assesses the tax risk of the company’s return filing positions and believes its accruals for uncertain tax benefits are adequate as of February 3, 2024 and January 28, 2023.

Management regularly assesses the tax risk of the company’s return filing positions and believes its accruals for uncertain tax benefits are adequate as of February 1, 2025, February 3, 2024, and January 28, 2023.

Recent Accounting Pronouncements

See Note 2 – "Summary of Significant Accounting Policies" for additional information.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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-K

Item 7. Management’s Discussion and Analysis