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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549  

 


FORM 10-Q


 

 

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended July 4, 2015

 

OR

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to              

 

Commission file number: 001-32320

 


 

BUILD-A-BEAR WORKSHOP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

 

   

Delaware

43-1883836

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

 

   

1954 Innerbelt Business Center Drive

St. Louis, Missouri

63114

(Address of Principal Executive Offices)

(Zip Code)

 

(314) 423-8000

(Registrant’s Telephone Number, Including Area Code)

 


 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

     

Large accelerated filer  ☐

 

Accelerated filer ☒

     

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

 

As of August 7, 2015, there were 16,941,315 issued and outstanding shares of the registrant’s common stock.



 

 
1

 

  

BUILD-A-BEAR WORKSHOP, INC.

INDEX TO FORM 10-Q

 

     
 

Page

Part I Financial Information

 

     

Item 1.

Financial Statements (Unaudited)

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations and Comprehensive (Loss) Income

4

 

Consolidated Statements of Cash Flows

5

 

Notes to Consolidated Financial Statements

6

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

     

Item 4.

Controls and Procedures

19

 

Part II Other Information

     

Item 1A.

Risk Factors

20

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

     

Item 6.

Exhibits

21

   

Signatures

22

 

 

 
2

 

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

 

 

July 4,

 

January 3,

 

June 28,

 
 

2015

 

2015

 

2014

 
 

(Unaudited)

       

(Unaudited)

 

ASSETS

 

Current assets:

                 
Cash and cash equivalents $ 41,813   $ 65,389   $ 41,762  
Inventories   50,359     51,939     43,463  
Receivables   7,693     11,461     9,307  
Prepaid expenses and other current assets   14,173     15,611     10,394  
Deferred tax assets   1,706     1,378     1,193  
Total current assets   115,744     145,778     106,119  
                   

Property and equipment, net of accumulated depreciation of $191,103, $185,044 and $181,527, respectively

  58,439     62,766     63,185  

Other intangible assets, net

  382     304     397  

Other assets, net

  3,019     3,206     3,630  

Total Assets

$ 177,584   $ 212,054   $ 173,331  
                   
                   

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

                 
Accounts payable $ 23,140   $ 38,107   $ 25,447  
Accrued expenses   13,269     24,058     11,961  
Gift cards and customer deposits   29,746     34,268     27,547  
Deferred revenue   2,596     2,654     4,243  
Deferred tax liability   -     -     856  
Total current liabilities   68,751     99,087     70,054  
                   

Deferred franchise revenue

  836     945     1,064  

Deferred rent

  11,700     13,353     14,073  

Other liabilities

  1,113     1,044     602  
                   

Stockholders' equity:

                 
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at July 4, 2015, January 3, 2015 and June 28, 2014   -     -     -  
Common stock, par value $0.01, Shares authorized: 50,000,000;                  

Issued and outstanding: 16,950,205; 17,360,635 and 17,617,182 shares, respectively

  170     174     176  
Additional paid-in capital   60,536     69,362     70,730  
Accumulated other comprehensive loss   (8,503 )   (8,698 )   (6,515 )
Retained earnings   42,981     36,787     23,147  
Total stockholders' equity   95,184     97,625     87,538  

Total Liabilities and Stockholders' Equity

$ 177,584   $ 212,054   $ 173,331  

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
3

 

  

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES                  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)                  

(Unaudited)

(Dollars in thousands, except share and per share data)

 

   

Thirteen weeks ended

   

Twenty-six weeks ended

 
   

July 4, 2015

   

June 28, 2014

   

July 4, 2015

   

June 28, 2014

 
                                 

Revenues:

                               
Net retail sales   $ 80,279     $ 75,351     $ 171,943     $ 172,191  
Franchise fees     548       487       1,099       1,156  
Commercial revenue     187       410       1,364       842  
Total revenues     81,014       76,248       174,406       174,189  
                                 

Costs and expenses:

                               
Cost of merchandise sold - retail     45,378       45,938       94,170       100,638  
Cost of merchandise sold - commercial     183       161       542       359  
Selling, general and administrative     35,933       34,044       73,173       71,844  
Interest expense (income), net     (42 )     64       (93 )     2  
Total costs and expenses     81,452       80,207       167,792       172,843  
Income (loss) before income taxes     (438 )     (3,959 )     6,614       1,346  

Income tax expense

    190       343       420       624  
Net income (loss)   $ (628 )   $ (4,302 )   $ 6,194     $ 722  
                                 
Foreign currency translation adjustment     1,194       747       195       788  

Comprehensive income (loss)

  $ 566     $ (3,555 )   $ 6,389     $ 1,510  
                                 

Income (loss) per common share:

                               
Basic   $ (0.04 )   $ (0.25 )   $ 0.36     $ 0.04  
Diluted   $ (0.04 )   $ (0.25 )   $ 0.35     $ 0.04  
                                 

Shares used in computing common per share amounts:

                               
Basic     16,861,458       17,024,598       16,917,272       16,863,160  
Diluted     16,861,458       17,024,598       17,162,024       17,097,263  

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

 

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES             

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS             

(Unaudited) 

(Dollars in thousands)

 

 

Twenty-six weeks ended

 
 

July 4, 2015

   

June 28, 2014

 
               

Cash flows from operating activities:

             
Net income $ 6,194     $ 722  
Adjustments to reconcile net income to net cash used in operating activities:              
Depreciation and amortization   8,233       8,977  
Stock-based compensation   970       1,187  
Deferred taxes   (2 )     (1,075 )
Impairment of store assets   258       433  
Provision for doubtful accounts   14       740  
Trade credit utilization   139       119  
Loss on disposal of property and equipment   73       43  
Change in assets and liabilities:              
Inventories   1,681       7,081  
Receivables   3,788       4,613  
Prepaid expenses and other assets   1,172       1,332  
Accounts payable and accrued expenses   (24,458 )     (12,649 )
Lease related liabilities   (1,653 )     (5,325 )
Gift cards and customer deposits   (3,891 )     (6,340 )
Deferred revenue   (142 )     (310 )
Net cash used in operating activities   (7,624 )     (452 )

Cash flows from investing activities:

             
Purchases of property and equipment   (5,842 )     (3,149 )
Purchases of other assets and other intangible assets   (238 )     (22 )
Cash used in investing activities   (6,080 )

 

  (3,171 )

Cash flows from financing activities:

             

Proceeds from the exercise of employee stock options, net of withholding tax payments

  (633 )     1,172  
Purchases of Company's common stock   (9,164 )     (723 )
Cash (used in) provided by financing activities   (9,797 )

 

  449  

Effect of exchange rates on cash

  (75 )     271  

Net (decrease) increase in cash and cash equivalents

  (23,576 )

 

  (2,903 )

Cash and cash equivalents, beginning of period

  65,389       44,665  

Cash and cash equivalents, end of period

$ 41,813  

 

$ 41,762  

 

See accompanying notes to condensed consolidated financial statements.

 

 
5

 

 

Notes to Condensed Consolidated Financial Statements

 

1. Basis of Presentation

 

The condensed consolidated financial statements included herein are unaudited and have been prepared by Build-A-Bear Workshop, Inc. and its subsidiaries (collectively, the Company) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated balance sheet of the Company as of January 3, 2015 was derived from the Company’s audited consolidated balance sheet as of that date.  All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented.  All of these adjustments are of a normal recurring nature.  All significant intercompany balances and transactions have been eliminated in consolidation.  Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year.  These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended January 3, 2015, which were included in the Company’s annual report on Form 10-K filed with the SEC on March 19, 2015.

 

Reclassifications of prior year amounts related to the presentation of cost of merchandise sold in the statement of operations and the provision for doubtful accounts in the statement of cash flows have been made to conform to current year presentation, with no impact to net income (loss) or net cash used in operating activities in any period.

 

2. Prepaid Expenses and Other Assets

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

   

July 4,

   

January 3,

   

June 28,

 
   

2015

   

2015

   

2014

 

Prepaid rent

  $ 8,432     $ 7,848     $ 4,995  

Short-term investment

    895       1,121       -  

Other

    4,846       6,642       5,399  
    $ 14,173     $ 15,611     $ 10,394  

 

 

 

 

3. Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

  

   

July 4,

   

January 3,

   

June 28,

 
   

2015

   

2015

   

2014

 

Accrued wages, bonuses and related expenses

  $ 6,088     $ 11,858     $ 6,330  

Sales tax payable

    2,893       7,694       2,157  

Accrued rent and related expenses

    3,675       3,365       3,474  

Current income taxes payable

    613       1,141       -  
    $ 13,269     $ 24,058     $ 11,961  

 

 
6

 

 

4. Stock-based Compensation

 

The following table is a summary of the balances and activity for restricted stock and stock options for the twenty-six weeks ended July 4, 2015:

 

 

   

Restricted

         
   

Stock

   

Options

 

Outstanding, January 3, 2015

    419,674       714,451  

Granted

    98,926       68,826  

Vested

    200,302        

Exercised

          120,440  

Forfeited

    33,787       14,594  

Canceled or expired

          39,200  

Outstanding, July 4, 2015

    284,511       609,043  

 

For the thirteen and twenty-six weeks ended July 4, 2015, selling, general and administrative expense includes $0.5 million and $1.0 million, respectively, of stock-based compensation expense. For the thirteen and twenty-six weeks ended June 28, 2014, selling, general and administrative expense includes $0.6 million and $1.2 million, respectively, of stock-based compensation expense. As of July 4, 2015, there was $4.2 million of total unrecognized compensation expense related to nonvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 2.0 years.

 

The total fair value of shares vested during the twenty-six weeks ended July 4, 2015 and June 28, 2014 was $3.9 million and $3.6 million, respectively.

 

5. Income Taxes

 

The effective tax rate was (43.4)% and 6.4% for the thirteen and twenty-six weeks ended July 4, 2015, respectively compared to (8.7)% and 46.4% for the thirteen and twenty-six weeks ended June 28, 2014, respectively.  The components of income tax expense in both periods were primarily foreign and state taxes as we currently have a valuation allowance recorded on substantially all domestic deferred tax assets.   As there was a valuation allowance recorded on substantially all domestic deferred tax assets in both periods, income tax expense on domestic income was offset by a reversal of a portion of the existing valuation allowance.  The change in the effective rate was primarily driven by the change in pre-tax results for the respective periods.

 

6. Income (Loss) per Share

 

The Company uses the two-class method to compute basic and diluted income (loss) per common share. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except share and per share data):

 

 

   

Thirteen weeks ended

   

Twenty-six weeks ended

 
   

July 4, 2015

   

June 28, 2014

   

July 4, 2015

   

June 28, 2014

 
                                 
NUMERATOR:                                

Net income (loss) before allocation of earnings to participating securities

  $ (628 )   $ (4,302 )   $ 6,194     $ 722  
Less: Earnings allocated to participating securities     -       -       127       25  
Net income (loss) after allocation of earnings to participating securities   $ (628 )   $ (4,302 )   $ 6,067     $ 697  
                                 
DENOMINATOR:                                

Weighted average number of common shares outstanding - basic

    16,861,458       17,024,598       16,917,272       16,863,160  
Dilutive effect of share-based awards:     -       -       244,752       234,103  
Weighted average number of common shares outstanding - dilutive     16,861,458       17,024,598       17,162,024       17,097,263  

Basic income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders:

  $ (0.04 )   $ (0.25 )   $ 0.36     $ 0.04  

Diluted income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders

  $ (0.04 )   $ (0.25 )   $ 0.35     $ 0.04  

 

In calculating diluted income (loss) per share for the thirteen and twenty-six week periods ended July 4, 2015, options to purchase 609,043 and 69,114 shares, respectively, of common stock that were outstanding at the end of the period were not included in the computation of diluted net income (loss) per share due to their anti-dilutive effect. For the thirteen and twenty-six week periods ended June 28, 2014, the number of options to purchase common shares that were excluded from the calculation was 784,139 and 132,146 shares, respectively.

 

 
7

 

 

Due to the net loss for the thirteen week periods ended July 4, 2015 and June 28, 2014, the denominator for diluted loss per common share is the same as the denominator for basic loss per common share for those periods because the inclusion of stock options and unvested restricted shares would be anti-dilutive.

 

7. Comprehensive Income (Loss)

 

The difference between comprehensive income or loss and net income or loss results from foreign currency translation adjustments on the balance sheets of subsidiaries whose functional currency is not the US Dollar.  The accumulated other comprehensive loss balance at July 4, 2015, January 3, 2015 and June 28, 2014 is comprised entirely of foreign currency translation.  For the thirteen and twenty-six weeks ended July 4, 2015 and June 28, 2014, there were no reclassifications out of accumulated other comprehensive loss.

 

8. Segment Information

 

The Company’s operations are conducted through three operating segments consisting of retail, international franchising and commercial. The retail segment includes the operating activities of company-owned stores in the United States, Canada, Puerto Rico, the United Kingdom, Ireland and Denmark and other retail delivery operations, including the Company’s web stores. The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe (outside of the United Kingdom, Ireland and Denmark), Asia, Australia, the Middle East, Africa and Mexico. The commercial segment includes the Company’s transactions with other businesses, mainly comprised of licensing the Company’s intellectual properties for third-party use and wholesale activities. The operating segments have discrete sources of revenue, different capital structures and different cost structures. These operating segments represent the basis on which the Company’s chief operating decision maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. Accordingly, the Company has determined that each of its operating segments represent a reportable segment. The three reportable segments follow the same accounting policies used for the Company’s consolidated financial statements.

 

 
8

 

 

Following is a summary of the financial information for the Company’s reportable segments (in thousands): 

 

           

International

                 
   

Retail

   

Franchising

   

Commercial

   

Total

 
                                 
Thirteen weeks ended July 4, 2015                                

Net sales to external customers

  $ 80,279     $ 548     $ 187     $ 81,014  

Income (loss) before income taxes

    (684 )     242       4       (438 )

Capital expenditures, net

    3,190       12       -       3,202  

Depreciation and amortization

    3,982       33       -       4,015  
                                 
Thirteen weeks ended June 28, 2014                                

Net sales to external customers

  $ 75,351     $ 487     $ 410     $ 76,248  

Income (loss) before income taxes

    (4,016 )     (141 )     198       (3,959 )

Capital expenditures, net

    2,066       -       -       2,066  

Depreciation and amortization

    4,433       36       -       4,469  
                                 
Twenty-six weeks ended July 4, 2015                                

Net sales to external customers

  $ 171,943     $ 1,099     $ 1,364     $ 174,406  

Income before income taxes

    5,420       372       822       6,614  

Capital expenditures, net

    6,048       32       -       6,080  

Depreciation and amortization

    8,163       70       -       8,233  
                                 
Twenty-six weeks ended June 28, 2014                                

Net sales to external customers

  $ 172,191     $ 1,156     $ 842     $ 174,189  

Income (loss) before income taxes

    1,198       (278 )     426       1,346  

Capital expenditures, net

    3,162       9       -       3,171  

Depreciation and amortization

    8,903       74       -       8,977  
                                 
Total Assets as of:                                

July 4, 2015

  $ 170,545     $ 2,194     $ 4,845     $ 177,584  

June 28, 2014

  $ 164,982     $ 2,509     $ 5,840     $ 173,331  

 

The Company’s reportable segments are primarily determined by the types of products and services that they offer.  Each reportable segment may operate in many geographic areas.  The Company allocates revenues to geographic areas based on the location of the customer or franchisee.  The following schedule is a summary of the Company’s sales to external customers and long-lived assets by geographic area (in thousands): 

 

   

North

                         
   

America (1)

   

Europe (2)

   

Other (3)

   

Total

 
Thirteen weeks ended July 4, 2015                                

Net sales to external customers

  $ 64,472     $ 16,213     $ 329     $ 81,014  

Property and equipment, net

    52,604       5,835       -       58,439  
Thirteen weeks ended June 28, 2014                                

Net sales to external customers

  $ 61,503     $ 14,424     $ 321     $ 76,248  

Property and equipment, net

    55,881       7,304       -       63,185  
                                 
Twenty-six weeks ended July 4, 2015                                

Net sales to external customers

  $ 141,119     $ 32,628     $ 659     $ 174,406  

Property and equipment, net

    52,604       5,835       -     $ 58,439  
Twenty-six weeks ended June 28, 2014                                

Net sales to external customers

  $ 141,332     $ 32,175     $ 682     $ 174,189  

Property and equipment, net

    55,881       7,304       -       63,185  

 

For purposes of this table only:

(1) North America includes the United States, Canada, Puerto Rico and franchise business in Mexico

(2) Europe includes the United Kingdom, Ireland, Denmark (in 2015) and franchise businesses in Europe

(3) Other includes franchise businesses outside of North America and Europe

 

 
9

 

 

9. Contingencies

 

In the normal course of business, the Company is subject to regular examination by various taxing authorities for years not closed by the statute of limitations, including an ongoing customs audit in the United Kingdom in which the Company is contesting audit findings. The Company accrues a liability for this type of contingency when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. In 2012, the Company received notification from the customs authority that it intended to make an assessment for unpaid duty, penalties and interest. The assessment was made in 2013. The Company has appealed this determination and continues to believe that the ultimate outcome of these matters will not have a material adverse impact on the results of operations, liquidity or financial position of the Company. However, if one or more of these examinations has an unfavorable resolution, it is possible that the results of operation, liquidity or financial position of the Company could be materially affected in any particular period. Since the date of the notification in the third quarter of fiscal 2012, the Company has been required to pay the disputed duty, pending resolution of the appeal. As of July 4, 2015, $3.5 million had been paid in respect of the disputed duty and is included in receivables in the Retail segment.

 

10. Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company in the first quarter of fiscal 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate for each annual and interim reporting period whether conditions or events give rise to substantial doubt that an entity has the ability to continue as a going concern within one year following issuance of the financial statements and requires specific disclosures regarding the conditions or events leading to substantial doubt. The ASU will be effective for the Company beginning January 1, 2017, with early adoption permitted. The adoption of ASU 2014-15 is not expected to have a material impact on the Company’s financial position or results of operations.

 

In April 2015, the Financial Accounting Standards Board issued ASU 2015-05, Customer’s,Accounting for Fees Paid in a Cloud Computing Arrangements, which provides guidance to assist entities in determining whether a cloud computing arrangement contains a software license. The ASU states that if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The ASU will be effective for the Company in the first quarter of fiscal 2016, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its consolidated financial statements.

 

11. Subsequent Event

 

The Company has a $10 million share repurchase program that was announced in February 2015 (the February 2015 Share Repurchase Program). On July 7, 2015, the Board of Directors of the Company (the Board) left the February 2015 Share Repurchase Program in place and adopted a new repurchase program which authorizes the Company to repurchase up to an additional $10 million of its common stock until March 31, 2016, subject to further extension by the Board. In the period from July 4, 2015 through August 7, 2015, the Company repurchased approximately 5,800 shares of its common stock for an aggregate amount of $91,000, leaving $10.7 million of availability under the Board approved share repurchase programs.

 

 
10

 

 

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 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 the Company’s annual report on Form 10-K for the year ended January 3, 2015, as filed with the SEC, and the following:

 

  

general global economic conditions may deteriorate, which could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending;

  

customer traffic may decrease in the shopping malls where we are located, on which we depend to attract guests to our stores;

  

we may be unable to generate interest in and demand for our interactive retail experience, or to identify and respond to consumer preferences in a timely fashion;

  

our marketing and on-line initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic;

  

we may improperly obtain or be unable to adequately protect customer information in violation of privacy or security laws or customer expectations;

  

we may be unable to generate comparable store sales growth;

  

we may be unable to effectively operate or manage the overall portfolio of our company-owned stores;

  

we may be unable to renew or replace our store leases, or enter into leases for new stores on favorable terms or in favorable locations, or may violate the terms of our current leases;

  

we may not be able to operate our international company-owned stores profitably;

  

the availability and costs of our products could be adversely affected by risks associated with international manufacturing and trade, including foreign currency fluctuation;

  

our products could become subject to recalls or product liability claims that could adversely impact our financial performance and harm our reputation among consumers;

  

we may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of our management team;

  

we are susceptible to disruption in our inventory flow due to our reliance on a few vendors;

  

we may be unable to effectively manage our international franchises or laws relating to those franchises may change;

  

we may fail to renew, register or otherwise protect our trademarks or other intellectual property;

  

we are subject to risks associated with technology and digital operations;

  

we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise;

  

we may be unable to operate our company-owned distribution center efficiently or our third-party distribution center providers may perform poorly;

  

high petroleum products prices could increase our inventory transportation costs and adversely affect our profitability;

  

our plans to leverage the Build-A-Bear brand to drive strategic expansion may not be successful;

  

our market share could be adversely affected by a significant, or increased, number of competitors;

  

we may suffer negative publicity or negative sales if the non-proprietary toy products we sell in our stores do not meet our quality or sales expectations;

  

poor global economic conditions could have a material adverse effect on our liquidity and capital resources;

  

fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; and

  

we may be unable to repurchase shares of our common stock at the times or in the amounts we currently anticipate or the results of the share repurchase program may not be as beneficial as we currently anticipate.

 

Overview

 

 

We are the only global company that offers an interactive “make your own stuffed animal” retail entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals. As of July 4, 2015, we operated 255 stores in the United States, Canada and Puerto Rico (collectively, North America), 60 stores in the United Kingdom, Ireland and Denmark (collectively, Europe) and had 67 franchised stores operating internationally under the Build-A-Bear Workshop brand.

 

 
11

 

 

We operate in three segments; each segment shares the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

 

 

 •

Retail - Company-owned retail stores located in North America and Europe and two web stores;

 

 

International Franchising – Other international stores operated under franchise agreements; and

 

 

Commercial - Transactions with other business partners, mainly comprised of wholesale product sales and licensing our intellectual property, including entertainment properties, for third-party use.

 

Our financial results in fiscal 2014 demonstrated the impact of the successful and consistent implementation of our key strategies of optimizing real estate, resetting the consumer value equation and rationalizing our expense structure. Our 2015 plan builds on the progress we made in 2014 and 2013 in implementing these key strategies, with a combination of continuous improvement of these initiatives and strategic expansion into additive opportunities. Specifically, we plan to expand into more places as we continue to improve our real estate model through selective new high-potential openings, a systematic refresh of our store base and strategic international expansion. We plan to reach more people as we continue to drive core consumer business and strategically expand our business with the over 12 year-old consumer segment. Additionally, we intend to sell more products by developing proprietary product stories along with re-launching an out-bound licensing program. We expect to do this more profitably as we continue to improve the value engineering of products and implement new systems that facilitate sales growth and increase efficiency.

 

Selected financial data attributable to each segment for the thirteen and twenty-six weeks ended July 4, 2015 and June 28, 2014 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.

 

We use comparable store sales as one of the performance measures for our business.  Comparable store sales percentage changes are based on net retail sales, excluding our webstores, and the impact of foreign exchange.  Stores are considered comparable beginning in their thirteenth consecutive full month of operation.  Comparable store sales percentage changes for the thirteen and twenty-six weeks ended July 4, 2015 are based on net retail sales as compared to the thirteen and twenty-six weeks ended July 5, 2014. The percentage change in comparable store sales for the periods presented below is as follows:

 

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

July 4, 2015

   

June 28, 2014

   

July 4, 2015

   

June 28, 2014

 

North America

    6.5 %     (4.0 )%     2.7 %     (2.8 )%

Europe

    18.2 %     (8.1 )%     15.7 %     (5.5 )%

Consolidated

    8.7 %     (4.9 )%     5.0 %     (3.4 )%

 

We believe our positive consolidated comparable store sales for the periods presented are primarily attributable to the following factors:

 

 

A balanced product assortment that simultaneously and consistently focused on our four key consumer segments supported by elevated marketing programs. We believe this resulted in improvements in key metrics including units per transaction and average unit retail in both North America and Europe for both the thirteen and twenty-six week periods;

 

 

Improved product development and planning processes that we believe enabled us to better match product supply with consumer demand and allowed us to optimize high impact launches in both North America and Europe in the second quarter of 2015; and

 

 

Increased traffic in the second quarter of 2015 that we believe was due, in part, to children being out of school for more days as compared to the 2014 period when many schools lengthened the year to make up for earlier school cancellations due to weather factors.

 

We expect to improve comparable store sales through the following key initiatives:

 

 

Expanding into more places: We intend to continue to improve our real estate model by strategically evolving our store portfolio to align with market trends while selectively opening new locations and systematically refreshing our store base. To this end, we plan to open additional stores in high potential destinations such as tourist locations, outlet malls and shop-in-shops.  We expect to strategically expand our international presence by leveraging the improving strength in our company-owned stores to restructure and extend our international footprint. We expect to expand into new markets through both franchise and company-owned store models.

 

 
12

 

 

 

Targeting more people: We intend to have continuous growth in our business with our core three to twelve year-old consumer segment which represents a majority of current revenue. We will focus on initiatives that drive trial and increase repeat visits with an evolved segmentation, product development and marketing strategy. We expect to strategically grow sales to the over twelve year-old consumers with a focus on key categories including gift-giving, affinity and collectibles. The over-twelve consumer segment currently represents approximately 20% of sales and has a tendency to over-index on less price-sensitive gift-able purchases.

     
 

Developing more products: We intend to make continuous improvements and extend our efforts to successfully develop high impact product stories coupled with integrated marketing programs that tend to garner higher price points, drive add-on purchases and create play beyond the plush. We expect to strategically expand our business by launching an out-bound licensing program to leverage our strong brand equity. This will enable us to extend our brand reach with new offerings in relevant categories with “products beyond the plush”. 

     

 

Driving more profitability: We intend to continue to improve our value engineering initiatives to further optimize product margins while implementing new systems that we expect to facilitate sales growth, increase efficiency and improve long term profitability. We expect to strategically expand our profitability by prioritizing incremental growth initiatives, like those discussed above, that leverage existing infrastructure, are primarily royalty-based, and/or allow for discrete pricing and are therefore comparatively margin-accretive.

 

Strategy

 

Retail Stores

 

The table below sets forth the number of Build-A-Bear Workshop company-owned stores in North America and Europe for the periods presented:

 

 

   

Twenty-six Weeks Ended

 
   

July 4, 2015

   

June 28, 2014

 
   

North America

   

Europe

   

Total

   

North America

   

Europe

   

Total

 

Beginning of period

    265       59       324       263       60       323  

Opened

    2       1       3       1       -       1  

Closed

    (12 )     -       (12 )     (10 )     (1 )     (11 )

End of period

    255       60       315       254       59       313  

 

During 2015, we expect to open stores in high potential destinations such as tourist locations, outlet malls and shop-in-shops. In the second half of 2015, we also expect to begin to systematically refresh our store base with our new “Discovery” format developed to improve productivity, optimize space and update our brand look. After completing value-engineering work on the design to move it from concept stage to standard model, we plan to open new stores in the format as well as systematically update our existing store fleet primarily in conjunction with natural lease events. We also expect to close select stores as a normal course of managing our real estate portfolio and ongoing operational planning.

 

International Franchise Locations

 

Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our company-owned stores. As of July 4, 2015, we had 10 master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 16 countries. The number of traditional international franchised stores opened and closed for the periods presented below are summarized as follows:

 

   

Twenty-Six Weeks Ended

 
   

July 4, 2015

   

June 28, 2014

 

Beginning of period

    71       86  

Opened

    -       2  

Closed

    (4 )     (13 )

End of period

    67       75  
 

In the 2015 second quarter, one franchise agreement, covering one country with two stores, expired and was not renewed. Additionally, in July 2015, we terminated franchise agreements in two countries; each terminated franchise had two stores in operation at the end of the quarter. In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements.  We believe there is a market potential for approximately 300 international stores outside of North America and Europe.

 

 
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In 2015, our international strategy is to leverage the improving strength in our company-owned stores to restructure and extend our international footprint. Key franchisees have started to apply our successful real estate approach including opening pop-up stores to assess long-term potential and adding shop-in-shops with key partners. As of July 4, 2015, our franchisees were operating eight of these non-traditional locations which are not included in the store count presented above.

 

 Results of Operations

 

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:

  

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES                 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                 

(Unaudited)                 

 

   

Thirteen weeks ended

   

Twenty-six weeks ended

 
   

July 4,

   

June 28,

   

July 4,

   

June 28,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues:

                               

Net retail sales

    99.1 %     98.8 %     98.6 %     98.9 %

Franchise fees

    0.7       0.6       0.6       0.7  

Commercial revenue

    0.2       0.5       0.8       0.5  
Total revenues     100.0       100.0       100.0       100.0  
                                 

Costs and expenses:

                               

Cost of merchandise sold - retail (1)

    56.5       61.0       54.8       58.4  

Cost of merchandise sold - commercial (1)

    97.9       39.3       39.7       42.6  

Selling, general and administrative

    44.4       44.6       42.0       41.2  

Interest expense (income), net

    (0.1 )     0.1       (0.1 )     0.0  
Total costs and expenses     100.5       105.2       96.2       99.2  
                                 
Income (loss) before income taxes     (0.5 )     (5.2 )     3.8       0.8  

Income tax (benefit) expense

    0.2       0.4       0.2       0.4  
Net income (loss)     (0.8 )     (5.6 )     3.6       0.4  
                                 

Retail Gross Margin %

    43.5 %     39.0 %     45.2 %     41.6 %

 

 

(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.

 

 
14

 

 

Thirteen weeks ended July 4, 2015 compared to thirteen weeks ended June 28, 2014

 

Total revenues. Total revenues increased to $81.0 million for the thirteen weeks ended July 4, 2015 from $76.2 million for the thirteen weeks ended June 28, 2014, an increase of $4.8 million, or 6.3%. Net retail sales were $80.3 million for the thirteen weeks ended July 4, 2015 as compared to $75.4 million for the thirteen weeks ended June 28, 2014, an increase of $4.9 million, or 6.5%. The components of this increase are as follows:

 

 

   

Thirteen weeks

ended

 
   

July 4,

 
   

2015

 
   

(dollars in millions)

 

Increase in comparable store sales

  $ 5.8  

Impact of foreign currency translation

    (1.6 )

Increase in non-comparable stores, primarily remodels and relocations

    1.6  

Impact of store closures

    (1.0 )

Increase from new stores

    1.0  

Changes from other retail including the imact of calendar shift and e-commerce sales

    (0.6 )

Change in deferred revenue

    (0.3 )
    $ 4.9  

 

We believe the increase in comparable store sales for the thirteen weeks ended July 4, 2015 was primarily attributable to the following factors:

 

 

A balanced product assortment that simultaneously and consistently focused on our four key consumer segments supported by elevated marketing programs. We believe this resulted in improvements in key metrics including units per transaction and average unit retail in both North America and Europe for both the thirteen and twenty-six week periods;

 

 

Improved product development and planning processes that we believe enabled us to better match product supply with consumer demand and allowed us to optimize high impact launches in both North America and Europe in the second quarter of 2015; and

 

 

Increased traffic in the second quarter of 2015 that we believe was due, in part, to children being out of school for more days as compared to the 2014 period when many schools lengthened the year to make up for school cancellations due to weather factors.

 

Revenue from franchise fees was $0.5 million for both the thirteen weeks ended July 4, 2015 and June 28, 2014. Commercial revenue was $0.2 million and $0.4 million for the thirteen weeks ended July 4, 2015 and June 28, 2014, respectively, primarily resulting from the timing of wholesale sales and a decline in licensing activities.

 

Retail gross margin. Retail gross margin increased to $34.9 million for the thirteen weeks ended July 4, 2015, compared to $29.4 million for the thirteen weeks ended June 28, 2014, an increase of $5.5 million, or 18.7%. As a percentage of net retail sales, retail gross margin increased to 43.5% for the thirteen weeks ended July 4, 2015 from 39.0% for the thirteen weeks ended June 28, 2014. This 450 basis points as a percentage of net retail sales improvement was primarily driven by a 240 basis point improvement from expansion in merchandise margin and reduction in distribution costs and 210 basis points of improved leverage of fixed occupancy cost.

 

Selling, general and administrative. Selling, general and administrative expenses were $35.9 million for the thirteen weeks ended July 4, 2015 compared to $34.0 million for the thirteen weeks ended June 28, 2014, an increase of $1.9 million, or 5.5%. As a percentage of total revenues, selling, general and administrative expenses decreased to 44.4% for the thirteen weeks ended July 4, 2015 compared to 44.6% for the thirteen weeks ended June 28, 2014, a decrease of 20 basis points. The dollar increase in the quarter was primarily due to increases in payroll costs, partially offset by decreased management transition costs. As a percent of revenue, this increase was offset by improved leverage on fixed overhead and the favorable impact of currency on the re-measurement of certain balance sheet items. Excluding the management transition costs and the impact of foreign currency remeasurement in both periods, selling, general and administrative expenses as a percent of revenue increased 40 basis points to 44.7%.

 

Interest expense (income), net. Interest income, net of interest expense was $42,000 for the thirteen weeks ended July 4, 2015. Interest expense, net of interest income, was $64,000 for the thirteen weeks ended June 28, 2014.

 

 
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Provision for income taxes. Income tax expense was $0.2 million for the thirteen weeks ended July 4, 2015 compared to $0.3 million for the thirteen weeks ended June 28, 2014.  The effective tax rate was (43.4)% for the thirteen weeks ended July 4, 2015 compared to (8.7)% for the thirteen weeks ended June 28, 2014.  This $0.1 million decrease was primarily attributable to a decrease in state tax expense and return-to provision adjustments, partially offset by increased tax expense in foreign jurisdictions.  As there was a valuation allowance recorded on substantially all domestic deferred tax assets in both periods, income tax expense on domestic income was offset by a reversal of a portion of the existing valuation allowance.  The change in the effective rate was primarily driven by the change in pre-tax results for the respective periods.

 

 

Twenty-six weeks ended July 4, 2015 compared to twenty-six weeks ended June 28, 2014

 

Total revenues. Total revenues were $174.4 million for the twenty-six weeks ended July 4, 2015 as compared to $174.2 million for the twenty-six weeks ended June 28, 2014, an increase of $0.2 million, or 0.1%. Net retail sales were $171.9 million for the twenty-six weeks ended July 4, 2015 as compared to $172.2 million for the twenty-six weeks ended June 28, 2014, a decrease of $0.3 million, or 0.1%. The components of this decrease are as follows:

 

   

Twenty-six

weeks ended

 
   

July 4,

 
   

2015

 
   

(dollars in millions)

 

Increase in comparable store sales

  $ 7.5  

Impact of foreign currency translation

    (3.5 )

Increase in non-comparable stores, primarily remodels and relocations

    3.0  

Impact of store closures

    (2.8 )

Increase from new stores

    1.7  

Changes from other retail including the imact of calendar shift and e-commerce sales

    (5.8 )

Change in deferred revenue

    (0.4 )
    $ (0.3 )

 

We believe the increase in comparable store sales for the twenty-six weeks ended July 4, 2015 was primarily attributable to the following factors:

 

 

A balanced product assortment that simultaneously and consistently focused on our four key consumer segments supported by elevated marketing programs. We believe this resulted in improvements in key metrics including units per transaction and average unit retail in both North America and Europe for both the thirteen and twenty-six week periods; and

 

 

Improved product development and planning processes that we believe enabled us to better match product supply with consumer demand and allowed us to optimize high impact launches in both North America and Europe in the second quarter of 2015 contributing to the overall improvement in comparable store sales in the twenty-six week period.

 

 

Revenue from franchise fees was $1.1 million for the twenty-six weeks ended July 4, 2015 compared to $1.2 million for the twenty-six weeks ended July 4, 2015, a decrease of $0.1 million. Commercial revenue was $1.4 million for the twenty-six weeks ended July 4, 2015 compared to $0.8 million for the twenty-six weeks ended June 28, 2014, an increase of $0.5 million, primarily resulting from the timing of wholesale revenue partially offset by a decline in licensing activities.

 

Retail gross margin. Retail gross margin was $77.8 million for the twenty-six weeks ended July 4, 2015 compared to $71.6 million for the twenty-six weeks ended June 28, 2014, an increase of $6.2 million, or 8.7%. As a percentage of net retail sales, retail gross margin increased to 45.2% for the twenty-six weeks ended July 4, 2015 from 41.6% for the twenty-six weeks ended June 28, 2014. This 360 basis point improvement was primarily driven by a 260 basis point improvement from expansion in merchandise margin and 100 basis points from a reduction in distribution costs and improved leverage on fixed occupancy cost.

 

Selling, general and administrative. Selling, general and administrative expenses were $73.2 million for the twenty-six weeks ended July 4, 2015 as compared to $71.8 million for the twenty-six weeks ended June 28, 2014, an increase of $1.3 million, or 1.8%. As a percentage of total revenues, selling, general and administrative expenses increased to 42.0% for the twenty-six weeks ended July 4, 2015 as compared to 41.2% for the twenty-six weeks ended June 28, 2014, an increase of 80 basis points. The dollar increase in the quarter was primarily due to increases in payroll costs and the negative impact of currency on the re-measurement of certain balance sheet items, partially offset by the timing of marketing spend between quarters and decreased management transition costs. As a percent of revenue, this increase was offset by improved leverage on fixed overhead. Excluding the management transition costs and the impact of foreign currency remeasurement in both periods, selling, general and administrative expenses as a percent of revenue were 41.1% in both periods.

 

 
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Interest expense (income), net. Interest income, net of interest expense was $93,000 for the twenty-six weeks ended July 4, 2015. Interest expense, net of interest income, was $2,000 for the twenty-six weeks ended June 28, 2014.

 

Provision for income taxes. Income tax expense was $0.4 million for the twenty-six weeks ended July 4, 2015 as compared to $0.6 million for the twenty-six weeks ended June 28, 2014.  The effective tax rate was 6.4% for the twenty-six weeks ended July 4, 2015 compared to 46.4% for the twenty-six weeks ended July 4, 2015.  This $0.2 million decrease was primarily attributable to a decrease in state tax expense and return-to provision adjustments, partially offset by increased tax expense in foreign jurisdictions.  As there was a valuation allowance recorded on substantially all domestic deferred tax assets in both periods, income tax expense on domestic income was offset by a reversal of a portion of the existing valuation allowance.  The change in the effective rate was primarily driven by the change in pre-tax results for the respective periods.

 

 

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) seasonal shopping patterns and holiday and vacation schedules; (2) the timing and frequency of our marketing initiatives, including national media and other public relations events; (3) the timing of our store openings and closings and related expenses; (4) changes in general economic conditions and consumer spending patterns; (5) increases or decreases in our comparable store sales; (6) fluctuations in the profitability of our stores; (7)  changes in foreign currency exchange rates; (8)  the actions of our competitors or mall anchors and co-tenants; (9) changes in consumer preferences; (10) the effectiveness of our inventory management; and (11) weather conditions.

 

 

The timing of store closures, remodels and 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; 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.

 

As a toy retailer, our sales are highest in our fourth quarter, followed by the first quarter. The timing of holidays and school vacations can impact our quarterly results. We cannot ensure that this will continue to be the case. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years. The 2014 fiscal fourth quarter had 14 weeks.

 

Liquidity and Capital Resources

 

Our cash requirements are primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, information systems and working capital.  Over the past several years, we have met these requirements through capital generated from cash flow provided by operations.  We have access to additional cash through our revolving line of credit that has been in place since 2000.

 

Operating Activities. Cash used in operating activities was $7.6 million for the twenty-six weeks ended July 4, 2015 compared to cash used in operating activities of $0.5 million for the twenty-six weeks ended June 28, 2014, an increase in cash used of $7.2 million. Generally, changes in cash from operating activities are driven by changes in net income or loss and changes in operating assets and liabilities. This increase in cash used in operating activities over the year ago period was primarily due to timing of inventory shipments and payments, partially offset by increased store contribution and the decrease in gift card redemptions due to the calendar shift.

 

Investing Activities. Cash used in investing activities was $6.1 million for the twenty-six weeks ended July 4, 2015 as compared to $3.2 million for the twenty-six weeks ended June 28, 2014, an increase of $2.9 million. Cash used in investing activities during the twenty-six weeks ended July 4, 2015 and June 28, 2014 primarily related to investments in central office information technology systems and construction costs for new and remodeled stores.

 

Financing Activities. Cash used in financing activities in the twenty-six weeks ended July 4, 2015 was $9.8 million as purchases of our stock used cash of $9.2 million and exercises of employee stock options, net of shares used for withholding tax payments used $0.6 million. In the twenty-six weeks ended June 28, 2014, financing activities provided cash of $0.4 million, including $1.2 million provided by exercises of employee stock options, net of shares used for withholding tax payments, partially offset by cash used for purchases of our common stock. No borrowings were made under our line of credit in either the twenty-six weeks ended July 4, 2015 or June 28, 2014.

 

 
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Capital Resources. As of July 4, 2015, we had a consolidated cash balance of $41.8 million, over half of which was domiciled outside of the United States. We also have a line of credit, which we can use to finance capital expenditures and working capital needs throughout the year. The bank line provides availability of $35 million. Borrowings under the credit agreement are secured by our assets and a pledge of 65% of our ownership interest in our foreign subsidiaries. The credit agreement expires on December 31, 2016 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates and investments. It also prohibits us from declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the credit agreement. We are also prohibited from repurchasing shares of our common stock unless such repurchase of shares would not violate any terms of the credit agreement; we may not use the proceeds of the line of credit to repurchase shares. Borrowings bear interest at LIBOR plus 1.8%. Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge coverage ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. As of July 4, 2015: (i) we were in compliance with these covenants; (ii) there were no borrowings under our line of credit; (iii) there was a standby letter of credit of approximately $1.1 million outstanding under the credit agreement; and (iv) there was approximately $33.9 million available for borrowing under the line of credit.

 

Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America typically have a ten-year term and contain provisions for base rent plus percentage rent based on defined sales levels. Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume is not achieved. In addition, some of these leases contain various restrictions relating to change of 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.

 

Our leases in the U.K. and Ireland typically have terms of 10 to 15 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 relocate existing stores and open new stores. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are charged quarterly and paid in advance.

 

In fiscal 2015, we expect to spend a total of $20 million to $25 million on capital expenditures. Capital spending through the twenty-six weeks ended July 4, 2015 totaled $6.1 million, on track with our full year plans. Capital spending in fiscal 2015 is primarily to support the refresh and repositioning of stores and investment in infrastructure.

 

We believe that cash generated from operations and borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for the near future.  

  

On February 20, 2007, we announced that our board of directors had authorized a $25 million share repurchase program of our outstanding common stock. On March 10, 2008, we announced an expansion of our share repurchase program to $50 million (the “2008 Share Repurchase Program”). Following a series of annual extensions, as of February 25, 2015, under the 2008 Share Repurchase Program, we had repurchased approximately 6,245,000 shares at an average price of $7.40 per share for an aggregate amount of $46.2 million, leaving $3.8 million of availability under the program. On February 25, 2015, we announced the termination of the 2008 Share Repurchase Program and the adoption of a new repurchase program (the “February 2015 Share Repurchase Program”) which authorizes us to repurchase up to $10 million of our common stock until March 31, 2016, subject to further extension by the Board. On July 7, 2015, we announced that our board of directors had left the February 2015 Share Repurchase Program in place and adopted a new repurchase program (the “July 2015 Share Repurchase Program”) (together, the “2015 Share Repurchase Programs”) which authorizes us to repurchase up to an additional $10 million of our common stock until March 31, 2016, subject to further extension by the Board. Under the 2015 Share Repurchase Programs, we currently intend to purchase up to $20 million of our common stock in the open market (including through 10b5-1 trading plans), through privately negotiated transactions, or through an accelerated repurchase transaction. The primary source of funding has been, and 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 2015 Share Repurchase Programs do not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time without prior notice. Shares repurchased under the 2015 Share Repurchase Programs will be subsequently retired. As of August 7, 2015, we had repurchased approximately 533,000 shares at an average price of $17.39 per share for an aggregate amount of $9.3 million, leaving $10.7 million of availability under the 2015 Share Repurchase Programs. 

 

Off-Balance Sheet Arrangements

 

None

 

Inflation

 

 
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We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented.  We cannot provide assurance, however, that our business will not be affected by inflation in the future.

 

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 application of accounting policies, and the estimates inherently required therein, are reasonable.  These accounting policies and estimates, including those related to inventory, long-lived assets, 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, as filed with the Securities and Exchange Commission (SEC) on March 19, 2015, which includes audited consolidated financial statements for our 2014, 2013 and 2012 fiscal years. There have been no material changes to the critical accounting estimates disclosed in the 2014 Form 10-K.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. In April 2015, the FASB issued ASU 2014-09, Customer’s,Accounting for Fees Paid in a Cloud Computing Arrangements, which provides guidance to assist entities in determining whether a cloud computing arrangement contains a software license. See Note 10 – Recently Issued Accounting Pronouncements to the Condensed Consolidated Financial Statements for additional information.  

 

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 January 3, 2015 as filed with the SEC on March 19, 2015. 

 

Item 4. Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief President Bear and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.  Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure.  Based on the foregoing evaluation, our management, including the Chief Executive Officer and Chief President Bear and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of July 4, 2015, the end of the period covered by this Quarterly Report.

 

It should be noted that our management, including the Chief Executive Officer and Chief President Bear and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all error and all fraud.  A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 
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Changes in Internal Control Over Financial Reporting.  The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief President Bear and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

 

PART II – OTHER INFORMATION

 

Item 1A. Risk Factors.

 

There have been no material changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended January 3, 2015 as filed with the SEC on March 19, 2015. 

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

(a)

Total Number of Shares (or Units) Purchased (1)

   

(b) Average Price Paid Per Share (or Unit)

   

(c)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)

   

(d)

Maximum Number (or Approximate Dollar Value) of Shares (or Units) the May Yet Be Purchased Under the Plans or Programs (2)

 

Apr. 5, 2015 – May 2, 2015

    6,220     $ 18.65       5,712     $ 6,896,457  

May 3, 2015 – May 30, 2015

    229,452     $ 16.96       229,321     $ 3,007,956  

May 31, 2015 – Jul. 4, 2015

    149,747     $ 15.80       137,720     $ 836,094  

Total

    385,419     $ 16.53       372,753          

 

(1)

Includes shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted shares which vested during the applicable period.  Our equity incentive plans provide that the value of shares delivered to us to pay the withheld to cover tax obligations is calculated at the closing trading price of our common stock on the date the relevant transaction occurs.

(2)

On February 25, 2015, we announced the termination of the share repurchase program that was adopted in 2008 and the adoption of the February 2015 Share Repurchase Program which authorizes us to repurchase up to $10 million of our common stock through March 31, 2016, subject to further extension by the Board.  On July 7, 2015, we announced the adoption of the July 2015 Share Repurchase Program which authorizes us to repurchase up to an additional $10 million of our common stock through March 31, 2016 subject to further extension by the Board, giving us authorization to repurchase an aggregate of $20 million of our common stock.  Shares repurchased under these programs will be subsequently retired.

 

 
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Item 6. Exhibits

 

The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:

 

Exhibit No.

Description 

   

2.1

Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the Registrant (incorporated by reference from Exhibit 2.1 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)

   

3.1

Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of our Current Report on Form 8-K, filed on November 11, 2004)

   

3.2

Amended and Restated Bylaws (incorporated by reference from Exhibit 3.4 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)

   

4.1

Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to our Registration Statement on Form S-1, filed on October 1, 2004, Registration No. 333-118142)

   

31.1

Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Officer and President Bear)

   

31.2

Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Officer)

   

32.1

Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Officer and President Bear)

   

32.2

Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Officer)

   

101.INS

XBRL Instance

   

101.SCH

XBRL Extension Schema

   

101.CAL

XBRL Extension Calculation

   

101.DEF

XBRL Extension Definition

   

101.LAB

XBRL Extension Label

   

101.PRE

XBRL Extension Presentation

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 13, 2015

 

 

 

 BUILD-A-BEAR WORKSHOP, INC.

 

 

 (Registrant)

 

 

 

 

By:

/s/ Sharon John

 

 

Sharon John

 

 

Chief Executive Officer and Chief President Bear

 

 

(on behalf of the registrant and as principal

 

 

executive officer)

 

 

 

 

By:

/s/ Voin Todorovic 

    Voin Todorovic
    Chief Financial Officer
    (on behalf of the registrant and as principal
    financial officer)

 

 

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