bbw20190504_10q.htm
0001113809 BUILD-A-BEAR WORKSHOP INC false --01-30 Q3 2020 0.01 0.01 0.01 15,000,000 15,000,000 15,000,000 0 0 0 0 0 0 0.01 0.01 0.01 50,000,000 50,000,000 50,000,000 15,960,262 15,960,262 15,205,981 15,205,981 15,219,915 15,219,915 39 5.9 3 5 10 10 3 0 3 3 0 5 Prepaid occupancy consists of prepaid expenses related to non-lease components. Accrued rent and related expenses consist of accrued costs associated with non-lease components. Other includes franchise businesses outside of North America and Europe and a corporately-managed location in China Accumulated other comprehensive income (loss) ("AOCI") Europe includes corporately managed locations in the U.K., Ireland, Denmark and franchise businesses in Europe Other consists primarily of prepaid expense related to IT maintenance contracts and software as a service. North America includes corporately managed locations in the United States, Canada, Puerto Rico. Additional paid-in capital ("APIC") 00011138092020-02-022020-10-31 xbrli:shares 00011138092020-12-07 thunderdome:item iso4217:USD 00011138092020-10-31 00011138092020-02-01 00011138092019-11-02 iso4217:USDxbrli:shares 0001113809us-gaap:RetailMember2020-08-022020-10-31 0001113809us-gaap:RetailMember2019-08-042019-11-02 0001113809us-gaap:RetailMember2020-02-022020-10-31 0001113809us-gaap:RetailMember2019-02-032019-11-02 0001113809bbw:CommercialProductAndServiceMember2020-08-022020-10-31 0001113809bbw:CommercialProductAndServiceMember2019-08-042019-11-02 0001113809bbw:CommercialProductAndServiceMember2020-02-022020-10-31 0001113809bbw:CommercialProductAndServiceMember2019-02-032019-11-02 0001113809bbw:InternationalFranchisingMember2020-08-022020-10-31 0001113809bbw:InternationalFranchisingMember2019-08-042019-11-02 0001113809bbw:InternationalFranchisingMember2020-02-022020-10-31 0001113809bbw:InternationalFranchisingMember2019-02-032019-11-02 00011138092020-08-022020-10-31 00011138092019-08-042019-11-02 00011138092019-02-032019-11-02 00011138092019-02-02 xbrli:pure 0001113809country:GBus-gaap:SubsequentEventMemberbbw:Covid19PandemicMember2020-11-01 0001113809country:IEus-gaap:SubsequentEventMemberbbw:Covid19PandemicMember2020-11-01 0001113809country:GBus-gaap:SubsequentEventMemberbbw:Covid19PandemicMember2020-12-02 0001113809us-gaap:SellingGeneralAndAdministrativeExpensesMemberbbw:Covid19PandemicMember2020-08-022020-10-31 0001113809us-gaap:SellingGeneralAndAdministrativeExpensesMemberbbw:Covid19PandemicMember2020-02-022020-10-31 0001113809bbw:Covid19PandemicMember2020-10-31 0001113809bbw:Covid19PandemicMember2020-08-022020-10-31 0001113809bbw:Covid19PandemicMember2020-02-022020-10-31 0001113809us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-11-02 0001113809bbw:DirectToConsumerMember2020-08-022020-10-31 utr:Y 0001113809bbw:InternationalFranchisingMember2020-10-31 0001113809srt:MinimumMember2020-10-31 0001113809srt:MaximumMember2020-10-31 0001113809bbw:IncentivePlan2020Member2020-10-31 0001113809bbw:OptionsAndRestrictedStockMember2020-08-022020-10-31 0001113809bbw:OptionsAndRestrictedStockMember2019-08-042019-11-02 0001113809bbw:OptionsAndRestrictedStockMember2020-02-022020-10-31 0001113809bbw:OptionsAndRestrictedStockMember2019-02-032019-11-02 0001113809bbw:OptionsAndRestrictedStockMember2020-10-31 0001113809us-gaap:RestrictedStockMember2020-02-01 0001113809us-gaap:PerformanceSharesMember2020-02-01 0001113809us-gaap:RestrictedStockMember2020-02-022020-10-31 0001113809us-gaap:PerformanceSharesMember2020-02-022020-10-31 0001113809us-gaap:RestrictedStockMember2020-10-31 0001113809us-gaap:PerformanceSharesMember2020-10-31 0001113809bbw:TimebasedAndPerformancebasedSharesMember2020-02-022020-10-31 0001113809bbw:TimebasedAndPerformancebasedSharesMember2019-02-032019-11-02 0001113809us-gaap:PerformanceSharesMember2020-10-012020-10-31 0001113809us-gaap:PerformanceSharesMemberbbw:VestingUponAchievementOf20182020ConsolidatedTotalRevenuesGrowthObjectivesMember2020-10-31 0001113809us-gaap:PerformanceSharesMemberbbw:VestingUponAchievementOf20182020ConsolidatedPreTaxIncomeGrowthObjectivesMember2020-10-31 0001113809us-gaap:PerformanceSharesMemberbbw:VestingUponAchievementOf20192021ConsolidatedPretaxIncomeGrowthObjectivesMember2020-10-31 0001113809us-gaap:PerformanceSharesMemberbbw:VestingUponAchievementOf20202022ConsolidatedLiquidityAndStrategicPerformanceObjectivesMember2020-10-31 0001113809us-gaap:PerformanceSharesMemberbbw:VestingUponAchievementOf20202022ConsolidatedEarningsBeforeInterestAndTaxesEbitGrowthObjectivesMember2020-10-31 0001113809us-gaap:CommonStockMember2020-08-01 0001113809us-gaap:AdditionalPaidInCapitalMember2020-08-01 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-08-01 0001113809us-gaap:RetainedEarningsMember2020-08-01 00011138092020-08-01 0001113809us-gaap:CommonStockMember2019-08-03 0001113809us-gaap:AdditionalPaidInCapitalMember2019-08-03 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-08-03 0001113809us-gaap:RetainedEarningsMember2019-08-03 00011138092019-08-03 0001113809us-gaap:CommonStockMember2020-08-022020-10-31 0001113809us-gaap:AdditionalPaidInCapitalMember2020-08-022020-10-31 0001113809us-gaap:CommonStockMember2019-08-042019-11-02 0001113809us-gaap:AdditionalPaidInCapitalMember2019-08-042019-11-02 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-08-022020-10-31 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-08-042019-11-02 0001113809us-gaap:RetainedEarningsMember2020-08-022020-10-31 0001113809us-gaap:RetainedEarningsMember2019-08-042019-11-02 0001113809us-gaap:CommonStockMember2020-10-31 0001113809us-gaap:AdditionalPaidInCapitalMember2020-10-31 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-10-31 0001113809us-gaap:RetainedEarningsMember2020-10-31 0001113809us-gaap:CommonStockMember2019-11-02 0001113809us-gaap:AdditionalPaidInCapitalMember2019-11-02 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-11-02 0001113809us-gaap:RetainedEarningsMember2019-11-02 0001113809us-gaap:CommonStockMember2020-02-01 0001113809us-gaap:AdditionalPaidInCapitalMember2020-02-01 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-02-01 0001113809us-gaap:RetainedEarningsMember2020-02-01 0001113809us-gaap:CommonStockMember2019-02-02 0001113809us-gaap:AdditionalPaidInCapitalMember2019-02-02 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-02-02 0001113809us-gaap:RetainedEarningsMember2019-02-02 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:RetainedEarningsMember2019-02-02 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-02-02 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:CommonStockMember2020-02-01 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:AdditionalPaidInCapitalMember2020-02-01 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:AccumulatedOtherComprehensiveIncomeMember2020-02-01 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:RetainedEarningsMember2020-02-01 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMember2020-02-01 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:CommonStockMember2019-02-02 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:AdditionalPaidInCapitalMember2019-02-02 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:AccumulatedOtherComprehensiveIncomeMember2019-02-02 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMemberus-gaap:RetainedEarningsMember2019-02-02 0001113809srt:CumulativeEffectPeriodOfAdoptionAdjustedBalanceMember2019-02-02 0001113809us-gaap:CommonStockMember2020-02-022020-10-31 0001113809us-gaap:AdditionalPaidInCapitalMember2020-02-022020-10-31 0001113809us-gaap:CommonStockMember2019-02-032019-11-02 0001113809us-gaap:AdditionalPaidInCapitalMember2019-02-032019-11-02 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-02-022020-10-31 0001113809us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-02-032019-11-02 0001113809us-gaap:RetainedEarningsMember2020-02-022020-10-31 0001113809us-gaap:RetainedEarningsMember2019-02-032019-11-02 0001113809bbw:TheAugust2017ShareRepurchaseProgramMember2017-08-31 0001113809bbw:TheAugust2017ShareRepurchaseProgramMember2017-08-312020-10-31 0001113809bbw:TheAugust2017ShareRepurchaseProgramMember2020-10-31 0001113809us-gaap:EmployeeStockOptionMember2020-08-022020-10-31 0001113809us-gaap:EmployeeStockOptionMember2020-02-022020-10-31 0001113809us-gaap:EmployeeStockOptionMember2019-08-042019-11-02 0001113809us-gaap:EmployeeStockOptionMember2019-02-032019-11-02 0001113809bbw:CommercialMember2020-08-022020-10-31 0001113809bbw:InternationalFranchisingMember2020-08-022020-10-31 0001113809bbw:DirectToConsumerMember2019-08-042019-11-02 0001113809bbw:CommercialMember2019-08-042019-11-02 0001113809bbw:InternationalFranchisingMember2019-08-042019-11-02 0001113809bbw:DirectToConsumerMember2020-02-022020-10-31 0001113809bbw:CommercialMember2020-02-022020-10-31 0001113809bbw:InternationalFranchisingMember2020-02-022020-10-31 0001113809bbw:DirectToConsumerMember2019-02-032019-11-02 0001113809bbw:CommercialMember2019-02-032019-11-02 0001113809bbw:InternationalFranchisingMember2019-02-032019-11-02 0001113809bbw:DirectToConsumerMember2020-10-31 0001113809bbw:CommercialMember2020-10-31 0001113809bbw:DirectToConsumerMember2019-11-02 0001113809bbw:CommercialMember2019-11-02 0001113809bbw:InternationalFranchisingMember2019-11-02 0001113809srt:NorthAmericaMember2020-08-022020-10-31 0001113809srt:EuropeMember2020-08-022020-10-31 0001113809bbw:OtherGeographicRegionMember2020-08-022020-10-31 0001113809srt:NorthAmericaMember2019-08-042019-11-02 0001113809srt:EuropeMember2019-08-042019-11-02 0001113809bbw:OtherGeographicRegionMember2019-08-042019-11-02 0001113809srt:NorthAmericaMember2020-02-022020-10-31 0001113809srt:EuropeMember2020-02-022020-10-31 0001113809bbw:OtherGeographicRegionMember2020-02-022020-10-31 0001113809srt:NorthAmericaMember2020-10-31 0001113809srt:EuropeMember2020-10-31 0001113809bbw:OtherGeographicRegionMember2020-10-31 0001113809srt:NorthAmericaMember2019-02-032019-11-02 0001113809srt:EuropeMember2019-02-032019-11-02 0001113809bbw:OtherGeographicRegionMember2019-02-032019-11-02 0001113809srt:NorthAmericaMember2019-11-02 0001113809srt:EuropeMember2019-11-02 0001113809bbw:OtherGeographicRegionMember2019-11-02 0001113809us-gaap:RevolvingCreditFacilityMemberbbw:PncBankMember2020-08-25 0001113809bbw:SwinglineLoansMemberbbw:PncBankMember2020-08-25 0001113809us-gaap:LetterOfCreditMemberbbw:PncBankMember2020-08-25 0001113809us-gaap:RevolvingCreditFacilityMemberbbw:PncBankMembersrt:MinimumMember2020-08-252020-08-25 0001113809us-gaap:RevolvingCreditFacilityMemberbbw:PncBankMembersrt:MaximumMember2020-08-252020-08-25 0001113809us-gaap:RevolvingCreditFacilityMemberbbw:PncBankMember2020-08-252020-08-25 0001113809us-gaap:RevolvingCreditFacilityMemberbbw:PncBankMember2020-10-31 0001113809bbw:UsBankNationalAssociationMemberus-gaap:LineOfCreditMember2020-05-28 0001113809bbw:UsBankNationalAssociationMemberus-gaap:LineOfCreditMember2020-09-30 0001113809us-gaap:LetterOfCreditMemberbbw:UsBankNationalAssociationMember2020-09-30
 
 

FORM 10-Q

 



 

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 October 31, 2020

 

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.)

 

 

 

415 South 18th St.

St. Louis, Missouri

63103

(Address of Principal Executive Offices)

(Zip Code)

 

(314) 423-8000

(Registrant’s Telephone Number, Including Area Code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock

BBW

New York Stock Exchange

 

 

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, every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No   ☐

 

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

 

Large accelerated filer  ☐

Accelerated filer

 

 

Non-accelerated filer ☐

Smaller reporting company 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 14(a) of the Exchange Act. ☐    

 

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 December 7, 2020, there were 15,960,262 issued and outstanding shares of the registrant’s common stock.

 

 

 

BUILD-A-BEAR WORKSHOP, INC.

INDEX TO FORM 10-Q

 

 

Page

Part I Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited)

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

Part II Other Information

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 6.

Exhibits

33

 

 

Signatures

35

 

 

 

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)

 

  

October 31,

  

February 1,

  

November 2,

 
  

2020

  

2020

  

2019

 
  

(Unaudited)

      

(Unaudited)

 

ASSETS

 

Current assets:

            
Cash and cash equivalents $25,809  $26,726  $6,167 
Inventories, net  51,501   53,381   66,205 
Receivables, net  7,950   11,526   10,250 
Prepaid expenses and other current assets  5,427   7,117   6,327 

Total current assets

  90,687   98,750   88,949 
             
Operating lease right-of-use asset  109,757   126,144   135,810 
Property and equipment, net  55,421   65,855   65,954 
Deferred tax assets  -   3,411   3,203 
Other assets, net  3,572   3,102   2,761 

Total Assets

 $259,437  $297,262  $296,677 
             

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

            
Accounts payable $14,527  $15,680  $18,390 
Accrued expenses  19,856   16,536   9,985 
Operating lease liability short term  35,489   30,912   31,537 
Gift cards and customer deposits  19,070   20,231   19,141 
Deferred revenue and other  2,364   2,605   2,347 

Total current liabilities

  91,306   85,964   81,400 
             
Operating lease liability long term  107,653   119,625   130,394 
Deferred franchise revenue  866   1,325   1,289 
Other liabilities  2,913   1,717   1,651 
             

Stockholders' equity:

            

Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at October 31, 2020, February 1, 2020 and November 2, 2019

  -   -   - 
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 15,960,262, 15,205,981 and 15,219,915 shares, respectively  160   152   152 
Additional paid-in capital  72,344   70,633   69,955 
Accumulated other comprehensive loss  (12,277)  (12,079)  (11,927)
Retained (deficit)/earnings  (3,528)  29,925   23,763 

Total stockholders' equity

  56,699   88,631   81,943 

Total Liabilities and Stockholders' Equity

 $259,437  $297,262  $296,677 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

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

 

  

Thirteen weeks ended

  

Thirty-nine weeks ended

 
  

October 31,

  

November 2,

  

October 31,

  

November 2,

 
  

2020

  

2019

  

2020

  

2019

 

Revenues:

                

Net retail sales

 $72,368  $66,575  $157,354  $222,837 

Commercial revenue

  1,858   2,560   3,056   8,507 

International franchising

  447   1,249   1,240   2,616 

Total revenues

  74,673   70,384   161,650   233,960 
                 

Costs and expenses:

                

Cost of merchandise sold - retail

  38,715   40,284   102,300   126,722 

Store asset impairment

  162   -   7,044   - 

Cost of merchandise sold - commercial

  782   1,412   1,309   3,887 

Cost of merchandise sold - international franchising

  251   962   636   2,417 

Total cost of merchandise sold

  39,910   42,658   111,289   133,026 

Consolidated gross profit

  34,763   27,726   50,361   100,934 

Selling, general and administrative expense

  33,091   35,412   81,332   106,940 

Interest expense, net

  2   8   6   21 

Income (loss) before income taxes

  1,670   (7,694)  (30,977)  (6,027)

Income tax expense (benefit)

  10   (1,821)  2,476   (126)

Net income (loss)

 $1,660  $(5,873) $(33,453) $(5,901)
                 

Foreign currency translation adjustment

  26   (349)  (198)  92 

Comprehensive income (loss)

 $1,686  $(6,222) $(33,651) $(5,809)
                 

Income (loss) per common share:

                
Basic $0.11  $(0.40) $(2.24) $(0.40)
Diluted $0.11  $(0.40) $(2.24) $(0.40)
                 

Shares used in computing common per share amounts:

                

Basic

  14,999,786   14,752,307   14,923,304   14,697,592 

Diluted

  15,220,432   14,752,307   14,923,304   14,697,592 

 

 See accompanying notes to condensed consolidated financial statements. 

 

 

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands) 

 

 

  

Thirty-nine weeks ended

 
  

October 31,

  

November 2,

 
  

2020

  

2019

 
         

Cash flows provided by (used in) operating activities:

        

Net loss

 $(33,453) $(5,901)

Adjustments to reconcile net less to net cash provided by (used in) operating activities:

        
Depreciation and amortization  9,905   10,359 
Share-based and performance-based stock compensation  1,250   1,827 
Impairment of right-of-use assets and fixed assets  7,044   - 
Deferred taxes  3,388   (106)
Provision for doubtful accounts  577   (140)
Loss on disposal of property and equipment  162   33 

Change in assets and liabilities:

        
Inventories, net  1,728   (7,971)
Receivables, net  2,944   370 
Prepaid expenses and other assets  1,667   6,610 
Accounts payable and accrued expenses  4,075   (4,715)
Operating leases  5,449   1,892 
Gift cards and customer deposits  (1,128)  (2,916)
Deferred revenue  (540)  (905)

Net cash provided by (used in) operating activities

  3,068   (1,563)

Cash flows used in investing activities:

        
Purchases of property and equipment  (4,029)  (10,099)

Net cash used in investing activities

  (4,029)  (10,099)

Cash flows used in financing activities:

        
Proceeds from the exercise of employee stock options, net of withholding tax payments  (114)  (245)

Net cash used in financing activities

  (114)  (245)
Effect of exchange rates on cash  143   180 
Net decrease in cash and cash equivalents  (932)  (11,727)
Cash and cash equivalents, beginning of period  28,395   19,547 

Cash and cash equivalents, end of period

 $27,463  $7,820 
         

Supplemental disclosure of cash flow information:

        
Total cash, cash equivalents and restricted cash $27,463  $7,820 
Less: Restricted cash from long-term deposits $(1,654) $(1,653)
Total cash and cash equivalents $25,809  $6,167 
         
Net cash received (paid) during the period for income taxes $135  $2,055 


See accompanying notes to condensed consolidated financial statements.

 

 

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 February 1, 2020 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 February 1, 2020, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2020. 

 

COVID-19 Pandemic

 

In March 2020, the World Health Organization announced that COVID-19 is a global pandemic. On  March 17, 2020, the Company announced the temporary closure of all corporately-managed stores in the United States, Canada, the United Kingdom, Denmark and Ireland as a result of local and governmental restrictions due to the pandemic. In addition, on March 26, 2020, the Company announced the temporary closure of its warehouse and e-commerce fulfillment center in Ohio as it reviewed its process related to workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention. The Ohio warehouse was reopened on April 1, 2020 following the review and reconfiguration of workflow and workspaces to further promote social distancing and minimize interaction as merchandise is shipped to stores and e-commerce orders are fulfilled. The Company took various initial steps in response to COVID-19, such as furloughing employees, reducing compensation for all corporate employees including its executive officers, delaying payment of bonuses and 401(k) plan matching contributions, reducing planned capital expenditures to maintenance levels, deferring payments through extension of terms, and leveraging outstanding rent payments to landlords and high optionality in the leases in its real estate portfolio to aggressively renegotiate more favorable terms. During the second quarter, the Company reopened the vast majority of its corporately-managed store locations, many with shortened hours of operations and lower traffic levels, saw strong digital demand on its e-commerce site, accelerated its omni-channel competencies, and continued disciplined expense management and cash preservation which included the renegotiation of lease terms to include rent reductions, deferrals and abatements.

 

Operational and Distribution Network Update for the third quarter due to COVID-19:

 

 
During the third quarter, the vast majority of the Company's corporately-managed store fleet remained opened in accordance with local law, with temporary closures and other related restrictions (e.g. safe at home or stay at home orders) continuing to fluctuate on a localized level, resulting in 7% fewer operating days in the third quarter. The Company ended the quarter with approximately 98% of its corporately-managed store locations open for operations, although certain stores in the United Kingdom were closed following the end of the third quarter, as discussed below.
 
The Company’s e-commerce site was fully operational throughout the quarter. The Company continued to see strong digital demand with growth rates at triple-digit levels compared to the comparable period in 2019.
 The Company continued to enhance its omni-channel capabilities of “Buy Online, Ship From Store” and “Buy Online, Pick Up In Store” by expanding the number of stores that are eligible to fulfill digital orders including the initialization of “Click and Collect” orders in its United Kingdom locations, a form of "Buy Online, Pick Up In Store" for U.K. operations. The Company believes these programs are an efficient use of available store labor and inventory to support the expected ongoing strong digital demand.
 The Company renegotiated lease terms to include rent reductions, deferrals and abatements on 99% of North American locations and almost 90% of those in the UK since the onset of the pandemic.
 The Company maintained disciplined expense management and cash preservation across the business including continued delayed payment of bonuses earned by executive officers for 2019 performance and the Company matching contribution to its 401(k) plan. The Company also continued to limit its capital expenditures to maintenance levels.
7

 

 In light of the Company's improved financial performance, on October 6, 2020, the Company’s Compensation Committee authorized the return of base salaries to the amounts that were effective prior to the salary reductions for all employees, including the Company’s executive officers. The restoration of the base salaries was effective September 27, 2020, and was not retroactive to the date salaries were reduced in March 2020.   
 
The Company’s supply chain experienced no significant disruptions in the quarter with the Company able to receive deliveries in a timely manner.
 
The Company’s franchisees ended the quarter with 74 locations open and operating as permitted by law across Africa, Asia, Australia, the Middle East and South America, while one location remained temporarily closed due to COVID- 19.
 Select locations associated with the Company’s third-party retail model were operating at the end of the quarter.


              At the beginning of the fourth quarter, the Company temporarily closed 43 stores in the United Kingdom as a result of governmental COVID-19 mandates. These temporary closures were in addition to two stores that were temporarily closed in Ireland shortly before the end of the third quarter due to  COVID-19 mandates. As of December 2, 2020, 39 of these locations in the United Kingdom reopened as restrictions in those jurisdictions were eased.

 

The Company's operating results for the thirteen and thirty-nine weeks ended October 31, 2020  may not be indicative of the results that may be expected for the fiscal year ending January 30, 2021 primarily due to the impact of the COVID-19 pandemic. The pandemic has had, and will continue to have, a negative impact on the Company's retail store operations and financial condition and will continue to affect its cash flows, although the full extent is uncertain at this time. As the pandemic continues to evolve, the extent of the future impact will depend on additional developments, including, but not limited to, the duration and extent of any temporary closing of certain of its stores, the enactment and duration of governmentally-mandated quarantines, shelter-in-place orders and other travel restrictions within the U.S. and other affected countries, the duration and spread of the pandemic (including any relapses), its severity, the actions to contain the virus and/or treat its impact including approval and distribution of vaccines, the duration, timing and severity of the impact on consumer spending (including the recession resulting from the pandemic), and how quickly and to what extent economic and operating conditions can recover and resume, all of which are highly uncertain and cannot be predicted.

 

In addition, the Company’s business is subject to seasonal fluctuations, with significant portions of the Company’s revenues and net income being realized during the fourth quarter of the fiscal year due to the holiday selling season. Therefore, the results for the thirteen and thirty-nine weeks ended October 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2021, or for any other future interim period or for any future year.

 

The Company had not borrowed on its credit facility as of December 7, 2020. Inclusive of the Company's credit facility, the Company's liquidity may be negatively impacted if the pandemic results in the temporary closure of certain of its stores in various locations due to local mandates or requirements. The Company believes that its current cash balance, access to its revolving credit facility, along with the expense management and cash preservation actions taken, provide it with sufficient, current liquidity. Due to the ongoing uncertainty regarding the future impact of COVID-19 and consumer shopping behavior, the Company expects to continue to carefully manage its cash position, and may take further actions to further improve its cash position, including but not limited to, monetizing Company assets, continuing its more aggressive inventory management, reimplementing employee furloughs or further position eliminations, and continuing to forego capital expenditures and other discretionary expenses.

 

Significant Accounting Policies

 

The Company's significant accounting policies are summarized in Note 2 to the consolidated financial statements included in its Form 10-K for the year ended February 1, 2020. An update and supplement to these policies is needed for the Company's accounting for government assistance and long-live asset impairment.

 

Government Grants

 

The Company applied for reimbursement of payroll expenses in certain jurisdictions through COVID-19 related government programs for payroll paid to employees who were paid while not providing services to the Company during the first three quarters of fiscal 2020. These programs require the Company to apply to the government for reimbursement of wages based on the applicable laws and programs within each jurisdiction. Through review of and application to these programs, the Company believes it qualifies for such reimbursement, and it is probable that the expenses will be reimbursed. As a result, the Company

 

8

 

recorded a reduction to expenses of approximately $0.3 million for the thirteen weeks ended October 31, 2020 and $3.3 million for the thirty-nine weeks ended October 31, 2020 related to these wages within the Selling, general and administrative line in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the period ending October 31, 2020 and as of the end of the third quarter $1.2 million of the reimbursement was outstanding from tax authorities.

 

Long-live Assets, including right-of-use operating lease assets

 

Whenever facts and circumstances indicate that the carrying value of long-lived assets and right-of-use operating lease assets  may not be recoverable, the carrying value of those assets is reviewed. If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. The Company typically performs an annual assessment of its store assets in the direct-to-consumer (“DTC”) segment, based on operating performance and forecasts of future performance. As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and identified indicators of impairment for its store fleet. The Company performed the recoverability test for these assets by comparing the estimated undiscounted future cash flows over the remaining useful life for its long-lived assets and right-of-use assets and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted future cash flows for the remaining useful life of the respective assets.

 

The Company estimated fair values of these long-lived assets based on its discounted future cash flows for the remaining useful life of the asset or market rent assessments. The Company's analysis indicated that the carrying values of certain of its long-lived assets exceeded their respective fair values determined by the discounted future cash flow analysis or the market rent assessment. As a result, the Company recognized an impairment charge of $0.2 million for the thirteen weeks ended October 31, 2020, with approximately $0.1 million for right-of-use operating lease assets and $0.1 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, and machinery and equipment. For the thirty-nine weeks ended October 31, 2020 the Company has recognized impairment charges totaling $7.0 million, with approximately $3.6 million for right-of-use operating lease assets and $3.4 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, machinery and equipment, and construction-in-progress. These charges are recorded in Store asset impairment within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the respective periods. These impairment charges were primarily driven by lower than projected revenues and the effect of temporary store closures as a result of the COVID-19 pandemic. The majority of the impairment was recorded for assets associated with stores in North America. For the thirteen weeks ended November 2, 2019, the Company recorded no impairment charges and for the thirty-nine weeks ended November 2, 2019 the Company recorded impairments charges of $5.9 million on right-of-use assets into retained earnings as a result of the adoption of ASC 842, Leases.

 

The determination of estimated market rent used in the fair value estimate of the Company’s operating lease assets included within the respective store asset group requires significant management judgment. Changes in these estimates could have a significant impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge. The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses including market rents, and market conditions.

 

 

2. Revenue

 

Nearly all the Company’s revenue is derived from retail sales (including from its e-commerce sites) and is recognized when control of the merchandise is transferred to the customer. The Company's disaggregated revenue is fully disclosed as net sales to external customers by reporting segment and by geographic area (See Note 11 — Segment Information for additional information). The Company's direct-to-consumer reporting segment represents 97% of consolidated revenue for the third quarter of fiscal 2020. The majority of these sales transactions are single performance obligations that are recorded when control is transferred to the customer.

 

The following is a description of principal activities from which the Company generates its revenue, by reportable segment.

 

The Company’s direct-to-consumer segment includes the operating activities of corporately-managed stores, other retail-delivered operations and online sales. Direct-to-consumer revenue is recognized when control of the merchandise is transferred to the customer and for the Company's online sales, generally upon estimated delivery to the customer. Revenue is measured as the amount of consideration, including any discounts or incentives, the Company expects to receive in exchange for transferring the merchandise. Product returns have historically averaged less than one-half of one percent due to the personalized and interactive

 

9

 

nature of sales, where consumers customize their own stuffed animal. The Company has elected to exclude from revenue all collected sales, value added and other taxes paid by its customers.

 

For the Company’s gift cards, revenue, including any related gift card discounts, is deferred for single transactions until redemption. Historically, the vast majority of gift card redemptions have occurred within three years of acquisition and approximately 75% of gift cards have been redeemed within the first twelve months. In addition, unredeemed gift cards or breakage revenue is recorded in proportion to the customer’s redemption period using an estimated breakage rate based on historical experience. For certain qualifying transactions, a portion of revenue transactions are deferred for the obligation related to the Company’s loyalty program or when a material right in the form of a future discount is granted. In these transactions, the transaction price is allocated to the separate performance obligations based on the relative standalone selling price. The standalone selling price for the points earned for the Company's loyalty program is estimated using the net retail value of the merchandise purchased, adjusted for estimated breakage based on historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. In regard to the consolidated balance sheet, contract liabilities for gift cards are classified as gift cards and customer deposits.

 

The Company’s commercial segment includes transactions with other businesses and are mainly comprised of licensing the Company’s intellectual properties for third-party use and wholesale sales of merchandise, including supplies and fixtures. Revenue for wholesale sales is recognized when control of the merchandise or fixtures is transferred to the customer, which generally occurs upon delivery to the customer. The license agreements provide the customer with highly interrelated rights that are not distinct in the context of the contract and therefore, have been accounted for as a single performance obligation and recognized as licensee sales occur. If the contract includes a guaranteed minimum, the minimum guarantee is recognized on a straight-line basis over the guarantee term until such time as royalties earned through licensee sales exceed the minimum guarantee. The Company classifies these guaranteed minimum contract liabilities as deferred revenue on the consolidated balance sheet.

 

The Company’s international franchising segment includes the activities with franchisees who operate store locations in certain countries and includes development fees, sales-based royalties and merchandise, including supplies and fixture sales. The Company's obligations under the franchise agreements are ongoing and include operations and product development support and training, generally concentrated around new store openings. These obligations are highly interrelated rights that are not distinct in the context of the contract and, therefore, have been accounted for as a single performance obligation and recognized as franchisee sales occur. If the contract includes an initial, one-time nonrefundable development fee, this fee is recognized on a straight-line basis over the term of the franchise agreement, which may extend for periods up to 25 years, or if the agreement is terminated prior to the end of the term. The Company classifies these initial, one-time nonrefundable franchise fee contract liabilities as deferred revenue on the consolidated balance sheet. Revenue from merchandise and fixture sales is recognized when control is transferred to the franchisee which generally occurs upon delivery to the customer.

 

The Company also incurs expenses directly related to the startup of new franchises, which may include finder’s fees, legal and travel costs, expenses related to its ongoing support of the franchisees and employee compensation. Accordingly, the Company’s policy is to capitalize any finder’s fee, an incremental cost, and expense all other costs as incurred. Additionally, the Company amortizes these capitalized costs into expense in the same pattern as the development fee's recording of revenue as described previously.

 

 

3. Leases

 

The majority of the Company's leases relate to retail stores and corporate offices. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Most retail store leases have an original term of a five to ten-year base period and may include renewal options to extend the lease term beyond the initial base period and are typically much shorter than the original lease term giving the Company lease optionality. Some leases also include early termination options, which can be exercised under specific conditions. Additionally, the Company may operate stores for a period of time on a month-to-month basis after the expiration of the lease term. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property.

 

10

 

The table below presents certain information related to the lease costs for operating leases for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 (in thousands).

 

  

Thirteen weeks ended

  

Thirty-nine weeks ended

 
  

October 31, 2020

  

November 2, 2019

  

October 31, 2020

  

November 2, 2019

 
                 

Operating lease costs

  8,880   10,260   28,464   31,030 

Variable lease costs

  1,000   514   1,422   1,828 

Short term lease costs

  17   255   111   940 

Total Operating Lease costs

 $9,897  $11,029  $29,997  $33,798 

 

Other information

 

The table below presents supplemental cash flow information related to leases for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 (in thousands).

 

  

Thirteen weeks ended

  

Thirty-nine weeks ended

 
  

October 31, 2020

  

November 2, 2019

  

October 31, 2020

  

November 2, 2019

 

Operating cash flows for operating leases

  9,949   10,872   25,878   33,061 

 

As of October 31, 2020 and November 2, 2019, the weighted-average remaining operating lease term was 5.0 years and 5.8 years, respectively, and the weighted-average discount rate was 6.0% and 5.9%, respectively, for operating leases recognized on the Company's Condensed Consolidated Balance Sheets.

 

As discussed above, the Company incurred impairment charges during the thirteen and thirty-nine weeks ended October 31, 2020, of $0.1 million and $3.6 million, respectively, against right-of-use operating lease assets.

 

During the second and third quarters, the Company renegotiated a large portion of its store lease portfolio resulting in a combination of rent reductions, deferments, and abatements in North America and the United Kingdom and Ireland. These negotiations have increased the percentage of leases with variable rent structures resulting in the increase in variable rent expense for the thirteen weeks ended October 31, 2020 compared to thirteen weeks ended November 2, 2019. For these renegotiated leases, under ASC 842 Leases, the Company assessed if the renegotiated leases represented a new, separate contract or a modification of the existing lease. The Company concluded all renegotiated leases represented a modification of terms of each existing agreement. As such, the Company remeasured the lease liability and decreased the carrying amount of the right-of-use asset in proportion to the modification of the existing lease and recognized in profit or loss any difference between the reduction in the lease liability and the reduction in the right-of-us asset, which had an immaterial impact on the second quarter results. The Company remains in negotiations with certain landlords for those stores not already renegotiated and expects further rent reductions, deferments or abatements to be recognized in the fourth quarter of the current fiscal year.

 

Undiscounted cash flows

 

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the balance sheet (in thousands).

 

Operating Leases

   
2020  11,890 
2021  40,496 
2022  30,635 
2023  25,716 
2024  21,532 
Thereafter  35,861 

Total minimum lease payments

  166,130 
Less: amount of lease payments representing interest  (22,988)

Present value of future minimum lease payments

  143,142 

Less: current obligations under leases

  (35,489)

Long-term lease obligations

 $107,653 

 

As of October 31, 2020, the Company had an additional executed lease that had not yet commenced with operating lease liabilities of $1.3 million. This lease is expected to commence in 2021 with a lease term of ten years.

 

11

 

4. Prepaid Expenses and Other Current Assets

 

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

 

  

October 31,

  

February 1,

  

November 2,

 
  

2020

  

2020

  

2019

 
Prepaid occupancy (1) $691  $1,097  $1,426 
Prepaid income taxes  233   164   879 
Prepaid insurance  31   628   132 
Prepaid gift card fees  1,312   1,413   1,285 
Other (2)  3,160   3,815   2,605 
Total $5,427  $7,117  $6,327 

 

 

(1)

Prepaid occupancy consists of prepaid expenses related to non-lease components.

 (2)Other consists primarily of prepaid expense related to IT maintenance contracts and software as a service.

 

 

5. Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

  

October 31,

  

February 1,

  

November 2,

 
  

2020

  

2020

  

2019

 
Accrued wages, bonuses and related expenses $14,844  $13,373  $8,116 
Sales and value added taxes payable  3,317   1,489   1,360 
Accrued rent and related expenses (1)  1,596   726   491 
Current income taxes payable  99   948   18 

Total

 $19,856  $16,536  $9,985 

 

 

(1)

Accrued rent and related expenses consist of accrued costs associated with non-lease components.

 

6. Stock-based Compensation

 

On April 14, 2020, the Board of Directors (the “Board”) of Build-A-Bear Workshop, Inc. (the “Company”) adopted, subject to stockholder approval, the Build-A-Bear Workshop, Inc. 2020 Omnibus Incentive Plan (the “2020 Incentive Plan”). On June 11, 2020, at the Company’s 2020 Annual Meeting of Stockholders (the “Annual Meeting”), the Company’s stockholders approved the 2020 Incentive Plan. The 2020 Incentive Plan, which is administered by the Compensation and Development Committee of the Board, permits the grant of stock options (including both incentive and non-qualified stock options), stock appreciation rights, other stock-based awards, including restricted stock and restricted stock units, cash-based awards, and performance awards pursuant to the terms of the 2020 Incentive Plan. The 2020 Incentive Plan will terminate on April 14, 2030, unless earlier terminated by the Board. The number of shares of the Company’s common stock authorized for issuance under the 2020 Incentive Plan is 1,000,000, plus shares of stock that remained available for issuance under the Build-A-Bear Workshop, Inc. 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) at the time the 2020 Incentive Plan was approved by the Company’s stockholders, and shares that are subject to outstanding awards made under the 2017 Incentive Plan that on or after April 14, 2020 may be forfeited, expire or be settled for cash.

 

For the thirteen weeks ended October 31, 2020 and November 2, 2019, Selling, general and administrative expense included $0.5 million and $0.4 million, respectively, of stock-based compensation expense, and for the thirty-nine weeks ended October 31, 2020 and November 2, 2019, Selling, general and administrative expense included $1.3 million and $1.8 million, respectively. As of October 31, 2020, there was $2.8 million of total unrecognized compensation expense related to unvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 1.3 years.

 

12

 

The following table is a summary of the balances and activity for stock options for the thirty-nine weeks ended October 31, 2020:

 

  

Options

 
  

Shares

  Weighted Average Exercise Price 

Outstanding, February 1, 2020

  923,254  $9.76 
Granted  -   - 
Exercised  -   - 
Forfeited  -   - 
Canceled or expired  (102,516)  8.13 
Outstanding, October 31, 2020  820,738  $9.97 

 

The following table is a summary of the balances and activity related to time-based and performance-based restricted stock for the thirty-nine weeks ended October 31, 2020:

 

  

Time-Based Restricted Stock

  

Performance-Based Restricted Stock

 
  

Shares

  Weighted Average Grant Date Fair Value  

Shares

  Weighted Average Grant Date Fair Value 

Outstanding, February 1, 2020

  453,403  $6.71   262,964  $7.59 
Granted  767,390   2.45   157,374   2.78 
Vested  (260,317)  6.98   (56,380)  8.85 
Forfeited  (18,408)  6.79   -   - 
Canceled or expired  -   -   (27,517)  8.85 
Outstanding, October 31, 2020  942,068  $3.16   336,441  $5.03 

 

The total fair value of shares vested during the thirty-nine weeks ended October 31, 2020 and November 2, 2019 was $2.3 million and $2.1 million, respectively.

 

In October 2020, the Company awarded three-year performance-based restricted stock subject to the achievement of liquidity, profitability and strategic performance objectives for fiscal 2020, 2021 and 2022 and assigned a weighting to each objective. Profitability will be measured by the Company’s achievement of consolidated earnings before interest and taxes (“EBIT”). The EBIT targets for the 2021 and 2022 fiscal years were not established by the Compensation and Development Committee of the Board as of the award date. As a result, under ASC 718 Compensation - Stock Compensation the expense related to these EBIT awards will not begin recognition until the targets are established by the Compensation and Development Committee as this portion of the award is not considered granted until the specific targets are established.

 

The outstanding performance shares as of October 31, 2020 consist of the following:

 

  Performance Shares 
     

Unearned shares subject to performance-based restrictions at target:

    

2018 - 2020 consolidated total revenue growth objectives

  20,756 

2018 - 2020 consolidated pre-tax income growth objectives

  62,500 

2019 - 2021 consolidated pre-tax income growth objectives

  95,811 
2020 - 2022 consolidated liquidity and strategic performance objectives  89,168 
2020 - 2022 consolidated earnings before interest and taxes (EBIT) objectives  68,206 

Performance shares outstanding, October 31, 2020

  336,441 

 

13

 
 

7. Income Taxes

 

The Company's effective tax rate was 0.6% and -8.0% for the thirteen and thirty-nine weeks ended October 31, 2020, respectively, compared to 23.7% and 2.1% for the thirteen and thirty-nine weeks ended November 2, 2019, respectively. The 2020 effective tax rate differed from the statutory rate of 21% primarily due to no tax expense or benefit being recorded on the current quarter's pretax income or the year-to-date pretax loss as a full valuation allowance has been recorded globally.  In addition, the first thirty-nine weeks of fiscal 2020 was impacted by the $3.3 million valuation allowance recorded on the beginning balance of the net deferred tax assets in certain jurisdictions.  The 2019 effective tax rate differed from the statutory rate of 21% primarily due to the valuation allowance being recorded in certain foreign loss companies and the $0.2 million tax impact of equity awards vesting.

 

8. Stockholders’ Equity

 

The following table sets forth the changes in stockholders’ equity (in thousands) for the thirteen weeks ended  October 31, 2020 and November 2, 2019 (in thousands):

 

  

For the thirteen weeks ended October 31, 2020

  

For the thirteen weeks ended November 2, 2019

 
                                         
  

Common

          

Retained

      

Common

          

Retained

     
  

stock

  

APIC (1)

  

AOCI (2)

  

earnings/(deficit)

  

Total

  

stock

  

APIC (1)

  

AOCI (2)

  

earnings/(deficit)

  

Total

 

Balance, beginning

 $156  $71,906  $(12,303) $(5,188) $54,571  $152  $70,295  $(11,579) $29,637  $88,505 
Issuance of restricted/performance stock $4  $(4)          -     $(1)          (1)
Stock-based compensation      441           441       (340)          (340)
Shares withheld in lieu of tax withholdings                  -                   - 
Other      1           1       1   1   (1)  1.00 
Other comprehensive income (loss)          26       26           (349)      (349)
Net income (loss)              1,660   1,660               (5,873)  (5,873)

Balance, ending

 $160  $72,344  $(12,277) $(3,528) $56,699  $152  $69,955  $(11,927) $23,763  $81,943 

 

(1) - Additional paid-in capital (“APIC”)

(2) - Accumulated other comprehensive income (loss) (“AOCI”)

 

14

 

The following table sets forth the changes in stockholders’ equity (in thousands) for the thirty-nine weeks ended October 31, 2020 and November 2, 2019 (in thousands):

 

  

For the thirty-nine weeks ended October 31, 2020

  

For the thirty-nine weeks ended November 2, 2019

 
                                         
  

Common

          

Retained

      

Common

          

Retained

     
  

stock

  

APIC (1)

  

AOCI (2)

  

earnings/(deficit)

  

Total

  

stock

  

APIC (1)

  

AOCI (2)

  

earnings/(deficit)

  

Total

 

Balance, beginning

 $152  $70,633  $(12,079) $29,925  $88,631  $150  $69,088  $(12,018) $37,094  $94,314 

Adoption of new accounting standard

  -   -   -   -   -   -   -   -   (7,430)  (7,430)

Subtotal

 $152  $70,633  $(12,079) $29,925  $88,631  $150  $69,088  $(12,018) $29,664  $86,884 

Issuance of restricted/performance stock

  8   491           499   2   (248)          (246)

Stock-based compensation

      1,334           1,334       1,114           1,114 

Shares withheld in lieu of tax withholdings

  (1)  (114)          (115)                  - 

Other

  1              1       1   (1)      0 
Other comprehensive income (loss)          (198)      (198)          92       92 

Net loss

              (33,453)  (33,453)              (5,901)  (5,901)

Balance, ending

 $160  $72,344  $(12,277) $(3,528) $56,699  $152  $69,955  $(11,927) $23,763  $81,943 

 

(1) - Additional paid-in capital (“APIC”)

(2) - Accumulated other comprehensive income (loss) (“AOCI”)

 

In August 2017, the Company’s Board of Directors authorized a share repurchase program of up to $20.0 million. From the date of such authorization through the program expiration on September 30, 2020, the Company had repurchased approximately 1.3 million shares at an average price of $8.75 per share for an aggregate amount of approximately $11.2 million. The Company does not plan to utilize cash to resume share repurchases in fiscal 2020. In addition, the Company's ability to repurchase shares is limited by conditions set forth by its lender in its credit agreement, as described below. 

 

15

 
 

9. Income per Share

 

The following table sets forth the computation of basic and diluted net income/(loss) per share (in thousands, except share and per share data):

 

  

Thirteen weeks ended

  

Thirty-nine weeks ended

 
  

October 31,

  

November 2,

  

October 31,

  

November 2,

 
  

2020

  

2019

  

2020

  

2019

 

NUMERATOR:

                

Net income (loss)

 $1,660  $(5,873) $(33,453) $(5,901)
                 

DENOMINATOR:

                

Weighted average number of common shares outstanding - basic

  14,999,786   14,752,307   14,923,304   14,697,592 

Dilutive effect of share-based awards:

  220,646   -   -   - 

Weighted average number of common shares outstanding - dilutive

  15,220,432   14,752,307   14,923,304   14,697,592 
                 
Basic income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders $0.11  $(0.40) $(2.24) $(0.40)
Diluted income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders $0.11  $(0.40) $(2.24) $(0.40)

 

In calculating the diluted income per share for the thirteen and thirty-nine weeks ended October 31, 2020, options to purchase 822,360 and 849,351 shares of common stock, respectively, that were outstanding at the end of the period were not included in the computation of diluted income per share due to their anti-dilutive effect. For the thirteen and thirty-nine weeks ended November 2, 2019, options to purchase 923,715 and 928,236 shares of common stock, respectively, that were outstanding at the end of the period were not included in the computation of diluted income per share due to their anti-dilutive effect.

 

 

10. Comprehensive Income (Loss)

 

The difference between comprehensive income or loss and net income or loss is the result of foreign currency translation adjustments on the balance sheets of subsidiaries whose functional currency is not the U.S. Dollar. The accumulated other comprehensive income (loss) balance at  October 31, 2020 and November 2, 2019 was comprised entirely of foreign currency translation. For the thirteen weeks ended October 31, 2020 and November 2, 2019, the Company had no reclassifications out of accumulated other comprehensive income (loss).

  

16

 
 

11. Segment Information 

 

The Company’s operations are conducted through three operating segments consisting of direct-to-consumer (“DTC”), commercial and international franchising. The DTC segment includes the operating activities of corporately-managed locations and other retail delivery operations in the U.S., Canada, China, Denmark, Ireland and the United Kingdom (“U.K.”), including the Company’s e-commerce sites and temporary stores. 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 international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Asia, Australia, Mexico, the Middle East, Africa, and South America. 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.

 

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

 

 

  

Direct-to-

      

International

     
  

Consumer

  

Commercial

  

Franchising

  

Total

 

Thirteen weeks ended October 31, 2020

                

Net sales to external customers

 $72,368  $1,858  $447  $74,673 

Income before income taxes

  713   803   154   1,670 
Capital expenditures  651   -   -   651 

Depreciation and amortization

  3,186   8   -   3,194 

Thirteen weeks ended November 2, 2019

                

Net sales to external customers

 $66,575  $2,560  $1,249  $70,384 
(Loss) Income before income taxes  (8,578)  753   131   (7,694)

Capital expenditures

  5,155   -   -   5,155 

Depreciation and amortization

  3,560   -   1   3,561 
                 
Thirty-nine weeks ended October 31, 2020                
Net sales to external customers $157,354  $3,056  $1,240  $161,650 

(Loss) Income before income taxes

  (31,802)  997   (172)  (30,977)
Capital expenditures  4,029   -   -   4,029 
Depreciation and amortization  9,882   23   0   9,905 
Thirty-nine weeks ended November 2, 2019                
Net sales to external customers $222,837  $8,507  $2,616  $233,960 
(Loss) Income before income taxes  (9,385)  3,488   (130)  (6,027)
Capital expenditures  10,099   -   -   10,099 
Depreciation and amortization  10,354   -   5   10,359 

Total Assets as of:

                
October 31, 2020  244,030   7,088   8,319  $259,437 

November 2, 2019

  281,365   7,508   7,804   296,677 

 

17

 

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. Revenues are recognized in the 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 October 31, 2020

                

Net sales to external customers

 $62,768  $11,320  $585  $74,673 

Thirteen weeks ended November 2, 2019

                

Net sales to external customers

 $57,503  $11,557  $1,324  $70,384 
                 
Thirty-nine weeks ended October 31, 2020                
Net sales to external customers $137,404  $23,126  $1,120  $161,650 
Property and equipment, net  51,314   4,107   -   55,421 
Thirty-nine weeks ended November 2, 2019                
Net sales to external customers $198,900  $32,639  $2,421  $233,960 
Property and equipment, net  60,481   5,462   11   65,954 

 

For purposes of this table only:

(1)  North America includes corporately-managed locations in the United States, Canada, Puerto Rico.

(2)  Europe includes corporately-managed locations in the U.K., Ireland, Denmark and franchise businesses in Europe 

(3)  Other includes franchise businesses outside of North America and Europe and includes a corporately-managed location in China 

 

 

12. Contingencies

 

In the normal course of business, the Company is subject to legal proceedings, government inquiries and claims, and other commercial disputes. If one or more of these matters has an unfavorable resolution, it is possible that the results of operations, liquidity or financial position of the Company could be materially affected in any particular period. The Company accrues a liability for these types of contingencies 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. Gain contingencies are recorded when the underlying uncertainty has been settled.

  

Assessments made by the U.K. customs authority in 2012 were appealed by the Company, which has paid the disputed duty, strictly under protest, pending the outcome of the continuing dispute, and this is included in receivables, net in the DTC segment. The U.K. customs authority contested the Company's appeal. In November 2019, the first-tier tribunal issued a ruling that duty was due on some, but not all, of the products at issue. Both the Company and the U.K. customs authority have appealed that ruling. The Company currently expects that the appeal on the matter will be heard by the upper tribunal sometime during the first half of calendar year 2021. The Company maintains a provision against the related receivable, based on a current evaluation of collectability, using the latest facts available in the dispute. As of October 31, 2020, the Company had a gross receivable balance of $4.5 million and a reserve of $3.6 million, leaving a net receivable of $0.9 million. The Company believes that the outcome of this dispute will not have a material adverse impact on its results of operations, liquidity or financial position.

 

 

13. Line of Credit

 

On August 25, 2020, Build-A-Bear Workshop, Inc. entered into a Revolving Credit and Security Agreement among the Company, as borrowing agent; Build-A-Bear Retail Management, Inc., together with the Company, as borrowers; Build-A-Bear Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Card Services LLC and Build-A-Bear Workshop Canada, Ltd.; the lenders party thereto; and PNC Bank, National Association ("PNC Bank"), as agent for lenders.
 
The agreement provides for a senior secured revolving loan in aggregate principal amount of up to $25,000,000 (subject to a borrowing base formula), which may be increased with the consent of the lenders by an amount not to exceed $25,000,000, subject to the conditions set forth in the agreement. The borrowing base under the agreement is based on specified percentages of eligible credit card receivables, eligible inventory and, under certain circumstances, eligible foreign in-transit inventory and, in the discretion of the agent, eligible receivables. The credit agreement provides for swingline loans of up to $5,000,000 and the issuance of standby or commercial letters of credit of up to $5,000,000. Proceeds of the advances under the agreement may be used to (a) repay existing indebtedness owed to U.S. Bank National Association ("U.S. Bank"), (b) pay fees and expenses relating to the
 
transactions contemplated by the credit agreement, and (c) fund ongoing working capital, capital expenditures, permitted acquisitions and general corporate purposes, in each case to the extent permitted under, and as defined in, the agreement. Revolving advances under the agreement will be secured (subject to permitted liens and certain other exceptions) by a first priority lien on substantially all of the personal property of the Company and all of its U.S. and Canadian subsidiaries, including certain receivables (including receivables from the sale of inventory and credit card receivables but excluding certain franchise receivables), equipment and fixtures, intellectual property, inventory and equity interests held by the borrowers and the guarantors in their respective domestic and foreign subsidiaries. The agreement includes a negative covenant with respect to granting a lien on the Company's Ohio warehouse.
 
Borrowings under the agreement bear interest at (a) a base rate determined under the agreement, or (b) the borrower’s option, at a rate based on LIBOR, plus in either case a margin based on the average undrawn availability as determined in accordance with the agreement. The agreement matures on August 25, 2025 (unless terminated earlier in accordance with the terms thereof) and requires compliance with conditions precedent that must be satisfied prior to any borrowing. The agreement also contains various representations, warranties and covenants that the Company considers customary.
 
The agreement requires the Company to comply with one financial covenant, specifically, that the Company maintain availability (as determined in accordance with the agreement) at all times equal to or greater than the greater of (a) 12.5% of the loan cap and (b) $3,125,000 (subject to increase upon exercise of the increase option). The “loan cap” is the lesser of ( 1) $25,000,000 less the outstanding amount of loans and letters of credit under the agreement and ( 2) the borrowing base from time to time under the agreement.  The agreement also contains various information and reporting requirements and provides for various fees customary for an asset-based lending facility. The Company anticipates the annual costs of maintaining the agreement, including interest and fees, will be between $500,000 and $600,000. The agreement contains customary events of default, including without limitation events of default based on payment obligations, material inaccuracies of representations and warranties, covenant defaults, final judgments and orders, unenforceability of the agreement, material ERISA events, change in control, insolvency proceedings, and defaults under certain other obligations. An event of default may cause the applicable interest rate and fees to increase by 2% until such event of default has been cured, waived, or amended. The agreement contains typical negative covenants, including, among other things, that the borrower will not incur indebtedness except for permitted indebtedness or make any investments except for permitted investments, declare dividends or repurchase its stock except as permitted, acquire any subsidiaries except in connection with a permitted acquisition, or merge or consolidate with any other entity or acquire all or substantially all of the assets of any other company outside the ordinary course of business.
 
At the closing date of the agreement and the end of the third quarter, the Company had no outstanding indebtedness under the agreement. As of October 31, 2020, the Company's borrowing base was slightly more than $11.5 million under the agreement. As a result of the $1.0 million letter of credit against the line of credit at the end of the third quarter, the Company's had $10.5 million available for borrowing with PNC Bank.
 
Additionally, on August 25, 2020, upon execution of the agreement with PNC Bank, the Company terminated its existing bank credit line with U.S. Bank, under the Company’s Fourth Amended and Restated Loan Agreement, as amended as of May 28, 2020. The former agreement with U.S. Bank provided for a maximum borrowing capacity of up to $10,000,000, subject to compliance with certain financial tests. The former credit agreement would have matured on September 30, 2020. At the time of termination, the Company did not have any outstanding borrowings under the agreement with U.S. Bank and was in compliance with the amended covenants set forth in the former credit agreement. The $1.0 million letter of credit that was outstanding under the agreement with U.S. Bank at the time of termination was subsequently cancelled and a replacement $1.0 million letter of credit was issued under the credit agreement with PNC Bank.
 
As part of obtaining the new credit agreement, the Company incurred approximately $0.6 million of issuance costs and fees. As previously stated, the Company had no outstanding borrowings at the beginning of the facility, therefore these costs and fees were recorded as a deferred asset within the Other assets, net line item within the Condensed Consolidated Balance Sheets and will be amortized over the length of the five-year agreement.
19

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Notice Regarding Forward-Looking Statements

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, and we undertake no obligation to update these statements except as required by the federal securities laws. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, as filed with the SEC, and include the following:

 

 

our business, operations and financial results have been and will continue to be negatively affected by the COVID-19 pandemic including the temporary closure of retail store locations which continues to fluctuate on a localized basis, presenting ongoing uncertainty relating to our anticipated duration and scope of the pandemic in areas in which we operate, as well as the restrictions imposed by federal, state, and local governments in response to the pandemic;
 

any sustained decline in general global economic conditions, caused by the COVID-19 pandemic or otherwise, could lead to disproportionately reduced consumer demand for our products, including those sold by our third-party retailers, which represent relatively discretionary spending, would cause an adverse effect on our liquidity and profitability;

 

we depend upon the shopping malls and tourist locations in which our corporately-managed stores and our third-party retail locations are situated to attract guests and a decline in consumer traffic, or if such consumer traffic does not return to levels that we saw prior to the COVID-19 pandemic, could adversely affect our financial performance and profitability;

  in connection with the reopening of our stores, we have modified our interactive shopping experience in order to comply with recommended social distancing and sanitation practices.  These modifications could have a negative impact on the appeal of our interactive shopping experience, reduce guest traffic to our stores, and decrease the volume of guest that may be able to enjoy our interactive shopping experience which could adversely impact our ability to operate our stores profitably;
  we may experience store closures in shopping malls and tourist locations and other impacts to our business resulting from civil disturbances;
  we believe the hands-on and interactive nature of our store and high touch service model result in guests forming an emotional connection with our brand, which in turn contributes to the success of our ecommerce platform and drives repeat customer transactions; if the revised experiences we are offering do not create the same guest affinity for our brand, it may adversely affect the value of our brand;
  birthdays and other special occasions have historically been a key driver for store traffic, and our inability to host such events due to COVID restrictions or if our guests are not willing to hold such events at our stores may adversely affect store performance and our overall profitability;
  a significant part of our revenue and net income comes during the holiday selling season; if the COVID-19 pandemic adversely affects consumers spending during this year’s holiday season our financial condition and flexibility could be adversely affected;
 

if we are unable to generate interest in and demand for our interactive retail experience and products, including being able to adjust that experience consistent with our guests' expectations as the general retail economy emerges from the restrictions imposed by the COVID-19 pandemic, and to otherwise identify and respond to consumer preferences in a timely manner, our sales, financial condition and profitability could be adversely affected;

  some of our licensed products are based on feature films with planned theatrical launches, given that the COVID-19 pandemic has negatively impacted theaters and delayed movie releases, the portion of our business associated with these films could be negatively affected, particularly during the holiday season;
  we may be unable to leverage the flexibility within our existing real estate portfolio to capitalize on future real estate opportunities over the near and intermediate term as our leases come up for renewal, and there may be other costs and risks relating to a brick and mortar retail store model such as a lack of available retail store sites on terms acceptable to us as a result;
 

consumer interests change rapidly and our success depends on the ongoing effectiveness of our marketing and online initiatives to build consumer affinity for our brand and drive consumer demand for key products and services;

 

we are subject to a number of risks related to disruptions, failures or security breaches of our information technology infrastructure. If we improperly obtain or are unable to protect our data or violate privacy or security laws such as the GDPR or the General Data Protection Regulation, the CCPA or the California Privacy Rights Act (as adopted), or expectations, we could be subject to liability as well as damage to our reputation;

 

we may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team;

 

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

 

 

 

we may not be able to evolve our store locations over time to align with market trends, successfully diversify our store models and formats in accordance with our strategic goals or otherwise effectively manage our overall portfolio of stores which could adversely affect our ability to grow and could significantly harm our profitability;

 

we rely on a few global supply chain vendors to supply substantially all of our merchandise, and significant price increases or any disruption in their ability to deliver merchandise could harm our ability to source products and supply inventory to our stores;

 

our company-owned distribution center which services the majority of our stores in North America and our third-party distribution center providers used in the western United States and Europe may experience disruptions in their ability to support our stores or may operate inefficiently;

 

●     

our merchandise is manufactured by foreign manufacturers and we transact business in various foreign countries, and the availability and costs of our products, as well as our product pricing, may be negatively affected by risks associated with international manufacturing and trade, tariffs and foreign currency fluctuations;
 

if we are unable to effectively manage our international franchises, attract new franchisees or if the laws relating to our international franchises change, our growth and profitability could be adversely affected and we could be exposed to additional liability;

  we may not be able to operate our international corporately-managed locations profitably;
 

we may fail to renew, register or otherwise protect our trademarks or other intellectual property and may be sued by third parties for infringement or, misappropriation of their proprietary rights, which could be costly, distract our management and personnel and which could result in the diminution in value of our trademarks and other important intellectual property;

 

we may suffer negative publicity or be sued if the manufacturers of our merchandise or of Build-A-Bear branded merchandise sold by our licensees ship any products that do not meet current safety standards or production requirements or if such products are recalled or cause injuries;

 

we may suffer negative publicity or be sued if the manufacturers of our merchandise violate labor laws or engage in practices that consumers believe are unethical;

 

our profitability could be adversely affected by fluctuations in petroleum products prices;

  our business may be adversely impacted at any time by a significant variety of competitive threats;
  we may suffer negative publicity or a decrease in sales or profitability if the products from other companies that we sell in our stores do not meet our quality standards or fail to achieve our sales expectations;
  we may be unsuccessful in engaging in various strategic transactions, which may negatively affect our financial condition and profitability;
  the duration of our plan to not utilize cash to resume share repurchases while we continue to take measure to preserve our cash position may negatively impact our financial condition;
  fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline;
  the market price of our common stock is subject to volatility, which could in turn attract the interest of activist shareholders; and
  our certificate of incorporation and bylaws and Delaware law contain provisions that may prevent or frustrate attempts to replace or remove our current management by our stockholders, even if such replacement or removal may be in our stockholders’ best interests.

 

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 guests participate in the stuffing, dressing, accessorizing and naming of their own teddy bears and other stuffed animals. As of October 31, 2020, we had 358 corporately-managed stores globally and had 75 internationally franchised stores under the Build-A-Bear Workshop brand, with select locations temporarily closed due to government restrictions brought on by the COVID-19 pandemic. In addition to these stores, we sell products on our company-owned e-commerce sites, our franchisees sell products through sites that they manage and our third parties sell products on their sites under wholesale agreements.

 

 

We operate in three segments that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

 

 

Direct-to-Consumer (“DTC”) – Corporately-managed retail stores located in the U.S., Canada, Puerto Rico, the U.K., Ireland, Denmark and China and two e-commerce sites;

 

Commercial – Transactions with other businesses, mainly comprised of wholesale product sales to third-party retailers and licensing our intellectual property, including entertainment properties, for third-party use; and

 

International franchising – Royalties as well as development fees and the sales from products and fixtures from other international operations under franchise agreements.

 

Selected financial data attributable to each segment for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

COVID-19 and Business Update

 

Our results of retail store operations for the thirteen and thirty-nine weeks ended October 31, 2020, were significantly negatively impacted by the effects of COVID-19, reflected by the 7% fewer operating days in the third quarter driven by the significant impact of temporary store closures. As of October 31, 2020, we had reopened the vast majority of our corporately-managed store locations, many with shortened hours of operations and lower traffic levels. This continued to drive consumer spending to our e-commerce sites, which were fully operational throughout the quarter, and which experienced a significant increase in demand. We continued to embrace this trend and worked to capitalize and leverage our investments to become a more digitally-focused organization with initiatives that are in step with our strategic business model:

 

  We delivered our twelfth consecutive quarter of double-digit or greater growth in e-commerce demand and were able to leverage available store labor and inventory to support the heightened digital demand with "buy online, ship from store" and "buy online, pick up in store or curbside" fulfillment options;
  We continued to refine and improve our digital marketing efforts leveraging the added CRM capabilities that come with our engagement with Salesforce to create meaningful consumer journeys that have multiple touch points with the goal of driving sales and ultimately increasing lifetime value;
  We continued to enhance our omni-channel capabilities of “Buy Online, Ship From Store” and “Buy Online, Pick Up In Store” by expanding the number of stores that are eligible to fulfill digital orders including the initialization of “Click and Collect” orders in our U.K. locations, a form of "Buy Online, Pick Up In Store" for U.K. operations. We believe these programs are an efficient use of available store labor and inventory to support the ongoing strong digital demand;
 

We created engaging live streaming events for key promotions such as National Teddy Bear Day and new product introductions as part of the creation and digital delivery of content which is an important part of the expression of our brand and as a tool to drive further connection and generate incremental sales; and

  We have advanced key entertainment platforms, from the increased listenership on Build-A-Bear radio on iHeart to the launch of a new CD to our first live action film in conjunction with Hallmark for the holidays.

 

In response to COVID-19, we maintained our disciplined expense management and cash preservation efforts across all areas of the business by continuing the delay of payment of bonuses earned by executive officers for 2019 performance and the Company matching contribution to its 401(k) plan and we continued to limit our capital expenditures to maintenance levels. On October 6, 2020, our compensation committee authorized the return of base salaries to the amounts that were effective prior to the salary reductions for all employees, including our executive officers. The restoration of the base salaries was effective September 27, 2020, and was not retroactive to the date salaries were reduced in March 2020. In the last six months, due to our high level of strategic lease flexibility, we renegotiated lease terms to include rent reductions, deferrals and abatements on 99% of North American locations and almost 90% of those in the U.K. After these negotiations, we have maintained a high level of lease flexibility with over 70% of our leases still coming up for renewal in the next three years. Our supply chain experienced no significant disruptions during the quarter and we were able to receive deliveries in a timely manner.

 

At the beginning of the fourth quarter, we temporarily closed 43 stores in the United Kingdom as a result of governmental COVID-19 mandates. These temporary closures were in addition to two stores that were temporary closed in Ireland shortly before the end of the third quarter due to COVID-19 mandates. As of December 2, 2020, 39 of these locations in the United Kingdom reopened as restrictions in those jurisdictions were eased.

 

The ultimate economic impact of the COVID-19 pandemic remains highly uncertain, including the duration and severity of the COVID-19 outbreak, actions taken to contain its spread as well as its impact to consumer discretionary spending and the pace of economic recovery if and when effective vaccines are distributed and widely administered and the pandemic subsides.

 

 

Therefore, we currently are not able to estimate the full impact of COVID-19 on our financial condition and future results of operations. In the near term, we expect that this situation will have an adverse effect on our reported results for the fourth fiscal quarter of 2020 and possibly beyond. We will continue to actively monitor the effects of COVID-19 on the retail industry including e-commerce and our own business. Imposition (or re-imposition) of governmental restrictions such as new shelter in place orders or quarantines under the evolving conditions relating to the pandemic, resulting in periods of temporary store closures, changes in consumer shopping behaviors and reductions of consumer discretionary spending would require us to continue to evaluate our business assumptions and estimates. Such conditions would likely result in lower future net sales and cash flow, which could lead to impairment of our store and other assets, as well as increase the risks associated with excess inventory and bad debt. 

 

Retail Stores:

 

The table below sets forth the number of Build-A-Bear Workshop corporately-managed stores in North America, Europe and Asia for the periods presented:

 

   

Thirty-nine weeks ended

 
   

October 31, 2020

   

November 2, 2019

 
   

North America

   

Europe

   

Asia

   

Total

   

North America

   

Europe

   

Asia

   

Total

 

Beginning of period

    316       55       1       372       311       59       1       371  
Opened     3       -       -       3       16       1       -       17  
Closed     (13 )     (4 )     -       (17 )     (12 )     (5 )     -       (17 )

End of period

    306       51       1       358       315       55       1       371  

 

As of October 31, 2020, 40% of our store base was in an updated Discovery format. We also expect to close certain stores in accordance with natural lease events as an ongoing part of our real estate management and day-to-day operational plans. The future of our retail store fleet may include expansion into more non-traditional locations, including concourse format shops and by expansion in other locations outside traditional malls.

 

International Franchise Stores:

 

Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our corporately-managed stores. As of October 31, 2020, we had eight master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 13 countries.

 

The number of franchised stores opened and closed for the periods presented below are summarized as follows:

 

   

Thirty-nine weeks ended

 
    October 31, 2020     November 2, 2019  

Beginning of period

    92       97  
Opened     4       28  
Closed     (21 )     (21 )

End of period

    75       104  

 

As of October 31, 2020, 74 franchised stores were operating and one remained temporarily closed due to COVID-19. In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements. We believe there is a total market potential for approximately 300 international stores outside of the U.S., Canada, the U.K., Ireland and Denmark. We source fixtures and other supplies for our franchisees from China which significantly reduces the capital and lowers the expenses required to open franchises. We are leveraging new formats that have been developed for our corporately-managed locations such as concourses and shop-in-shops with our franchisees.

 

 

Results of Operations

 

The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to cost of merchandise sold being expressed as a percentage of net retail sales, commercial revenue, international franchising, respectively, as well as immaterial rounding:

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

October 31,

   

November 2,

   

October 31,

   

November 2,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

Net retail sales

    96.9 %     94.6 %     97.3 %     95.2 %

Commercial revenue

    2.5       3.6       1.9       3.7  

International franchising

    0.6       1.8       0.8       1.1  

Total revenues

    100.0       100.0       100.0       100.0  
                                 

Costs and expenses:

                               

Cost of merchandise sold - retail (1)

    53.5       60.5       65.0       56.9  

Store asset impairment

    0.2       0.0       4.5       0.0  

Cost of merchandise sold - commercial (1)

    42.1       55.2       42.8       45.7  

Cost of merchandise sold - international franchising (1)

    56.2       77.0       51.3       92.4  

Total cost of merchandise sold

    53.4       60.6       68.8       56.9  

Consolidated gross profit

    46.6       39.5       31.2       43.1  

Selling, general and administrative

    44.3       50.3       50.3       45.7  

Interest expense, net

    0.0       0.0       0.0       0.0  

Income (loss) before income taxes

    2.2       (10.9 )     (19.2 )     (2.6 )

Income tax expense (benefit)

    0.0       (2.6 )     1.5       (0.1 )

Net income (loss)

    2.2       (8.3 )     (20.7 )     (2.5 )
                                 

Retail Gross Margin (2)

    46.5 %     39.5 %     35.0 %     43.1 %

 

(1)

Cost of merchandise sold – retail is expressed as a percentage of net retail sales. Cost of merchandise sold – commercial is expressed as a percentage of commercial revenue. Cost of merchandise sold – international franchising is expressed as a percentage of international franchising revenue.

(2)

Retail gross margin represents net retail sales less cost of merchandise sold - retail; retail gross margin percentage represents retail gross margin divided by net retail sales.

 

 

Thirteen weeks ended October 31, 2020 compared to thirteen weeks ended November 2, 2019

 

Total revenues. Consolidated revenues increased 6.1%, including a 9.2% increase in North America and partially offset by a 2.1% decrease in Europe. A triple-digit increase in consolidated e-commerce sales contributed to the increase in North American sales and reduced the overall decrease in sales in Europe. 

 

Net retail sales for the thirteen weeks ended October 31, 2020 were $72.4 million, compared to $66.6 million for the thirteen weeks ended November 2, 2019, an increase of $5.8 million, or 8.7% compared to the prior year period. The components of this increase are as follows (dollars in millions):

 

   

Thirteen weeks ended

 
   

October 31, 2020

 
Impact from:        
Existing stores   $ (2,307 )
E-commerce   $ 7,991  
New stores     1,040  
Store closures     (1,406 )
Gift card breakage     (182 )
Foreign currency translation     584  
Deferred revenue estimates     72  

Total Change

  $ 5,793  

 

The retail revenue increase was primarily the result of the increase in our e-commerce sales both in North America and the United Kingdom.

 

Commercial revenue was $1.9 million for the thirteen weeks ended October 31, 2020 compared to $2.6 million for the thirteen weeks ended November 2, 2019. The $0.7 million decrease is the result of decreased sales volume from our commercial customers as a result of COVID-19, which we believe is principally because the third-party retail locations serviced by our commercial customers were either temporarily closed or operated under governmentally-mandated restrictions for a portion or all of the third quarter.

 

International franchising revenue was $0.4 million for the thirteen weeks ended October 31, 2020 compared to $1.2 million for the thirteen weeks ended November 2, 2019. The $0.8 million decrease is primarily due to temporary closures of franchise locations due to governmentally-mandated restrictions in response to the COVID-19 pandemic and a reduction in new store openings resulting in a lower level of inventory and fixture sales to franchisees to support these openings.

 

Retail gross margin. Retail gross margin dollars increased $7.4 million to $33.7 million compared to the thirteen weeks ended November 2, 2019. The retail gross margin rate increased 701 basis points primarily driven by a decrease in fixed occupancy costs recorded through the end of the third quarter as a result of rent negotiations during the last six months and an increase in merchandise margin partially offset by increased warehouse and distribution costs.

 

Impairment of long-live assets, including right-of-use assets. As a result of the COVID-19 pandemic, we experienced lower than projected revenues and identified indicators of impairment for our store fleet. We performed an undiscounted future cash flow analysis over the long-lived assets and right-of-use assets for the remaining useful life of the assets and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted future cash flows. We estimated fair values of these long-lived assets based on our discounted future cash flows or market rent assessments. Our analysis indicated that the carrying values of our long-lived assets exceeded their respective fair values. As a result, we recognized an impairment charge of $0.2 million for the thirteen weeks ended October 31, 2020,with approximately $0.1 million for right-of-use operating lease assets and $0.1 million for fixed assets including leasehold improvements, fixtures, furniture and fixtures, machinery and equipment, and construction-in-progress. These charges are recorded in Store asset impairment within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the respective periods. The majority of the impairment was recorded for assets associated with stores in North America. For the thirteen weeks ended November 2, 2019, we recorded no impairment charges.

 

Selling, general and administrative. Selling, general and administrative expenses were $33.1 million for the thirteen weeks ended October 31, 2020, a decrease of $2.3 million compared to the thirteen weeks ended November 2, 2019. The decline was primarily due to lower labor costs resulting from temporary store closures and employee furloughs due to the COVID-19 pandemic, salary reductions, position eliminations, and reduced outside services costs.

 

 

Interest expense, net. Interest expense was $2,000 for the thirteen weeks ended October 31, 2020 compared to interest expense of $8,000 for the thirteen weeks ended November 2, 2019.

 

Benefit/Provision for income taxes. Income tax expense was less than $0.1 million with a tax rate of 0.6% for the thirteen weeks ended October 31, 2020 as compared to a benefit of $1.8 million with a tax rate of 23.7% for the thirteen weeks ended November 2, 2019.  In the third quarter of fiscal 2020, the effective tax rate differed from the statutory rate of 21% primarily due to no tax expense being recorded on the pretax income as a full valuation allowance had been recorded globally and the company has a pretax loss year-to-date.  In the third quarter of fiscal 2019, the effective tax rate differed from the statutory rate of 21% primarily due to the valuation allowance being recorded in certain foreign loss companies.

 

Thirty-nine weeks ended October 31, 2020 compared to thirty-nine weeks ended November 2, 2019

 

Total revenues. Consolidated revenues decreased 30.9%, including a 30.9%