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BBW > SEC Filings for BBW > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BUILD A BEAR WORKSHOP INC

Form 10-Q for BUILD A BEAR WORKSHOP INC


8-Nov-2012

Quarterly Report


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

Cautionary Notice Regarding Forward-Looking Statements

This report includes statements of our expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. These statements relate to future events or our future financial performance in Management's Discussion and Analysis of Financial Condition and Results of Operations. We generally identify these statements by words or phrases such as "may," "might," "should," "expect," "plan," "anticipate," "believe," "estimate," "intend," "predict," "future," "potential" or "continue," the negative or any derivative of these terms and other comparable terminology.

Without limiting the foregoing, all statements relating to our future sales and operating results, anticipated store locations, openings, closings, relocations and remodels and capital expenditures, future cash flows and share repurchases, and sources of funding are forward-looking statements and speak only as of the date of this report. These forward-looking statements are based on numerous assumptions that we believe are reasonable, but are subject to a wide range of uncertainties and business risks and actual results may differ materially from those discussed in these statements. Among the factors that could cause actual results to differ materially are:

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

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

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

· our marketing and on-line initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic; we may be unable to generate comparable store sales growth;

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

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

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

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

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

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

· we may not be able to operate our company-owned stores in the United Kingdom and Ireland profitably;

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

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

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

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

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

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

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

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

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

· we may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights;

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

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


When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other Securities and Exchange Commission filings, including the more detailed discussion of these factors, as well as other factors that could affect our results, contained in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011. These forward-looking statements speak only as of the date on which such statements were made, and we undertake no obligation to update these statements except as required by federal securities laws.

Overview

We are the leading, and only international, company providing a "make your own stuffed animal" interactive entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals. Our concept, which we developed primarily for mall-based retailing, capitalizes on what we believe is the relatively untapped demand for experience-based shopping as well as the widespread appeal of stuffed animals. The Build-A-Bear Workshop experience appeals to a broad range of age groups and demographics, including children, teens, their parents and grandparents.

Build-A-Bear Workshop is in a turnaround phase as we work to improve store productivity and profitability. We are taking actions to change our business dynamics with a reinvented store design, aggressive repositioning of our portfolio of stores, including closures and remodels that will reduce square footage, and a rebalancing of our marketing to include higher levels of brand advertising. We currently expect our optimal store count to be 295 to 320 company-owned stores in the United States, Canada, the United Kingdom and Ireland. We believe the actions we are taking will result in improvements in productivity and profitability and, ultimately, stakeholder value. We also believe there are additional international growth opportunities, primarily through existing and new franchises.

As of September 29, 2012, we operated 283 traditional stores and ten non-traditional stores in United States, Canada and Puerto Rico (collectively, North America), 58 traditional stores in the United Kingdom and Ireland (collectively, Europe) and had 87 franchised stores operating internationally under the Build-A-Bear Workshop brand. Non-traditional store locations include stores in select Major League Baseball® ballparks, a zoo, a science center, an airport and a hospital as well as temporary pop-up locations. In order to capitalize on short-term opportunities in specific locations, we have selectively opened temporary, pop-up locations. In addition to our stores, we market our products and build our brand through our Web sites.

We operate in three reportable segments (retail, commercial and international franchising) that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

• Company-owned traditional and non-traditional retail stores located in North America and Europe and e-commerce Web sites or "web stores";

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

• Other international stores operated under franchise agreements.

Selected financial data attributable to each segment for the thirteen and thirty-nine weeks ended September 29, 2012 and October 1, 2011 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.


We use comparable store sales as one of the performance measures for our business. Comparable store sales percentage changes are based on net retail sales, excluding our web store and seasonal and event-based locations. Stores are considered comparable beginning in their thirteenth full month of operation. Stores with relocations or remodels that result in a significant change in square footage are excluded from the comparable stores sales calculation until the thirteenth full month of operation after the change. The percentage change in comparable store sales for the periods presented below is as follows:

                            Thirteen weeks ended             Thirty-nine weeks ended
                        September 29,      October 1,     September 29,      October 1,
                            2012              2011            2012              2011

       North America         (11.8 )%           0.7 %          (3.4 )%           (1.1 )%
       Europe                 (7.9 )%           3.0 %          (6.7 )%            0.0 %
       Consolidated          (11.1 )%           1.1 %          (4.0 )%           (0.9 )%

We believe the changes in comparable store sales for the periods presented are primarily attributable to the following factors:

• In the fiscal 2012 third quarter, we experienced a decline in the number of transactions compared to the 2011 third quarter which benefitted from a strong product offering that was tied to a major theatrical release that was supported by studio marketing and advertising.

• The sales decline in North America in the third quarter more than offset the slight positive in comparable store sales through the first twenty-six weeks of fiscal 2012. In the first half of the year, we had benefit from higher redemption rates and transaction value of our holiday gift cards and from a promotion in the United States with McDonald's Happy Meals® that drove awareness of our brand and brought traffic to our stores.

• In the United Kingdom, we believe the negative economic conditions contributed to a continued decline in consumer sentiment and a corresponding decline in spending that negatively impacted our comparable store sales.

The Company is working improve comparable store sales with the following key initiatives:

• We are aggressively working to increase store traffic and the destination appeal of our stores by:

· enhancing our experience with a new store design;

· increasing productivity and profitability of our existing stores through strategic closures, primarily in multi-store markets where we expect to transfer a portion of the closed stores sales to remaining stores in the market and the relocation of select other stores with a reduction in square footage thereby improving their productivity; and

· increasing shopping frequency by increasing new guest traffic to our stores through a rebalanced marketing message to include both product and brand;

• We have refreshed our loyalty program to increase retention; and

• We will capitalize on our brand advertising to increase gift purchases by reminding consumers about the gift of the experience and by expanding distribution of gift cards in third-party outlets during the peak gifting season in the fourth quarter.


Stores

Company-owned:

As of September 29, 2012, we operated 283 traditional stores and ten
non-traditional stores (such as ballparks, zoo, airport, hospital and temporary
stores) in North America and 58 traditional stores in Europe. The table below
sets forth the number of Build-A-Bear Workshop company-owned stores for the
periods presented:

                                                                                             2012
                                   Thirty-nine Weeks Ended September 29, 2012                               Fifty-two Weeks Ended December 29, 2012 - Projected
                     December 31,                                             September 29,      December 31,                                                December 29,
                         2011                Opened             Closed            2012               2011                Opened             Closed               2012
North America
Traditional                    287                  1                 (5 )               283               287                  2                 (6 )                 283
Non-traditional                 11                  1                 (2 )                10                11                  1                 (3 )                   9
                               298                  2                 (7 )               293               298                  3                 (9 )                 292

Europe                          58                  -                  -                  58                58                  2                  -                    60
Total                          356                  2                 (7 )               351               356                  5                 (9 )                 352




                                                                                      2011
                                  Thirty-nine Weeks Ended October 1, 2011                                Fifty-two Weeks Ended December 31, 2011
                    January 1,                                              October 1,       January 1,                                         December 31,
                       2011               Opened             Closed            2011             2011             Opened          Closed             2011
North America
Traditional                 290                  -                  (3 )            287              290                2              (5 )               287
Non-traditional              15                  1                  (4 )             12               15                2              (6 )                11
                            305                  1                  (7 )            299              305                4             (11 )               298

Europe                       54                  3                  (1 )             56               54                5              (1 )                58
Total                       359                  4                  (8 )            355              359                9             (12 )               356

Our long term store real estate goal is to improve our stores' sales productivity and profitability. Today we believe that the optimal number of Build-A-Bear Workshop stores in North America is between 225 to 250 and approximately 70 in the United Kingdom and Ireland for a total of 295 to 320 stores. We expect to reach this level within the next two years with the closure of 50 to 60 stores, primarily in North America, and select openings as part of our market repositioning and optimization plans.

Integral to the success of this strategy is the opening of our new store design which gives certain stores destination appeal and increases productivity in the market. The new design merges Build-A-Bear Workshop's iconic hands-on bear-making process with the power of technology to provide a new, highly interactive experience for our guests. As of November 6, 2012, we have opened four of these stores, one new store and three remodels, and we plan to open two additional remodeled locations by the end of 2012. Aspects of the new design will be expanded and leveraged across future relocations and remodels as part of our market optimization plan. In 2012, we have also opened one traditional store and one non-traditional store in North America. The traditional store is a reopening in a mall that had been closed since 2010 due to flooding. We have opened two more traditional stores in the UK since the end of the third quarter of 2012.

We have been aggressively renegotiating rents and executing short term extensions to line up lease dates within markets as part of an overall strategic plan to optimize our store locations and market positioning. As part of this strategy, we will continue to close underperforming stores in conjunction with natural lease expirations and kick out clauses, primarily in multi-store markets. In these markets, we currently expect to maintain approximately 20% to 30% of the sales from closing stores by transferring customers to other locations in the same market. In fiscal 2011, we closed 12 stores, and in fiscal 2012, we anticipate closing nine stores, including non-traditional store locations. As a result, at the end of fiscal 2012, we anticipate that we will have 343 traditional stores, 283 in North America and 60 in Europe and nine non-traditional stores. In 2013, we currently plan to close approximately 30 to 35 additional stores in North America with approximately half of these scheduled in the first quarter.


International Franchise Locations:

Our first franchised location opened in November 2003. The number of
international, franchised stores for the periods presented below can be
summarized as follows:

                                          Thirty-nine weeks ended
                                     September 29,          October 1,
                                         2012                  2011

              Beginning of period                79                  63
              Opened                             12                  16
              Closed                             (4 )                (3 )
              End of period                      87                  76

As of September 29, 2012, we had master franchise agreements, which typically grant franchise rights for a particular country or countries, covering 16 countries. We anticipate signing additional master franchise agreements in the future. We expect to end fiscal 2012 with approximately 90 franchised locations. We believe there is a market potential for approximately 300 franchised stores outside of the United States, Canada, Puerto Rico, the United Kingdom and Ireland.

Results of Operations

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

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