BUILD-A-BEAR WORKSHOP, INC. 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 endedJanuary 29, 2022 , as filed with theSEC , and include the following:
? the COVID pandemic has had and is expected to continue to have an adverse
effect on our business and results of operations through periodic factory
closures and other supply chain disruptions;
? we depend upon the shopping malls and tourist locations in which our
corporately-managed stores and third-party retail locations are located to
attract guests. Continued or further declines in retail consumer traffic could
adversely affect our financial performance and profitability;
? any continuing or sustained decline in general global economic conditions,
caused by the pandemic, inflation, or otherwise, could lead to
disproportionately reduced discretionary consumer spending and a corresponding
reduction in demand for our products and have an adverse effect on our
liquidity and profitability;
? 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;
? our profitability could be adversely affected by fluctuations in petroleum
products prices;
? our business may be adversely impacted at any time by a variety of significant
competitive threats;
? continuing inflationary pressures may increase supply chain costs, especially
freight and fuel costs, and may reduce disposable income for consumers and
demand for our products, therefore negatively impacting our sales and
profitability;
? if we are unable to generate interest in and demand for our interactive retail
experience and products, including being able to identify and respond to
consumer preferences in a timely manner, our sales, financial condition and
profitability could be adversely affected;
? failure to successfully execute our omnichannel strategy and the cost of our
investments in e-commerce and digital technology may materially adversely
affect our financial condition and profitability;
? we are subject to risks associated with technology and digital operations;
? if we are unable to renew, renegotiate or replace our store leases or enter
into leases for new stores on favorable terms, or if we violate any of the
terms of our current leases, our revenue and profitability could be harmed;
? our company-owned distribution center that services the majority of our stores
in
western
disruptions or may operate inefficiently;
? 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 may not be able to operate our international corporately-managed locations
profitability;
? we rely on a few global supply chain vendors to supply substantially all of our
merchandise, and significant price increases or disruption in their ability to
deliver merchandise could harm our ability to source products and supply
inventory in our stores;
? 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;
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? if we are unable to effectively manage our international franchises, attract
new franchises 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 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), the TCPA or the
Telephone Consumer Protection Act, or expectations, we could be subject to
liability as well as damage to our reputation;
? 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;
? 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;
? fluctuations in our operating results could reduce our cash flow, or trigger
restrictions under our credit agreement, and we may be unable to repurchase
shares at all or at the times or in the amounts we desire, or the results of
our share repurchase program may not be as beneficial as we would like;
? 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
attract the interest of activist shareholders;
? our certificate of incorporation and bylaws and
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;
? 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 may be unsuccessful in acquiring businesses or engaging in other strategic
transactions, which may negatively affect our financial condition and
profitability.
Overview
Build-A-Bear Workshop, Inc. , a Delaware corporation, was formed in 1997 as a
mall-based, experiential specialty retailer where children and their families
could create their own stuffed animals. Over the last nearly 25 years,
Build-A-Bear has become a brand with high consumer awareness and positive
affinity with over 200 million furry friends made by guests. We are leveraging
this brand strength to strategically evolve our brick-and-mortar retail
footprint beyond traditional malls with a versatile range of formats and
locations including tourist destinations, expand into international markets
primarily via a franchise model, and broaden the consumer base beyond children
by adding teens and adults with entertainment/sports licensing, collectible and
gifting offerings. Build-A-Bear's pop-culture and multi-generational appeal have
also played a key role in our digital transformation which includes a meaningful
e-commerce/omni-channel business that has delivered sustained growth, engaging
consumer loyalty program and robust digital marketing and content capabilities
with industry-leading partners. As of July 30, 2022 , we
had 346 corporately-managed stores globally and 6 seasonal locations, 65
locations operating through our "third-party retail" model in which we sell our
products on a wholesale basis to other companies that then, in turn, execute our
retail experience, and 62 international franchised stores under the Build-A-Bear
Workshop brand. In addition to these stores, we sell products on our
company-owned e-commerce sites and third-party marketplace sites,
our franchisees sell products through sites that they manage as well as other
third-party marketplace sites and other parties sell products on their sites
under wholesale agreements.
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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
• 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
twenty-six weeks ended
Business UpdateBuild-A-Bear Workshop offers interactive entertainment experiences via both physical and e-commerce engagement, targeting a range of consumer segments and purchasing occasions through digitally-driven, diversified omnichannel capabilities. We operate a vertical retail channel with stores that feature a unique combination of experience and product in which guests can "make their own stuffed animals" by participating in the stuffing, fluffing, dressing, accessorizing, and naming of their teddy bears and other stuffed animals. We also operate e-commerce sites that focus on gift-giving, collectible merchandise and licensed products that appeal to consumers that have an affinity for characters from a range of licensed properties. Over the last nearly 25 years, Build-A-Bear has become a brand with high consumer awareness and positive affinity. We believe there are opportunities to leverage this brand strength, pop-culture status and multi-generational appeal and generate incremental revenue and profits through licensing our intellectual properties through content and entertainment development for kids and adults while also offering products at wholesale and in non-plush consumer categories through outbound licensing agreements with leading manufacturers. . We believe we have built the infrastructure to respond with greater agility to deal with ongoing and future potential uncertainty and we expect to deliver continued growth in total revenues and profit in fiscal 2022 compared to fiscal 2021. While we believe that we have seen benefits from pandemic-driven factors such as pent-up demand and stimulus packages, we believe that the initiatives and investments that were put in place prior to the pandemic, and in many cases accelerated during the pandemic, are driving improved results, which we expect to continue. We remain focused on our strategic priorities which are centered primarily on three key areas:
• Further acceleration of a broad-reaching and comprehensive digital
transformation including content and entertainment initiatives.We expect to
more effectively use our expanded digital capabilities and platforms to inform
and drive marketing and content campaigns and deliver personalized experiences
and sales messaging. We also plan to expand our addressable market by reaching
beyond the core kid base and continue to acquire new tween, teen, and adult
consumers by offering unique affinity offerings and expanding purchase
occasions. We are in the process of updating our website in the third quarter
of fiscal 2022 with a reimagined online guest experience with a goal of driving
additional digital demand. We expect to modernize the site, improve efficiency,
and optimize organic traffic through leading SEO, or search engine
optimization, practices, in order to improve interfaces across all areas of the
site including gifting, affinity and the Bear Builder 3D Workshop as well as
improve conversion at checkout. In addition, we plan to continue to utilize
digital media, content and entertainment as marketing and brand-building tools
to engage consumers and create value. Although our first half e-commerce sales
were down from the first half of 2021, the results are up 180% compared to the
first half of fiscal 2019, which was prior to the implementation of key digital
initiatives. The year-over-year decrease in e-commerce sales were impacted by a
heavier mix of e-commerce sales relative to brick-and-mortar store sales due to
the ongoing impact of the pandemic in 2021 as well as the strong launch of a
key licensed product collection in 2021.
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• Continuing to leverage our expanded omnichannel capabilities while further
evolving retail experiences and purchase occasions. As of
new
progress we are making to reach our goal of opening approximately 20 new
locations through a combination of corporately-managed and third-party retail
this fiscal year. We expect to finish fiscal 2022 with a net increase in the
number of stores in
have fewer locations in
models, we plan to have more total locations at the end of this fiscal year
compared to the end of 2021. We have made a concerted effort to shift to
non-traditional locations including family-centric tourist sites and now have
approximately 35% of total retail locations in non-traditional settings. As
consumers have embraced a return to physical and in-person experiences and
travel, in general, key metrics in our non-traditional locations have continued
to outpace traditional retail locations. We also continue to develop innovative
experiences to expand our brand reach. This includes Build-A-Bear vending
machines, also known as ATMs or automatic teddy machines. We expect to have
approximately 10 machines by the end of this year with more than half of them
in airports through our relationship with
retail throughout
since
occasion to create interest, leverage nostalgia and drive incremental
purchases.
• Optimizing our solid financial position including a strong balance sheet to
support our business and make strategic investments designed to drive further
growth. We plan to maintain disciplined expense management particularly in
light of recent inflationary pressures, wage increases and supply chain
challenges. We are also focused on ongoing lease negotiations as we continue to
evolve our real estate portfolio with new locations, formats and business
models. In addition, we expect to continue to strategically manage our capital
to support key initiatives and innovative developments designed to deliver
long-term profitable growth while returning value to shareholders through
actions such as the recent completion of our previous buyback program, and with
plans to buyback additional shares through a newly-authorized repurchase
program announced in
of Directors continues to have in our strategy and future.
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:
Twenty-six weeks ended
July 30, 2022 July 31, 2021
North America Europe Asia Total North America Europe Asia Total
Beginning of period 306 39 - 345 305 48 1 354
Opened 2 - - 2 2 - - 2
Closed (1 ) - - (1 ) (2 ) (1 ) (1 ) (4 )
End of period 307 39 - 346 305 47 - 352
As of July 30, 2022 , 45% of our corporately-managed stores were in an updated
Discovery format. We also expect to close certain stores in accordance with
natural lease events as an ongoing part of our real estate management and
day-to-day operational plans. 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 of traditional malls.
International Franchise Stores:
Our first franchisee location was opened inNovember 2003 . All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our corporately-managed stores. As ofJuly 30, 2022 , we had six master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 10 countries.
The number of franchised stores opened and closed for the periods presented below are summarized as follows:
Twenty-six weeks ended
July 30, 2022 July 31, 2021
Beginning of period 72 71
Opened 4 5
Closed (14 ) (2 )
End of period 62 74
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In the ordinary course of business, we anticipate signing additional master
franchise agreements in the future and terminating other such agreements.
We source fixtures and other supplies for our franchisees from
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:
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