BUILD-A-BEAR WORKSHOP, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Annual Report on Form 10-K. COVID-19 Pandemic InMarch 2020 , the spread of COVID-19 was declared a global pandemic by theWorld Health Organization . We have been and continue to closely monitor the impact of COVID-19 on all facets of our business. We have taken decisive actions to protect the safety of our employees and customers and to manage the business throughout the fluid and challenging environment resulting from COVID-19. The pandemic has negatively affected theU.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including government mandated closures and orders to "shelter-in-place." The actions that governments around the world have taken to mitigate the spread of COVID-19 have resulted in a period of disruption, including temporary closure of our stores, limited store operating hours, reduced customer traffic and consumer spending and delays in manufacturing and shipping of products In response to the government recommendations and for the health and safety of our employees and customers, onMarch 17, 2020 we announced the temporary closure of all corporately-managed stores inthe United States ,Canada , theUnited Kingdom ,Denmark andIreland . OnMarch 26, 2020 we announced the temporary closure of our warehouse and e-commerce fulfillment center inOhio which was subsequently reopened onApril 1, 2020 following the review and reconfiguration of workflow and workspaces. Additionally, onMarch 26, 2020 we announced the furlough of over 90% of our workforce, effectiveMarch 29, 2020 ; reduced pay by 20% for the remaining employees; delayed payment of bonuses earned based on fiscal 2019 performance; and delayed the Company matching contribution to our 401(k) plan. During the second quarter of fiscal 2020, we reopened the majority of our stores with the remainder reopening in the third quarter and brought back our workforce from furloughs over the same period. Further, in the third quarter our compensation committee authorized the return of base salary amounts, the payment of 2019 performance bonuses inDecember 2020 , and the matching contribution to our 401(k) plan inDecember 2020 . Disruptions continued thereafter, however, as certain stores were required to temporarily close either individually or as part of entire geographic region mandates in response to COVID-19. At the end of fiscal 2020, 47 of our stores in theUnited Kingdom andIreland were closed as a result of government mandate. These stores are expected to open in the first quarter of fiscal 2021, however these reopenings are dependent on the lifting of restrictions. Due to the uncertainty of COVID-19 and the speed at which the pandemic continues to impact our markets, we are continuing to assess the situation, including government-imposed restrictions, market by market. Our results of operations for the fiscal year endedJanuary 30, 2021 were significantly impacted by the effects of COVID-19. Total revenues decreased$ 83.2 million or 25% for fiscal 2020 compared to fiscal 2019, but strategic investments made to enhance our omnichannel capabilities have enabled us to support increased e-commerce demand and strong guest engagement. In addition to decreased total revenue, our overall profitability also decreased as compared to the prior year. These developments have required us to recognize certain long-lived asset impairment charges. Further, in connection with the Coronavirus Aid, Relief, and Economic Securities Act andUnited Kingdom government programs, we recognized payroll subsidies as a reduction of Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). In addition, theUnited Kingdom government offered grants for businesses in the retail, hospitality and leisure sectors. These grants were applied for on a per-property basis to support businesses through the latest lockdown restrictions and were recorded as "other income" within the Selling, general and administrative line in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). Operations and financial performance are expected to be challenged as events continue to change, and we are unable to accurately predict the future impact that COVID-19 will have on our results of operations due to uncertainties including, but not limited to, additional periodic temporary reclosing of certain of our stores, additional periodic temporary restrictions on certain store operating hours and/or in-store capacity, the duration of potential future quarantines, "shelter-in-place" orders and other travel restrictions within theU.S. and other affected countries, the duration of the pandemic, the emergence of more dangerous variants of the virus, the duration, timing and severity of the impact on consumer spending, the timing and effectiveness of vaccine distribution, and how quickly and to what extent economic and operating conditions can return. 23
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Business Overview In fiscal 2020 we leveraged our unique capabilities, including our supply chain expertise, flexible store operating model and ability to drive demand through our digital platforms. We provided customers with multiple options for how, when and where they shopped with us to ensure we satisfied their need for safety and convenience. Throughout the pandemic and across all the ways customers can shop, we adhered to safety protocols that limited store capacity, followed strict social distancing practices and used proper protective equipment, including requiring our employees to wear masks.
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The pandemic and the shift in customer buying behavior underscores the importance of our expanded multi-channel capabilities. In fiscal 2020 our ecommerce demand grew significantly compared to the prior year and we believe it is essential to provide options that let customers choose what works best for them. To best serve our customers during the pandemic, we had to be innovative and flexible. Early in the year, we quickly rolled out enhanced order fulfillment and pick-up across our stores inthe United States and later in the year in theUnited Kingdom to provide our customers convenience when we were required by government mandates to close our stores inMarch 2020 . Throughout the year, we accelerated initiatives to expand fulfillment options and were able to provide services that customers have come to expect like fast home delivery, in-store pick-up and curbside pick-up.
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As we look forward, the environment is still evolving, and our operating model and supporting cost structure are evolving as well. The pandemic has accelerated the evolution of retail and compelled us to change our operating model which we believe is in the best interests of our employees and customers. We have also expedited some planned strategic initiatives that we believe will allow us to emerge from this time stronger and better positioned for long-term success. 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, fluffing, dressing, accessorizing and naming of their own teddy bears and other stuffed animals. As ofJanuary 30, 2021 , we operated 354 stores globally and had 71 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we sold product on our company-owned e-commerce sites, third party marketplaces and franchisee sites and through retailer's wholesale agreements. There were also 56 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.
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 , theU.K. ,Ireland ,Denmark andChina and two e-commerce sites;
• Commercial - Transactions with other businesses, mainly comprised of wholesale
product sales and licensing our intellectual property, including entertainment
properties, for third-party use; and
• International franchising - Royalties as well as product and fixture
sales from other international operations under franchise agreements.
Selected financial data attributable to each segment for fiscal 2020 and 2019 are set forth in Note 15 - Segment Information to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Our consolidated net loss was$23.0 million in fiscal 2020 compared to net income of$0.3 million in fiscal 2019. We believe that we have a concept that has broad demographic appeal which, for North American stores open for the entire year other than periods of temporary government-mandated closures, averaged net retail sales per store of$0.6 million and$0.8 million in fiscal 2020 and 2019, respectively. With retail as a significant driver of our performance, in order to effectively measure our store operations, we use store contribution as the key performance metric. The diversification of our real estate portfolio and shift to smaller more flexible store formats may result in lower average store revenue but is expected to improve store contribution on a long-term basis. Consolidated store contribution as a percentage of net retail sales was 8.5% for fiscal 2020 reflecting the negative impact of COVD-19, and 15.4% for fiscal 2019. Consolidated store contribution consists of store location net retail sales less cost of product, marketing and store related expenses. Non-store general and administrative expenses are excluded as are our revenues and expenses associated with e-commerce sites and adjustments to deferred revenue related to gift card breakage and our loyalty program. See "Non-GAAP Financial Measures" for a reconciliation of store contribution to net income. The decrease in consolidated store contribution as a percent of net retail sales in fiscal 2020 was primarily due to temporary store closures as a result of COVID-19 resulting in a decrease in retail gross margin as a percent of revenue of 470 basis-points. Specifically, warehouse and distribution costs increased as a percentage of revenue primarily due to increased 24 -------------------------------------------------------------------------------- customer shipping costs resulting from increased sales from ecommerce. Additionally, occupancy costs increased as a percentage of revenue due to expense recognition under ASC 842 Leases when our stores were temporarily closed and abatements or deferrals were negotiated from landlords for the same period. The effects of these abatements and deferrals on expense recognition are spread across the remainder of the lease term. We ended fiscal 2020 with no borrowings under our credit agreement and with$34.8 million in cash, cash equivalents and restricted cash after investing$5.0 million in capital projects throughout the year. We did not repurchase any shares during fiscal 2020. Our prior stock repurchase authorization expired inSeptember 2020 and our Board of Directors has not authorized a new stock repurchase plan.
Following is a description and discussion of the major components of our statement of operations:
Revenues
Net retail sales, commercial revenue and international franchising: See Note 3 - Revenue to the consolidated financial statements for additional accounting information.
We use net retail sales per square foot as a performance measure for our business. The following table details net retail sales per square foot for stores open throughout the fiscal year other than periods of temporary government-mandated closures, for the periods presented:
Fiscal year ended
January 30, February 1,
Net retail sales per square foot 2021 2020
North America (1) $ 234 $ 343
United Kingdom (2) £ 199 £ 405
(1) Net retail sales per square foot in
from stores open throughout the entire period in
periods of temporary government-mandated closures, excluding e-commerce
sales, divided by the total leased square footage of such stores.
(2) Net retail sales per square foot in the
stores open throughout the entire period in the
temporary government-mandated closures, excluding e-commerce sales, divided
by the total selling square footage of such stores.
Costs and Expenses
Cost of merchandise sold: Cost of merchandise sold is driven primarily by our
retail segment. Cost of merchandise sold - retail includes the cost of the
merchandise, including royalties paid to licensors of third party branded
merchandise; store occupancy cost, including store depreciation and store asset
impairment charges (See Note 5 - Property and Equipment, net to the consolidated
financial statements for additional accounting information regarding store asset
impairment); cost of warehousing and distribution; packaging; stuffing; damages
and shortages; and shipping and handling costs incurred in shipment to
customers. Retail gross margin is defined as net retail sales less the cost of
merchandise sold - retail. For the commercial segment, cost of merchandise
includes the cost of merchandise sold to third-party retailers on a wholesale
basis for sale within their stores. For the franchise segment, cost of
merchandise includes the sale of furniture, fixtures, and supplies to our
franchise partners.
Selling, general and administrative expense ("SGA"): These expenses include
store payroll and benefits, advertising, credit card fees, store supplies and
normal store pre-opening and closing expenses as well as central office general
and administrative expenses, including costs for management payroll, benefits,
incentive compensation, travel, information systems, accounting, insurance,
legal and public relations. These expenses also include depreciation of central
office assets as well as the amortization of intellectual property and other
assets. Certain store expenses such as credit card fees historically have
increased or decreased proportionately with net retail sales. In addition, bad
debt expenses and accounts receivable related charges are recorded in SGA. See
Note 5 - Property and Equipment, net to the consolidated financial statements
for additional accounting information regarding store asset
25
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impairment. Additionally, as a result of COVID-19, governments enacted relief
legislation and stimulus packages to help combat the economic effects of the
pandemic through such things as payroll expense reimbursement and business
grants, whose effects are recorded within SGA.
Stores
Corporately-managed locations:
The number of
Fiscal year ended
January 30, 2021 February 1, 2020
North North
America Europe China Total America Europe China Total
Beginning of period 316 55 1 372 311 59 1 371
Opened 3 - - 3 18 1 - 19
Closed (14 ) (7 ) - (21 ) (13 ) (5 ) - (18 )
End of period 305 48 1 354 316 55 1 372
During fiscal 2020, our retail business model continued to evolve to address
changing shopping patterns by diversifying our locations, formats and
geographies. We are updating our store portfolio with our Discovery format,
which represented 40% of our store base as of January 30, 2021 . During fiscal
2020, we halted many of our planned new store openings as a result of COVID-19
resulting in the opening of three stores, one Discovery, one concourse, and one
temporary location which was closed prior to the end of the fiscal year. Through
our third-party retail model, there were 56 stores in operation with
relationships that included Carnival Cruise Line , Great Wolf Lodge Resorts ,
Landry's and Beaches Family Resorts , with select locations temporarily closed
due to government mandates or self-imposed reductions in operating days, reduced
operating hours and/or capacity restrictions and limitations. As in prior years,
we operated in a number of other non-traditional locations as well
as shop-in-shop arrangements within other retailers' stores. In one location in
the year, we deployed a temporary store which we deemed prudent and profitable.
Temporary locations generally have lease terms of two to eighteen months. These
specific sites are designed to capitalize on short-term opportunities. During
fiscal 2020, we closed 21 stores as part of natural lease events or through
negotiations with landlords as part of COVID-19 related renegotiations. In the
future, we 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.
International Franchise Locations:
Our first franchisee location was opened inNovember 2003 . All franchised stores have similar signage, store layout and merchandise assortments as our corporately-managed stores. As ofJanuary 30, 2021 , we had six master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 12 countries.
The number of international, franchised stores opened and closed for the periods presented below is summarized as follows:
Fiscal year ended
January 30, 2021 February 1, 2020
Beginning of period 92 97
Opened 8 32
Closed (29 ) (37 )
End of period 71 92
26-------------------------------------------------------------------------------- As ofJanuary 30, 2021 , the distribution of franchised locations among these countries was as follows:Australia (1) 19South Africa 18India (2) 13China (3) 11 Gulf States (4) 6Chile 4 Total 71
(1)
currently any open stores.
(2)
currently any open stores.
(3)
(4) Gulf States master franchise agreement includes
Arab Emirates which all have stores as well as
are not currently stores open.
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. We expect
to develop market expansion through both new and existing franchisees in the
future.
Results of Operations
2020 Overview
The COVID-19 pandemic had a profound impact on the retail industry and our
business, particularly in our first and second quarters of fiscal 2020. In the
first half of the year, we rapidly responded to the onset of a global pandemic
that forced a government-mandated temporary closure of all
of our corporately-operated stores as well as many third party and franchise
locations. We took immediate action to protect the financial well-being of the
company including aggressive expense management and cash preservation while
pivoting to driving e-commerce demand even as our headquarters staff shifted to
working remotely. As we moved into the second half and stores reopened on a
staggered basis as guidelines transitioned, our focus turned to accelerating
key strategic initiatives to drive digital transformation and evolve retail. In
the second half of the year, we earned revenues of $168.3 million compared to
first half revenues of $87.0 million , a 94% increase. Consolidated gross profit
increased by $66.2 million or 425% when comparing second half results to first
half results and pre-tax income increased $45.1 million or 138% over the same
period. The strong growth from our e-commerce channel was the main contributor
to revenue in the first half after the temporary store closures that occurred
and the demand continued in the second half bolstering our second half revenue
and profitability. Additionally, our focus on expense management throughout the
year saw Selling, general and administrative expense decrease as a percentage of
revenue by 14%, contributing to our second half profitability.
27
--------------------------------------------------------------------------------The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to immaterial rounding:
Fiscal year ended
January 30, February 1,
2021 2020
Revenues:
Net retail sales 97.6 % 95.6 %
Commercial revenue 1.7 3.5
International franchising 0.7 0.9
Total revenues 100.0 100.0
Costs and expenses:
Cost of merchandise sold - retail (1) 59.3 54.6
Store asset impairment 2.9
0.0
Cost of merchandise sold - commercial (1) 41.5
45.7
Cost of merchandise sold - international franchising (1) 55.9
89.7
Total cost of merchandise sold 61.8
54.6
Consolidated gross profit 38.2
45.4
Selling, general and administrative 46.1
44.9
Interest expense, net 0.0
0.0
(Loss) income before income taxes (7.9 ) 0.5 Income tax expense 1.1 0.4 Net (loss) income (9.0 ) 0.1 Retail gross margin (2) 40.7 % 45.4 %
(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.
Fiscal Year Ended
Total revenues. Net retail sales were$249.2 million for fiscal 2020, compared to$323.5 million for fiscal 2019, a decrease of$74.3 million or 23.0%. The components of this decrease are as follows: Fiscal year ended January 30, 2021 (dollars in millions) Impact from: Existing stores $ (97.2 ) E-commerce 30.3 New stores 3.1 Store closures (7.6 ) Gift card breakage (2.1 ) Foreign currency translation 0.4 Deferred revenue estimates (1.2 ) $ (74.3 ) 28
-------------------------------------------------------------------------------- The retail revenue decrease was driven primarily by temporary store closures, reductions in store operating days, fewer operating hours and capacity restrictions and limitations as a result of COVID-19 partially offset by increased e-commerce sales inNorth America and theUnited Kingdom resulting from our pivot to digital sales due to the aforementioned temporary store closures. Commercial revenue was$4.4 million for fiscal 2020 compared to$11.9 million for fiscal 2019, a decrease of$7.5 million primarily due to 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 similar operating restrictions for our own stores (government-mandated or self-imposed reductions in operating days, reduced operating hours and/or capacity restrictions and limitations) for portions of the fiscal year. Revenue from international franchising was$1.7 million for fiscal 2020 compared to$3.2 million for fiscal 2019. This$1.5 million decrease was primarily the result of the temporary store closures of franchise locations due to governmentally-mandated restrictions and a reduction in new store openings resulting in a lower level of inventory and fixtures sales to franchisees to support these openings. Retail gross margin. Retail gross margin was$101.4 million in fiscal 2020 compared to$146.8 million in fiscal 2019, a decrease of$45.4 million . As a percentage of net retail sales, retail gross margin decreased to 40.7% for fiscal 2020 from 45.4% for fiscal 2019, or 470 basis points as a percentage of net retail sales. Specifically, warehouse and distribution costs increased as a percentage of revenue primarily due to increase customer shipping costs resulting from increased sales from our e-commerce channel. Additionally, occupancy costs increased as a percentage of revenue due to expense recognition under ASC 842 Leases when our stores were temporarily closed and abatements or deferrals were negotiated from landlords for the same period. The effects of these abatements and deferrals on expense recognition are spread across the remainder of each lease term. Impairment of long-lived assets, including right-of-use assets. As a result of COVID-19, we experienced lower revenues, especially in the first half of the fiscal year, and identified indicators of impairment for our store fleet. We performed undiscounted future cash flow analysis over the long-lived assets and right-of-use assets for the remaining useful life of the asset 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. For fiscal 2020, we recognized long-lived asset impairment charges totaling$7.3 million , with approximately$3.8 million for right-of-use operating lease assets and$3.5 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, machinery and equipment, and construction-in-progress. These impairment charges were primarily driven by lower than projected revenues and the effect of temporary store closures. The majority of the impairment was recorded for assets associated with stores inNorth America and theUnited Kingdom . Selling, general and administrative. Selling, general and administrative expenses were$117.6 million for fiscal 2020 as compared to$152.0 million for fiscal 2019, a decrease of$34.4 million . Selling, general and administrative expenses were lower primarily due to lower labor costs from temporary store closures, salary reductions and employee furloughs due to COVID-19 as well as a decrease in marketing spend throughout the year.
Interest expense (income), net. Interest expense, net of interest income, decreased an immaterial amount for fiscal 2020 as compared to fiscal 2019.
Provision for income taxes. The provision for income taxes was$2.8 million in fiscal 2020 compared to$1.3 million in fiscal 2019. The 2020 effective rate of (13.9%) differed from the statutory rate of 21% primarily due to no tax benefit being recorded on the current year pretax loss as a full valuation allowance has now been recorded globally. Fiscal 2020 was also 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 rate of 83.0% differed from the statutory rate of 21% primarily due to the valuation allowance recorded in certain foreign jurisdictions and a$0.2 million tax impact of equity awards. Non-GAAP Financial Measures We use the term "store contribution" throughout this Annual Report on Form 10-K. Store contribution consists of income (loss) before income tax expense, interest, general and administrative expense, excluding income from franchise and commercial activities and contribution from our e-commerce sites, locations, other than periods of temporary government-mandated closures, for the full fiscal year and adjustments to deferred revenue related to our loyalty program and gift card breakage. This term, as we define it, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance withU.S. generally accepted accounting principles ("GAAP"). We use store contribution as a measure of our stores' operating performance. 29
-------------------------------------------------------------------------------- Store contribution should not be considered a substitute for net income, net income per store, cash flows provided by operating activities, cash flows provided by operating activities per store, or other income or cash flow data prepared in accordance withU.S. GAAP. Additionally, store-level performance measures are inherently limited in that they exclude certain expenses that are recurring in nature and are necessary to support the operation and development of our stores. We believe store contribution is useful to investors in evaluating our operating performance because it, along with the number of stores in operation, directly impacts our profitability. The following table sets forth a reconciliation of store contribution to net income (loss) for our corporately-managed stores located in theU.S. ,Canada andPuerto Rico (collectively "North America"); stores located in theU.K. ,Ireland andDenmark (collectively "Europe"); andChina , for our consolidated store base (dollars in thousands). For fiscal 2020, corporately-managed stores included are those that were not newly opened or permanently closed in fiscal 2020. As our entire store fleet was temporarily closed during portions of the year due to COVID-19, no stores qualified as operating for the full year. For year-over-year comparison purposes such temporary closed stores were included in the below table. For fiscal 2019, corporately-managed stores included all stores open throughout the entire period. Fiscal 2020 Fiscal 2019 North Europe North Europe America and China Total America and China Total Net income (loss) (24,256 ) 1,273$ (22,983 ) $ 3,677 $ (3,416 ) $ 261 Items excluded: Income tax expense (benefit) 2,796 1 2,797 1,325 (25 ) 1,300 Interest expense (income) 15 (5 ) 10 24 (9 ) 15 Store asset impairment 5,429 1,917 7,346 - - - General and administrative expense (1) 41,972 2,657 44,629 50,566 3,653 54,219 Contribution from other retail activities (2) (10,632 ) (4,126 ) (14,758 ) (6,244 ) (1,627 ) (7,871 ) Other contribution (3) (1,247 ) (47 ) (1,294 )
(4,563 ) (274 ) (4,837 )
Store contribution
Total revenues from external customers$ 216,809 $ 38,501 $ 255,310 $ 290,883 $ 47,660 $ 338,543 Items excluded: Revenues from other retail activities (2) (43,951 ) (19,154 ) (63,105 ) (38,261 ) (5,400 ) (43,661 ) Other revenues from external customers (4) (5,644 ) (457 ) (6,101 ) (13,860 ) (1,192 ) (15,052 ) Store location net retail sales$ 167,214 $ 18,890 $ 186,104 $ 238,762 $ 41,068 $ 279,830 Store contribution as a percentage of store location net retail sales 8.4 % 8.8 % 8.5 % 18.8 % (4.1 %) 15.4 % Total net income (loss) as a percentage of total revenues (11.2 %) 3.3 % (9.0 %) 1.3 % (7.2 %) 0.1 %
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(1) General and administrative expense consists primarily of non-store
related expenses such as management compensation, travel, information
systems, accounting, purchasing and legal costs. Additionally, non-store
related depreciation and amortization, store closing and pre-opening expenses
are included within general and administrative expense as well as certain
intercompany charges in
include marketing costs, primarily payroll and related benefits expense, but
exclude advertising expenses, which are included in store contribution.
(2) Other retail activities are comprised primarily of our e-commerce sites,
stores not open for the full year and adjustments to deferred revenue related
to our loyalty program and gift card breakage.
(3) Other contribution includes commercial revenue, international franchising and
intercompany revenues as well as all expenses attributable to the commercial
and international franchising segments, excluding interest expense (income)
and income tax expense (benefit).
(4) Other revenues from external customers are comprised of commercial revenue
and international franchising.
30--------------------------------------------------------------------------------
Liquidity and Capital Resources
Our cash requirements are primarily for the opening, remodeling or reformatting
of stores, installation and upgrades of information systems and working capital.
Over the past several years, we have met these requirements through cash
generated from operations.
Fiscal year ended
January 30 , February 1,
2021 2020Net cash provided by operating activities $ 13,386 $
21,609
Net cash used in investing activities (5,046 ) (12,384 ) Net cash used in financing activities (114 ) (245 ) Effect of exchange rates on cash (112 ) (140 ) Net increase in cash, cash equivalents and restricted cash $ 8,114 $ 8,840 Operating Activities. Cash flows provided by operating activities were$13.4 million and$21.6 million in fiscal years 2020 and 2019, respectively. Cash flows from operating activities decreased in fiscal 2020 as compared to 2019 primarily driven by the temporary closure of corporately managed retail stores and reduced operating hours inNorth America and theUnited Kingdom during periods of the fiscal year. Investing Activities. Cash flows used in investing activities were$5.0 million and$12.4 million in fiscal years 2020 and 2019, respectively. Cash used in investing activities in fiscal 2020 decreased as compared to fiscal 2019 primarily driven by reductions in planned capital expenditures as a result of COVID-19. Financing Activities. Financing activities used cash of$0.1 million and$0.2 million in fiscal years 2020 and 2019, respectively. Cash used in financing activities in fiscal 2020 decreased as compared to fiscal 2019, driven by less stock-based compensation vesting in fiscal 2020 compared to the prior year resulting in the need for fewer shares withheld for taxes.
Capital Resources. As of
OnAugust 25, 2020 , we entered into a Revolving Credit and Security Agreement withPNC Bank, National Association , as agent. 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 . 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 average undrawn availability as determined in accordance with the agreement. The agreement matures onAugust 25, 2025 (unless terminated earlier in accordance with its terms) and requires compliance with conditions precedent that must be satisfied prior to any borrowing. The agreement also contains various representations, warranties and covenants that we consider customary for an asset-based credit facility. The agreement requires us to comply with one financial covenant, specifically, that we 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. We anticipate 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. 31 -------------------------------------------------------------------------------- At the closing date of the credit agreement with PNC Bank, we had no outstanding indebtedness. As ofJanuary 30, 2021 , our borrowing base was slightly more than$19.8 million . As a result of a$1.0 million letter of credit against the line of credit at the end of the fiscal year,$18.8 million was available for borrowing. Additionally, onAugust 25, 2020 , upon execution of the agreement with PNC Bank, we terminated our existing bank credit line withU.S. Bank , under the Fourth Amended and Restated Loan Agreement, as amended. The former agreement withU.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 onSeptember 30, 2020 . At the time of termination, we did not have any outstanding borrowings under the agreement withU.S. Bank and we were in compliance with the amended covenants. The$1.0 million letter of credit that was outstanding under the agreement withU.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. During the fiscal year, we renegotiated a large portion of our store lease portfolio resulting in a combination of rent reductions, deferments, and abatements inNorth America , theUnited Kingdom andIreland . These negotiations have increased the percentage of leases with variable rent structures resulting in the increase in variable rent expense in fiscal 2020 compared to fiscal 2019. For these renegotiated leases, under ASC 842 Leases, we assessed if the renegotiated leases represented a new, separate contract or a modification of the existing lease. Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases inNorth America have shifted to shorter term leases to provide flexibility in aligning stores with market trends. Our leases typically require us to pay personal property taxes, our pro rata share of real property taxes of the shopping mall, our own utilities, repairs and maintenance in our store, a pro rata share of the malls' common area maintenance and, in some instances, merchant association fees and media fund contributions. Many leases contain incentives to help defray the cost of construction of a new store. Typically, a portion of the incentive must be repaid to the landlord if we choose to terminate the lease prior to its contracted term. In addition, some of these leases contain various restrictions relating to change in control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases. Rents are invoiced monthly and paid in advance. Our leases in theU.K. andIreland typically have terms of ten years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. We may also be required to make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are invoiced monthly and quarterly and paid in advance.
Capital spending in fiscal 2020 totaled
InAugust 2017 , our Board of Directors adopted a share repurchase program authorizing the repurchase of up to$20 million of our common stock. From the date of the program approval through the program expiration onSeptember 30, 2020 , we repurchased a total of 1.3 million shares at an average price of$8.75 per share for an aggregate amount of$11.2 million . No share repurchase program is currently authorized. In addition, our ability to repurchase shares is subject to satisfaction of conditions set forth in our credit agreement.
Off-Balance Sheet Arrangements
None.
Contractual Obligations and Commercial Commitments
Not applicable.
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Inflation
We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. However, we can provide no assurance that our business will not be affected by inflation in the future.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates. Our accounting policies are more fully described in Note 2 to our consolidated financial statements, which appear elsewhere in this Annual Report on Form 10-K. We have identified the following critical accounting estimates: Long-Lived Assets In accordance with ASC 360-10-35, we assess the potential impairment of long-lived assets, which include property, plant and equipment and operating lease assets (subsequent to the adoption of ASC 842, Leases) when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset, or asset group, to expected future net cash flows generated by the asset, or asset group. If the carrying amount exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. For operating lease assets, we determine the fair value of the assets by comparing the contractual rent payments to estimated market rental rates. Fair value is calculated as the present value of estimated future cash flows for each asset group. For purposes of evaluating store assets for impairment, we have determined that each store location is an asset group, inclusive of the right-of-use asset attributable to each store. Factors that we consider important which could individually or in combination trigger an impairment review include, but are not limited to, the following: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (3) significant changes in our business strategies and/or negative industry or economic trends. We assess events and changes in circumstances or strategy that could potentially indicate that the carrying value of long-lived assets may not be recoverable as they occur. Due to the significance of the fourth quarter to individual store locations, we assess store performance quarterly, using the full year's results. We consider a historical and/or projected negative cash flow trend for a store location to be an indicator that the carrying value of that asset group may not be recoverable. Impairment charges related to this assessment are typically included in cost of merchandise sold - retail as a component of income (loss) before income taxes in the DTC segment. See Note 4 - Leases and Note 6 - Property and Equipment, Net to our consolidated financial statements for further discussion. Given the reductions in our revenues in our revenues and cash flows as a result of COVID-19, primarily in the first and second quarters of fiscal 2020, we identified triggering events that required us to assess the need for potential impairment charges. As a result of these activities we recorded store impairment charges of$7.3 million , with approximately$3.8 million for right-of-use operating lease assets and$3.5 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, machinery and equipment, and construction-in-progress. Additionally, we consider a more likely than not assessment that an individual location will close prior to the end of its lease term as a triggering event to review the store asset group for recoverability. These assessments are reviewed on a quarterly basis. When indicated, the carrying value of the assets is reduced to fair value, calculated as the estimated future cash flows for each asset group. 33
-------------------------------------------------------------------------------- In the event that we decide to close any or all of these stores in the future, we may be required to record additional impairments, lease termination fees, severance and other charges. Impairment losses in the future are dependent on a number of factors such as site selection, general economic trends, public health issues (such as the COVID-19 pandemic) and thus could be significantly different than historical results. The assumptions used in future calculations of fair value may change significantly which could result in further impairment charges in future periods. Revenue Recognition For our gift cards, revenue is deferred for single transactions until redemption including any related gift card discounts. Historically, most gift card redemptions have occurred within three years of purchase 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 pattern 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 our 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 our 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, and contract liabilities related to the loyalty program are classified as deferred revenue and other. During 2020, we experienced lower redemptions of our gift cards as a result of COVID-19 for all periods of outstanding activated cards. The redemption patterns used to determine the gift card breakage rate, especially in the first year after gift card purchase, currently cards sold in 2019 and 2020, resulted in changes to the breakage rate. We do not believe that the redemption pattern experienced in fiscal 2020 reflects the pattern in the future and have adjusted the breakage rates to exclude certain current year activity.
See Note 3 - Revenue for additional information.
Leases We determine if an arrangement is a lease at inception. The fair value of right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments using a discounted cash flow analysis, considering market rent and market discount rates, over the lease term for those arrangements where there is an identified asset and the contract conveys the right to control its use. Our lease term includes options to extend or terminate a lease only when it is reasonably certain that we will exercise that option. The majority of our leases do not provide an implicit rate and therefore, we estimate the incremental borrowing discount rate based on information available at lease commencement. The discount rates used are indicative of a synthetic credit rating based on quantitative and qualitative analysis and adjusted one notch higher to estimate a secured credit rating. For non-U.S. locations, a risk-free rate yield based on the currency of the lease is used to estimate the incremental borrowing rate. The weighted average risk-free rates were based on the Treasury BVAL rates curve in Bloomberg. Rates were developed for length of lease term for each year 1 through 10 and for 12, 15, 20, 25, and 30-year terms. 34
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Income Taxes We recognize deferred tax assets resulting from tax credit carryforwards and deductible temporary differences between taxable income on our income tax returns and income before taxes under GAAP. Deferred tax assets generally represent future tax benefits to be received when these carryforwards can be applied against future taxable income or when expenses previously reported in our consolidated financial statements become deductible for income tax purposes. A deferred tax asset valuation allowance is required when some portion or all of the deferred tax assets may not be realized. We consider the weight of all available evidence, both positive and negative, in assessing the realizability of the deferred tax assets by each taxing jurisdiction. We consider our ability to carry back our tax losses or credits for refunds, the availability of tax planning strategies and reversals of existing taxable temporary differences as well as projections of future taxable income. In the first quarter of fiscal 2020, as we had anticipated incurring a cumulative book loss inNorth America over the three-year period endedJanuary 30, 2021 , we evaluated the realizability of ourNorth America deferred tax assets. We performed an analysis of all available positive and negative evidence. The three-year cumulative loss is a significant piece of negative evidence. ASC 740, Income Taxes, requires objective historical evidence be given more weight than subjective evidence, such as forecasts of future income. Accordingly, in the first quarter of fiscal 2020, we recorded a$3.3 million valuation allowance on ourNorth America deferred tax assets. As we had incurred a cumulative book loss in theU.K. over the three-year period endedFebruary 2, 2019 , we evaluated the realizability of ourUK deferred tax assets and, accordingly, in the fourth quarter of fiscal 2018, we recorded a$3.7 million valuation allowance on ourU.K. deferred tax assets. Significant judgment is required in evaluating our uncertain tax positions. We establish accruals for uncertain tax positions when we believe that the full amount of the associated tax benefit may not be realized. In the future, if we prevail in matters for which accruals have been established previously or pay amounts in excess of reserves, there could be an effect on our income tax provisions in the period in which such determination is made. Tax authorities regularly examine our returns in the jurisdictions in which we do business. Management regularly assesses the tax risk of our return filing positions and believes our accruals for uncertain tax benefits are adequate as ofJanuary 30, 2021 andFebruary 1, 2020 .
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies for additional information.
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