BUILD-A-BEAR WORKSHOP INC

Previous wording

Build-A-Bear Workshop, Inc. a Delaware corporation, was formed in 1997 as a mall-based, experiential specialty retailer. Build-A-Bear has evolved to become a beloved multi-generational brand focused on its mission to “add a little more heart to life” where guests of all ages make their own “furry friends” in celebration and commemoration of life moments. Guests create their own stuffed animals by participating in the stuffing, dressing, accessorizing, and naming of their own teddy bears and other plush toys. We believe the hands-on and interactive nature of our experience locations, our personal service model and engaging digital shopping experiences result in guests forming an emotional connection with our brand, which differentiates it in the marketplace. Over the last 27 years, Build-A-Bear has become a brand with high consumer awareness, positive affinity, and strong retail influence by leveraging our brand strength to grow our brick-and-mortar retail footprint beyond traditional malls through a range of store sizes, formats and locations including tourist destinations. We are also growing through our websites, which focus on gift-giving, collectible merchandise, and licensed products. In addition to growing our corporately-managed store and e-commerce footprint, we are also growing through third-party operated and franchised stores, particularly for our international expansion. Our ongoing digital transformation, which touches our e-commerce business, consumer loyalty program and digital marketing and content, has led to omni-channel growth over the past several years. Build-A-Bear's pop-culture appeal has played a key role in growing our total addressable market beyond children by adding teens and adults with entertainment and sports licensing, collectible and gifting offerings, as well as by introducing new products and adding categories beyond plush.

Current wording

Build-A-Bear Workshop, Inc. a Delaware corporation, was formed in 1997 as a mall-based, experiential specialty retailer. Build-A-Bear has evolved to become a beloved multi-generational brand focused on its mission to “add a little more heart to life” where guests of all ages make their own “furry friends” in celebration and commemoration of life moments. Guests create their own stuffed animals by participating in the stuffing, dressing, accessorizing, and naming of their own teddy bears and other plush toys based on the Company’s own intellectual property and in conjunction with a variety of best-in-class licenses. The hands-on and interactive nature of our more than 500 company-owned, partner-operated and franchise experience locations around the world, combined with Build-A-Bear’s pop-culture appeal, often fosters a lasting and emotional brand connection with consumers, and has enabled the Company to expand beyond its retail stores to include e-commerce sales on www.buildabear.com and non-plush branded consumer categories via out-bound licensing agreements with leading manufacturers, as well as the creation of engaging content via Build-A-Bear Entertainment (a subsidiary of Build-A-Bear Workshop, Inc.). Over the last 27 years, Build-A-Bear has become a brand with high consumer awareness, positive affinity, and strong retail influence by leveraging our brand strength to grow our brick-and-mortar retail footprint beyond traditional malls through a range of store sizes, formats and locations including tourist destinations. We are also growing through our websites, which focus on gift-giving, collectible merchandise, and licensed products. In addition to growing our corporately-managed store and e-commerce footprint, we are also growing through third-party operated and franchised stores, particularly for our international expansion. Our ongoing digital transformation, which touches our e-commerce business, consumer loyalty program and digital marketing and content, has led to omni-channel growth over the past several years. Build-A-Bear's pop-culture appeal has played a key role in growing our total addressable market beyond children by adding teens and adults with entertainment and sports licensing, collectible and gifting offerings, as well as by introducing new products and adding categories beyond plush.

Previous wording

As of May 4, 2024, we had 357 corporately-managed stores globally and 4 seasonal locations, 97 partner-operated locations operating through our "third-party retail" model in which we sell our products on a wholesale basis to other companies that execute our retail experience, and 77 international franchised stores, all 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.

Current wording

As of August 3, 2024, we had 361 corporately-managed stores globally and 6 seasonal locations, 107 partner-operated locations operating through our "third-party retail" model in which we sell our products on a wholesale basis to other companies that execute our retail experience, and 80 international franchised stores, all 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.

Previous wording

Selected financial data attributable to each segment for the thirteen weeks ended May 4, 2024 and April 29, 2023 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Current wording

Selected financial data attributable to each segment for the thirteen and twenty-six weeks ended August 3, 2024 and July 29, 2023 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Previous wording

Build-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, 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 26 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.

Current wording

Build-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, 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 27 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.

Previous wording

As of May 4, 2024, 51% 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.

Current wording

As of August 3, 2024, 47% 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.

Previous wording

Through our third-party retail model, there were 97 stores in operation at the end of the first quarter of 2024 with relationships that included Carnival Cruise Line, Great Wolf Lodge Resorts, Landry's and Girl Scouts of the USA. The third-party retail model is capital light for us, with the partner company building out and operating the workshops including providing the real estate location and covering the cost of labor and inventory, which is purchased on a wholesale basis. These locations are heavily-weighted to the hospitality industry, which allow us to further advance our focus on experience location expansion in non-traditional and tourist areas, as well as shop-in-shop arrangements within other retailers’ stores.

Current wording

Through our third-party retail model, there were 107 stores in operation at the end of the second quarter of 2024 with relationships that included Carnival Cruise Line, Great Wolf Lodge Resorts, Landry's and Girl Scouts of the USA. The third-party retail model is capital light for us, with the partner company building out and operating the workshops including providing the real estate location and covering the cost of labor and inventory, which is purchased from us on a wholesale basis. These locations are heavily-weighted to the hospitality industry, which allow us to further advance our focus on experience location expansion in non-traditional and tourist areas, as well as shop-in-shop arrangements within other retailers’ stores.

Previous wording

International franchising revenue was $0.9 million for the thirteen weeks ended May 4, 2024 compared to $1.3 million for the thirteen weeks ended April 29, 2023. The change is the result of the timing of product shipments.

Current wording

International franchising revenue was $1.0 million for the thirteen weeks ended August 3, 2024 compared to $0.8 million for the thirteen weeks ended July 29, 2023. The change is primarily the result of the timing of product shipments.

Previous wording

*Selling, general and administrative.*SG&A expenses were $47.6 million, or 41.5% of consolidated revenue, for the thirteen weeks ended May 4, 2024, compared to $45.6 million, or 38.0% of consolidated revenue, for the thirteen weeks ended April 29, 2023. The increase in overall expense was driven by higher wage rates, expense timing and general inflationary pressures.

Current wording

*Selling, general and administrative.*SG&A expenses were $49.2 million, or 44.0% of consolidated revenue, for the thirteen weeks ended August 3, 2024, compared to $48.3 million, or 44.2% of consolidated revenue, for the thirteen weeks ended July 29, 2023. The increase in overall expense was driven by higher wage rates, expense timing and general inflationary pressures.

Previous wording

*Interest income, net.*Interest income was $426,000 for the thirteen weeks ended May 4, 2024 compared to interest income of $76,000 for the thirteen weeks ended April 29, 2023. The increase in interest income compared to the prior year is the result of the Company's cash management strategy to invest cash on-hand in short-term, highly liquid investments.

Current wording

*Interest income, net.*Interest income was $188,000 for the thirteen weeks ended August 3, 2024 compared to interest income of $167,000 for the thirteen weeks ended July 29, 2023. The increase in interest income compared to the prior year is the result of the Company's cash management strategy to invest cash on-hand in short-term, highly liquid investments.

Previous wording

*Total revenues.*Consolidated revenues decreased 4.4%, primarily driven by a 6.9% decrease in North America and partially offset by a 14.1% increase in Europe. Although a decline was expected as a result of economic uncertainty and business volatility from our ongoing marketing and website transitions, the impacts were greater than expected, with web demand (online orders fulfilled from either the Company’s warehouse or its stores) being a significant contributor to our total revenue decline. Additionally, the decrease also resulted from the expected negative timing due to the calendar shift (53rd week shift) along with a decrease in commercial revenue due to timing of product shipments to wholesale customers compared to the same period prior year.

Current wording

*Total revenues.*Consolidated revenues decreased 1.2%, primarily driven by a 3.9% decrease in North America and partially offset by a 19.7% increase in Europe. Although a decline was expected as a result of economic uncertainty and business volatility from our ongoing marketing and website transitions, the impacts were greater than expected, with web demand (online orders fulfilled from either the Company’s warehouse or its stores) being a significant contributor to our total revenue decline. Additionally, the decrease also resulted from the expected negative timing due to the calendar shift (53rd week shift).

Previous wording

Net retail sales for the thirteen weeks ended May 4, 2024 were $107.9 million, compared to $112.1 million for the thirteen weeks ended April 29, 2023, a decreaseof $4.2 million, or 3.8%, compared to the prior year period. The components of this decrease are as follows (dollars in thousands):

Current wording

Net retail sales for the twenty-six weeks ended August 3, 2024 were $211.3 million, compared to $215.6 million for the twenty-six weeks ended July 29, 2023, a decreaseof $4.2 million, or 2.0%, compared to the prior year period. The components of this decrease are as follows (dollars in thousands):

Previous wording

The retail revenue decrease was primarily the result of adecline in web demand resulting in decrease sales through existing stores and our webstore and expected negative timing due to the calendar shift (53 rd week shift). Additionally, we experience small declines in both traffic and dollars per transaction impacting retail revenue for the fiscal quarter. The decline in web demand continued into the second quarter and is expected to have a negative impact on sales made through our existing stores and webstore.

Current wording

The retail revenue decrease was primarily the result of adecline in web demand, decreased sales through existing and closed stores as well as the expected negative timing due to the calendar shift (53 rd week shift). Additionally, we experience small declines in both traffic and dollars per transaction impacting retail revenue for the fiscal 2024 first half. Thus far in third quarter, web demand has improved due a stronger product launch schedule and improved organic search results, as well as improved store performance driven by higher store conversion.

Previous wording

Commercial revenue was $6.0 million for the thirteen weeks ended May 4, 2024 compared to $6.7 million for the thirteen weeks ended April 29, 2023. The $0.7 million decrease is primarily the result of timing of product shipments to wholesale customers compared to the same period prior year.

Current wording

Commercial revenue was $13.3 million for the twenty-six weeks ended August 3, 2024 compared to $11.7 million for the twenty-six weeks ended July 29, 2023. The $1.6 million increase is primarily the result of timing of product shipments to wholesale customers compared to the same period prior year.

Previous wording

*Retail gross margin.*Retail gross margin dollars decreased $2.7 million to $58.5 million from $61.2 million for the thirteen weeks ended April 29, 2023. The retail gross margin rate decreased 40 basis points compared to the prior year primarily driven by higher freight and occupancy costs offset by a decrease in merchandise cost compared to the fiscal 2023 first quarter.

Current wording

*Retail gross margin.*Retail gross margin dollars decreased $2.6 million to $114.3 million from $116.9 million for the twenty-six weeks ended July 29, 2023. The retail gross margin rate decreased 20 basis points compared to the prior year primarily driven by higher occupancy costs offset by a decrease in merchandise and warehousing and distribution costs compared to the fiscal 2023 first half.

Previous wording

Provision for income taxes. Income tax expense was $3.6 million with a tax rate of 23.8% for the thirteen weeks ended May 4, 2024, as compared to $4.7 million with a tax rate of 24.5% for the thirteen weeks ended April 29, 2023. In the first quarter of fiscal 2024, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In the fourth quarter of fiscal 2023, the Company reversed the valuation allowance on deferred tax assets expected to be realized in the U.K. In the first quarter of fiscal 2024, the Company remains in a full valuation in certain other foreign jurisdictions. In the first quarter of fiscal 2023, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense. In addition, the Company remained in a full valuation in certain foreign jurisdictions, including the UK.

Current wording

Provision for income taxes. Income tax expense was $6.3 million with a tax rate of 24.0% for the twenty-six weeks ended August 3, 2024, as compared to $6.9 million with a tax rate of 23.1% for the twenty-six weeks ended July 29, 2023. In the first half of fiscal 2024 and 2023, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In the fourth quarter of fiscal 2023, the Company reversed the valuation allowance on deferred tax assets expected to be realized in the U.K. The Company remains in a full valuation in certain other foreign jurisdictions.

Previous wording

EBITDA for the thirteen weeks ended May 4, 2024 decreased $4.1 million, or 18.3% to $18.3 million from $22.4 million for the thirteen weeks ended April 29, 2023. The decrease in EBITDA is driven by an increase in SG&A expenses due to higher wages, expense timing, and general inflationary pressures coupled with a slight decrease in retail gross margin.

Current wording

EBITDA for the twenty-six weeks ended August 3, 2024, decreased $2.6 million, or 7.4%, to $33.3 million from $35.9 million for the twenty-six weeks ended July 29, 2023. The decrease in EBITDA was driven by an increase in SG&A expenses due to higher wages, expense timing, and general inflationary pressures coupled with a decrease in retail gross margin.

Previous wording

As of May 4, 2024, we had a consolidated cash balance of $38.2 million, 83% of which was domiciled within the U.S. Historically, our cash requirements have been primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, investments in information technology infrastructure and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations. Additionally, during 2024 we have used cash on-hand to invest in short-term, highly liquid investments with original maturities of three months or less resulting in interest income of $0.4 million during the thirteen weeks ended May 4, 2024

Current wording

As of August 3, 2024, we had a consolidated cash balance of $25.2 million, 83% of which was domiciled within the U.S. Historically, our cash requirements have been primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, investments in information technology infrastructure and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations. Additionally, during 2024 we have used cash on-hand to invest in short-term, highly liquid investments with original maturities of three months or less resulting in interest income of $0.6 million during the thirteen weeks ended August 3, 2024

Previous wording

Operating Activities. Cash provided by operating activities decreased $8.4 million for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023. This decrease in cash from operating activities was primarily driven by decreased sales volume, resulting in lower net income, coupled with an increase in cash spent on inventory purchases.

Current wording

Operating Activities. Cash provided by operating activities decreased $19.4 million for the twenty-six weeks ended August 3, 2024, as compared to the twenty-six weeks ended July 29, 2023. This decrease in cash from operating activities was primarily driven by decreased sales volume, resulting in lower net income, coupled with an increase in cash spent on inventory purchases.

Previous wording

Investing Activities. Cash used in investing activities decreased $0.6 million for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023. This decrease in cash used in investing activities was primarily driven by lower spending on capital expenditures related to information technology projects.

Current wording

Investing Activities. Cash used in investing activities decreased $0.4 million for the thirteen weeks ended August 3, 2024, as compared to the twenty-six weeks ended July 29, 2023. This decrease in cash used in investing activities was primarily driven by lower spending on capital expenditures related to information technology projects.

Previous wording

Financing Activities. Cash used in financing activities decreased $11.1 million for the thirteen weeks ended May 4, 2024, as compared to the thirteen weeks ended April 29, 2023. This decrease in cash used in financing activities was driven primarily by the payment in 2023 fiscal first quarter of a special cash dividend of $22.1 million compared to a quarterly dividend of $2.9 million in the 2024 fiscal first quarter. Thiswas partially offset by an increase in repurchases of our common stock during the thirteen weeks ended May 4, 2024.

Current wording

Financing Activities. Cash used in financing activities decreased $9.4 million for the twenty-six weeks ended August 3, 2024, as compared to the twenty-six weeks ended July 29, 2023. This decrease in cash used in financing activities was driven primarily by the payment in 2023 fiscal first quarter of a special cash dividend of $22.1 million compared to quarterly dividends of $2.7 million and $2.9 million paid in the fiscal first and second quarters of 2024. Thiswas partially offset by an increase in repurchases of our common stock during the twenty-six weeks ended August 3, 2024.

Previous wording

Capital spending through thethirteen weeks ended May 4, 2024 totaled$2.4 million for information technology projects and new store openings, and we expect to spend approximately $18 to $20 million on capital expenditures in fiscal 2024.

Current wording

Capital spending through thetwenty-six weeks ended August 3, 2024 totaled$5.7 million for information technology projects and new store openings, and we expect to spend approximately $18 to $20 million on capital expenditures in fiscal 2024.

Previous wording

Total inventory at quarter end was $64.0 million, a decrease of $2.5 million or 4% from the end of the fiscal 2023 first quarter. We are comfortable with the level and composition of our inventory.

Current wording

Total inventory at quarter end was $67.0 million, an increase of $0.6 million or 1% from the end of the fiscal 2023 second quarter. We are comfortable with the level and composition of our inventory.

Previous wording

We have various contractual or other obligations, including operating lease commitments and obligations under deferred compensation plans. As of May 4, 2024, we had purchase obligations totaling approximately $82.4 million, of which $24.4 million are due in the next 12 months. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.

Current wording

We have various contractual or other obligations, including operating lease commitments and obligations under deferred compensation plans. As of August 3, 2024, we had purchase obligations totaling approximately $103.3 million, of which $30.2 million are due in the next 12 months. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.

Previous wording

Weutilized $9.2 million in cash to repurchase 343,406 shares during the thirteen weeks ended May 4, 2024 compared to using$3.1 million in cash to repurchase 132,385 shares during the thirteen weeks ended April 29, 2023. Since the end of the first fiscal quarter, we utilized $3.8 million in cash to repurchase 131,419 shares leaving $13.2 million available under the current $50.0 million stock repurchase program adopted on August 31, 2022.

Current wording

Weutilized $18.2 million in cash to repurchase 685,027 shares during the twenty-six weeks ended August 3, 2024, compared to using$11.1 million in cash to repurchase 526,706 shares during the twenty-six weeks ended July 29, 2023. Since the end of the second fiscal quarter, we utilized $2.0 million in cash to repurchase 73,274 shares leaving $5.9 million available under the August 2022 Stock Repurchase Program.