Build-A-Bear Workshop 2009 Annual Report Download - page 24

BUILD-A-BEAR WORKSHOP, INC. 2009 FORM 10-K
• manage inventory to meet the needs of new and existing
stores on a timely basis;
• hire, train and retain qualified store personnel;
• develop cooperative relationships with our landlords; and
• successfully integrate new stores into our existing
operations.
In July 2005, we opened our flagship store in New York
City. This store is much larger than our typical mall-based
stores and originally included additional facilities, such as a
restaurant, that we do not operate in our typical mall-based
stores. Because of these differences, we may be unable to
generate revenues from this store at a level that justifies
keeping the store open. In 2007, we closed the restaurant in
the store. Closing this store could not only have an adverse
impact on our profitability, as the costs of opening this store
were much larger than those for a typical store, but, as our
flagship store, it could also have an adverse impact on the
Build-A-Bear Workshop brand and consumer perception of
our brand.
Increased demands on our operational, managerial and
administrative resources as a result of our growth strategy
could cause us to operate our business less effectively, which
in turn could cause deterioration in our profitability.
If we are not able to franchise new stores outside of the
United States, Canada, the U.K., Ireland and France, if we are
unable to effectively manage our international 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.
In 2003, we began to expand the Build-A-Bear Workshop
brand outside of the United States, opening our own stores in
Canada and our first franchised location in the United
Kingdom. We intend to continue expanding outside of our
company-owned regions through franchising in several
countries over the next several years. As of January 2, 2010,
there were 65 Build-A-Bear Workshop franchised stores
located outside of the United States, Canada, the U.K.,
Ireland and France. We cannot assure you that our
franchisees will be successful in identifying and securing
desirable locations or in operating their stores. International
markets frequently have different demographic characteristics,
competitive conditions, consumer tastes and discretionary
spending patterns than our existing North American and
European markets, which may cause these stores to be less
successful than those in our existing markets. Additionally, our
franchisees may experience merchandising and distribution
expenses and challenges that are different from those we
currently encounter in our existing markets. The operations
and results of our franchisees could be negatively impacted
by the economic or political factors in the countries in which
they operate or foreign currency fluctuations. These
challenges, as well as others, could have a material adverse
effect on our business, financial condition and results of
operations.
The success of our franchising strategy will depend upon
our ability to attract and maintain qualified franchisees with
sufficient financial resources to develop and grow the
franchise operation and upon the ability of those franchisees
to successfully develop and operate their franchised stores.
Franchisees may not operate stores in a manner consistent
with our standards and requirements, may not hire and train
qualified managers and other store personnel and may not
operate their stores profitably. As a result, our franchising
strategy may not be profitable to us. Moreover, our brand
image and reputation may suffer. When franchisees perform
below expectations we may transfer those agreements to other
parties or discontinue the franchise agreement. Furthermore,
even if our international franchising strategy is successful, the
interests of franchisees might sometimes conflict with our
interests. For example, whereas franchisees are concerned
with their individual business strategies and objectives, we are
responsible for ensuring the success of the Build-A-Bear
Workshop brand and all of our stores.
The laws of the various foreign countries in which our
franchisees operate govern our relationships with our
franchisees. These laws, and any new laws that may be
enacted, may detrimentally affect the rights and obligations
between us and our franchisees and could expose us to
additional liability.
Our merchandise is manufactured by foreign manufacturers
and we transact business in various foreign countries;
therefore 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 and
foreign currency fluctuations.
We purchase our merchandise from domestic vendors who
contract with manufacturers in foreign countries, primarily in
China. Any event causing a disruption of imports, including
the imposition of import restrictions or labor strikes or lock-
outs, could adversely affect our business. For example, in
fiscal 2002, we experienced disruption to our import of
merchandise as well as increased shipping costs associated
with a dock-worker labor dispute. The flow of merchandise
from our vendors could also be adversely affected by
financial or political instability in any of the countries in which
the goods we purchase are manufactured, especially China, if
the instability affects the production or export of merchandise
from those countries. Trade restrictions in the form of tariffs or
quotas, or both, applicable to the products we sell could also
affect the importation of those products and could increase the
cost and reduce the supply of products available to us. In
addition, decreases in the value of the U.S. dollar against
foreign currencies, particularly the Chinese renminbi, could
increase the cost of products we purchase from overseas
14