Build-A-Bear Workshop 2009 Annual Report Download - page 34

BUILD-A-BEAR WORKSHOP, INC. 2009 FORM 10-K
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
OVERVIEW
We are the leading, and only international, company
providing a “make your own stuffed animal” interactive
entertainment experience under the Build-A-Bear Workshop
brand, in which our guests stuff, fluff, dress, accessorize and
name their own teddy bears and other stuffed animals. Our
concept, which we developed for mall-based retailing,
capitalizes on what we believe is the relatively untapped
demand for experience-based shopping as well as the
widespread appeal of stuffed animals. The Build-A-Bear
Workshop experience appeals to a broad range of age
groups and demographics, including children, teens, their
parents and grandparents. As of January 2, 2010, we
operated 291 stores in the United States, Canada and Puerto
Rico, 50 stores in the United Kingdom, one store in Ireland
and three stores in France, and had 65 franchised stores
operating in international locations under the Build-A-Bear
Workshop brand. In addition to our stores, we sell our
products on our e-commerce Web site, buildabear.com and
market our products and build our brand through our “virtual
world” Web site, buildabearville.com, which complements
our interactive shopping experience and positively enhances
our core brand value. We also operate non-traditional store
locations in Major League Baseball ballparks, one location in
a zoo and one location in a science center.
On April 2, 2006, we acquired all of the outstanding
shares of The Bear Factory Limited, a stuffed animal retailer in
the United Kingdom, and Amsbra Limited, our former U.K.
franchisee. The results of the acquisitions’ operations have
been included in the consolidated financial statements since
that date. We are currently operating 36 of the acquired
stores, having permanently closed four locations during
transition. Since 2006, our European operations have grown
to 54 stores, including three in France. We have improved
sales performance and adopted internal best practices in the
areas of merchandising, marketing, purchasing and store
operations, across the acquired store base that resulted in
improved sales and earnings from the acquisition.
We operate in three segments that share the same
infrastructure, including management, systems, merchandising
and marketing, and generate revenues as follows:
• Company-owned retail stores located in the United
States, Canada, Puerto Rico, the United Kingdom,
Ireland, and France, a webstore and seasonal, event-
based locations;
• International stores operated under franchise
agreements; and
• License arrangements with third parties which
manufacture and sell to other retailers merchandise
carrying the Build-A-Bear Workshop brand.
Selected financial data attributable to each segment for
fiscal 2009, 2008 and 2007, are set forth in Note 18 to our
consolidated financial statements included elsewhere in this
Annual Report on Form 10-K.
For a discussion of the key trends and uncertainties that
have affected our revenues, income and liquidity, see the
“— Revenues,” “— Costs and Expenses” and “— Expansion
and Growth Potential” subsections of this Overview.
We believe that we have developed an appealing retail
store concept that, for North American stores open for the
entire year, averaged $1.0 million in fiscal 2009, $1.3
million in fiscal 2008 and $1.6 million in fiscal 2007 in net
retail sales per store. For a discussion of the changes in
comparable store sales in fiscal years 2009, 2008 and
2007, see “— Revenues” below. Store contribution, which
consists of income (loss) before income tax expense (benefit);
interest; store depreciation, amortization and impairment;
store preopening expense; store closing expense; losses from
investment in affiliate and general and administrative
expense, excluding franchise fees, income from licensing
activities and contribution from our webstore and seasonal
event-based locations, as a percentage of net retail sales,
excluding revenue from our webstore and seasonal and event-
based locations, was 12.4% for fiscal 2009, 16.0% for fiscal
2008 and 21.5% for fiscal 2007. Total company net loss as
a percentage of total revenues was 3.2% for fiscal 2009.
Total company net income as a percentage of total revenues
was 1.0% for fiscal 2008 and 4.7% for fiscal 2007. See
“— Non-GAAP Financial Measures” for a reconciliation of
store contribution to net income. Net income declined in
2009, 2008 and 2007 due primarily to the decrease in
comparable store sales. As we have added stores and grown
our sales volume, the quantities of merchandise and supplies
we purchase have increased which has created economies of
scale for our vendors allowing us to obtain reduced costs for
these items and increase our merchandise margin. In 2009,
2008 and 2007, merchandise margin improvement was
more than offset by fixed occupancy cost deleverage due
primarily to the decrease in comparable store sales. The store
contribution of our average store, coupled with the fact that
24