Build-A-Bear Workshop 2009 Annual Report Download - page 46

BUILD-A-BEAR WORKSHOP, INC. 2009 FORM 10-K
result in additional impairment charges in future periods.
Factors that have the potential to create variances between
forecasted cash flows and actual results include but are not
limited to (i) fluctuations in sales volumes, (ii) long-term growth
in the number of stores; and (iii) distribution costs, including
fuel, and other product costs. Refer to “Forward-Looking
Statements” included in the beginning of this Form 10-K for
further information regarding the impact of estimates of future
cash flows.
The calculation of fair value could increase or decrease
depending on changes in the inputs and assumptions used,
such as changes in the financial performance of the reporting
unit, future growth rate, and discount rate. In order to evaluate
the sensitivity of the fair value calculations on the goodwill
impairment test, we applied a hypothetical decrease in cash
flows, and made changes to our projected growth rate and
discount rate which we believe are considered appropriate.
Based on the goodwill analysis performed as of January 2,
2010, the outlined changes in our assumptions would not
affect the results of the impairment test, as the reporting unit
still had an excess of fair value over the carrying value.
However, as we continue to face a challenging retail
environment and general uncertainty in the global economy,
the assumptions used in future calculations of fair value may
change significantly which could result in impairment charges
in future periods.
Revenue Recognition
Revenues from retail sales, net of discounts and excluding
sales tax, are recognized at the time of sale. Guest returns
have not been significant. Revenues from gift certificates are
recognized at the time of redemption. Unredeemed gift cards
are included in current liabilities on the consolidated balance
sheets.
We have an automated frequent shopper program in
North America, the Stuff Fur Stuff club, whereby guests enroll
in the program and receive one point for every dollar or
partial dollar spent and after reaching 100 points receive a
$10 discount on a future purchase. An estimate of the
obligation related to the program, based on historical
redemption rates, is recorded as deferred revenue and a
reduction of net retail sales at the time of purchase. The
deferred revenue obligation is reduced, and a corresponding
amount is recognized in net retail sales, in the amount of and
at the time of redemption of the $10 discount.
We use actual redemption rates and historical results to
estimate how much revenue to defer. We review these
redemption rates and assess the adequacy of the deferred
revenue account at the end of each fiscal quarter. Due to the
estimates involved in these assessments, adjustments to the
deferral rate are generally made no more often than
bi-annually in order to allow time for more definite trends to
emerge.
Based on the most recent assessment at the end of fiscal
2009, no adjustment was made to the deferral rate. The
calculation of fair value could increase or decrease
depending on changes in the inputs and assumptions used,
specifically, expected redemption rates. In order to evaluate
the sensitivity of the estimates used in the recognition of
deferred revenue, we applied a hypothetical decrease of 25
bps in the redemption rate which we believe is appropriate.
Based on the analysis performed as of January 2, 2010, the
change in our assumptions would have resulted in a $0.7
million reduction of net retail sales.
Based on the assessment at the end of fiscal 2008, the
deferred revenue liability was adjusted downward by $1.8
million, effective at the beginning of fiscal 2008, with a
corresponding increase to net retail sales, and a $1.2 million
increase in net income. Additionally, the amount of revenue
being deferred for future periods was decreased by 33 bps to
give effect to the change in redemption experience and the
increased visibility of the redemptions with the automated
system.
In 2007, we reduced the estimated liability by $0.4
million.
Recent Accounting Pronouncements
There are no recently issued but not yet adopted accounting
pronouncements that are expected to significantly impact our
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates,
and we bear this risk in two specific ways. First, our revolving
credit facility carries a variable interest rate that is tied to
market indices and, therefore, our results of operations and
our cash flows can be impacted by changes in interest rates.
Outstanding balances under our credit facility bear interest at
LIBOR plus 2.05%. We had no borrowings outstanding
during fiscal 2009. Accordingly, a 100 basis point change in
interest rates would result in no material change to our annual
interest expense. The second component of interest rate risk
involves the short term investment of excess cash in short term,
investment grade interest-bearing securities. These investments
are considered to be cash equivalents and are shown that
way on our balance sheet. If there are changes in interest
rates, those changes would affect the investment income we
earn on these investments and, therefore, impact our cash
flows and results of operations.
We conduct operations in various countries, which
expose us to changes in foreign exchange rates. The financial
results of our foreign subsidiaries and franchisees may be
materially impacted by exposure to fluctuating exchange
rates. Reported sales, costs and expenses at our foreign
subsidiaries, when translated into U.S. dollars for financial
reporting purposes, can fluctuate due to exchange rate
movement. While exchange rate fluctuations can have a
material impact on reported revenues, costs and expenses,
and earnings, this impact is principally the result of the
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