Build-A-Bear Workshop 2011 Annual Report Download - page 22

BUILD-A-BEAR WORKSHOP, INC. 2011 FORM 10-K
compliance with changing mall rules and the exercise of
discretion by our landlords on various matters within the
malls. In addition, the lease for our store in the Downtown
Disney®District at the Disneyland®Resort in Anaheim,
California provides that the landlord may terminate the lease
at any time, subject to the payment of an early termination
fee. As a result, we cannot assure you that the landlord will
not exercise its right to terminate this lease.
In addition, most of our leases will expire within the next
ten years and many of our initial leases are near completion
and do not contain options to renew. We may not be offered
a lease renewal by our landlord, may not be able to renew
leases under favorable economic terms or maintain our
existing store location thereby requiring additional capital
expenditure to move the store location within the mall. Those
locations may be in parts of the mall that have less traffic or
be positioned further from our desired co-tenants and our
ongoing sales and profitability results may be negatively
affected. The terms of new leases may not be as favorable,
increasing store expenses and impacting overall
profitability. If we execute termination rights, we may have
expenses and charges associated with those closures which
could negatively impact our profitability.
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 as well as
increases in raw material and labor costs 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 vendors. The
pricing of our products in our stores may also be affected by
changes in foreign currency rates and require us to make
adjustments which would impact our revenue and profit in
various markets.
We may suffer negative publicity or be sued if the
manufacturers of our merchandise ship any products that do
not meet current safety standards or production requirements
or if our products are recalled or cause injuries.
Although we require our manufacturers to meet our product
specifications and safety standards and submit our products
for testing, we cannot control the materials used by our
manufacturers. If one of these manufacturers ships
merchandise that does not meet our required standards, we
could in turn experience negative publicity or be sued.
Many of our products are used by small children and
infants who may be injured from usage if age grading or
warnings are not followed. We may decide or be required to
recall products or be subject to claims or lawsuits resulting
from injuries. For example, we have voluntarily recalled four
products in the past three years due to possible safety
issues. While the vendors have historically reimbursed us for
certain, related expenses, negative publicity in the event of
any recall or if any children are injured from our products
could have a material adverse effect on sales of our products
and our business, and related recalls or lawsuits with respect
to such injuries could have a material adverse effect on our
financial position. Additionally, we could incur fines related to
consumer product safety issues from the regulatory authorities
in the countries in which we operate. Although we currently
have liability insurance, we cannot assure you that it would
cover product recalls or related fines, and we face the risk
that claims or liabilities will exceed our insurance
coverage. Furthermore, we may not be able to maintain
adequate liability insurance in the future.
We rely on a few vendors to supply substantially all of our
merchandise, and significant price increases or any disruption
in their ability to deliver merchandise could harm our ability
to source products and supply inventory to our stores.
We do not own or operate any manufacturing facilities. We
purchased approximately 81% of our merchandise in fiscal
2011, approximately 73% in fiscal 2010 and approximately
80% in fiscal 2009 from three vendors. Our 2010 purchases
included a significant purchase of non-proprietary toy
products that were incremental to our traditional
purchasing. Excluding these purchases, we purchased
approximately 80% of our merchandise from three
vendors. These vendors in turn contract for our orders with
multiple manufacturing facilities located primarily in China for
the production of merchandise. Our relationships with our
vendors generally are on a purchase order basis and do not
provide a contractual obligation to provide adequate supply
or acceptable pricing on a long-term basis. Our vendors
could discontinue sourcing merchandise for us at any time. If
any of our significant vendors were to discontinue their
relationship with us, or if the factories with which they contract
were to suffer a disruption in their production, we may be
unable to replace the vendors in a timely manner, which
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