Build-A-Bear Workshop 2011 Annual Report Download - page 23

BUILD-A-BEAR WORKSHOP, INC. 2011 FORM 10-K
could result in short-term disruption to our inventory flow or
quality of the inventory as we transition our orders to new
vendors or factories which could, in turn, disrupt our store
operations and have an adverse effect on our business, financial
condition and results of operations. For example in 2011, one
factory used by one of our vendors closed unexpectedly,
causing us to quickly switch factories for one product, affecting
the quality and flow of the product. Additionally, in the event of
a significant price increase from these suppliers, we may not be
able to find alternative sources of supply in a timely manner or
raise prices to offset the increases, which could have an adverse
effect on our business, financial condition and results of
operations.
Our profitability could be adversely affected by high
petroleum products prices.
The profitability of our business depends to a certain degree
upon the price of petroleum products, both as a component of
the transportation costs for delivery of inventory from our
vendors to our stores and as a raw material used in the
production of our animal skins and stuffing. For example, our
results in fiscal 2011, 2008 and 2007 were impacted by
significant increases in fuel surcharges due to higher
petroleum products prices. We are unable to predict what the
price of crude oil and the resulting petroleum products will be
in the future. We may be unable to pass along to our
customers the increased costs that would result from higher
petroleum prices. Therefore, any such increase could have an
adverse impact on our business and profitability.
We may not be able to operate our European company-
owned stores in the United Kingdom and Ireland profitably.
In April 2006, we acquired The Bear Factory Limited, a
stuffed animal retailer in the United Kingdom owned by The
Hamleys Group Limited, and Amsbra Limited, our former
United Kingdom franchisee (the UK Acquisition). Both The
Bear Factory and Amsbra had losses in prior to our
acquisition. Although we have realized benefits from these
operations as part of our larger company, we may be unable
to continue to do so on a consistent basis. In particular, we
face business, regulatory and cultural differences from our
domestic business, such as economic conditions, changes in
foreign government policies and regulations and potential
restrictions and costs to convert and repatriate currency, as
well as other risks that we may not anticipate. We also face
difficulties realizing benefits because we have less brand
awareness than in the U.S., face higher labor and rent costs,
and have different holiday schedules. In 2007, we terminated
our French franchise agreement and opened three company-
owned stores in France. We were unable to operate the stores
in France profitably and in 2010, we closed all three of our
company-owned stores in France.
Our leases in the United Kingdom and Ireland also
typically contain provisions requiring rent reviews every five
years in which the base rent that we pay is adjusted to current
market rates. These rent reviews require that base rents cannot
be reduced if market conditions have deteriorated but can be
changed “upwards only”. We may be required to pay base
rents that are significantly higher than we have forecast. For
example, past rent reviews have resulted in increases as high
as 40% in select locations within the United Kingdom. As a
result of these and other factors, we may not be able to
operate our European store locations profitably. If we are
unable to do so, our results of operations and financial
condition could be harmed and we may be required to record
significant additional impairment charges.
If we are not able to franchise new stores outside of the
United States, Canada, the United Kingdom and Ireland, 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 company-owned
stores in Canada and our first franchised location in the
United Kingdom. We have continued to expand outside of
our company-owned regions through franchising in a number
of countries. As of December 31, 2011, there were
79 Build-A-Bear Workshop franchised stores located outside
of the United States, Canada, the United Kingdom and
Ireland. 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
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