Build-A-Bear Workshop 2011 Annual Report Download - page 32

BUILD-A-BEAR WORKSHOP, INC. 2011 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 December 31, 2011, we
operated 288 stores in the United States, Canada and
Puerto Rico, 56 stores in the United Kingdom and two stores
in Ireland, and had 79 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, bearville.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, six temporary locations,
one location in a zoo, one location in a science center and
an airport.
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 and
Ireland, a webstore and seasonal, event-based locations;
• Transactions with other business partners, mainly
comprised of licensing our intellectual property, including
entertainment properties, for third-party use and
wholesale product sales; and
• International stores operated under franchise agreements.
Selected financial data attributable to each segment for
fiscal 2011, 2010 and 2009, are set forth in Note 19 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 2011, fiscal 2010
and fiscal 2009 in net retail sales per store. For a discussion
of the changes in comparable store sales in fiscal years
2011, 2010 and 2009, 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
commercial activities and contribution from our webstore,
temporary and seasonal event-based locations, as a
percentage of net retail sales, excluding revenue from our
webstore, temporary and seasonal and event-based locations,
was 15.2% for fiscal 2011, 15.3% for fiscal 2010 and
12.4% for fiscal 2009. Total company net loss as a
percentage of total revenues was 4.3% for fiscal 2011 and
3.2% for fiscal 2009. Total company net income as a
percentage of total revenues was 0.0% for fiscal 2010. See
“— Non-GAAP Financial Measures” for a reconciliation of
store contribution to net (loss) income. The net loss in 2011
was primarily attributable to the decrease in comparable store
sales and the recording of a valuation allowance on the
Company’s US deferred tax assets. Net income increased in
2010 due to stable store sales trends, continued cost
reductions, improvements in margin and leverage of fixed
costs. Additionally, certain non-cash charges included in
2009 did not recur, or were significantly lower in 2010. Net
income declined in 2009 due primarily to the decrease in
comparable store sales and the impact of certain non-cash
charges. In 2009, merchandise margin improvement was
more than offset by fixed occupancy cost deleverage due
primarily to the decrease in comparable store sales.
In 2011, our results reflect stablizing economic trends
and modest mall traffic increases but continuing low levels of
consumer confidence. In 2011, our store contribution
percentage was essentially flat with 2010, as declining sales
were offset by lower store expenses, specifically payroll and
supplies. In 2009 and 2010, our results reflect the
challenging retail environment – economic recession,
declining mall traffic, and slowing consumer spending –
factors impacting many retailers and particularly our company
given the discretionary nature of our products and our
experience. In 2010, our store contribution increased,
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