Build-A-Bear Workshop 2012 Annual Report Download - page 23

BUILD-A-BEAR WORKSHOP, INC. 2012 FORM 10-K
successor that can continue to drive the execution of the
company’s strategic initiatives as well as contribute additional
strategic thought leadership to our company. We may not be
able to retain all senior management or associates during the
transition period and integration period of the new CEB.
We have also announced our plans to close 50 to 60
additional stores by the end of 2014. To the extent available,
managers and associates will be offered opportunities at
nearby stores. This may lead to higher company turnover. In
addition, having fewer stores will limit promotion opportunities
in the future for current associates, which may have a negative
impact on our ability to retain quality employees, which may in
turn have a negative impact on our results of operations.
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 80% of our merchandise in fiscal
2012, approximately 81% in fiscal 2011 and approximately
73% in fiscal 2010 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 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 2012, 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.
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 29, 2012, there were 91
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 financing, 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
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