Build-A-Bear Workshop 2013 Annual Report Download - page 20

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 five products in the past five 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 may not be able to operate successfully if we lose key personnel,
are unable to hire qualified additional personnel, or experience
turnover of our management team.
The success of our business depends upon the quality of associates
throughout our organization. Because guest service is a defining
feature of the Build-A-Bear Workshop experience, we must be able
to hire and train qualified managers and Bear Builder® associates
to succeed. We closed 47 stores in 2012 and 2013 and expect to close
an additional ten to fifteen stores in 2014. Having fewer stores may
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. Additionally, our Founder and Chief Executive Bear
retired from the Company in July 2013 six weeks after we hired a
new Chief Executive Officer. The success of our business depends
on an effective transition. During this transition period, however,
organizational changes are likely to occur, and we may not be able
to retain key senior managers or associates. The loss of certain key
employees, our inability to attract and retain other qualified key
employees or a labor shortage that reduces the pool of qualified
candidates could have a material adverse effect on our business,
financial condition and 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. For the past
three years, 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.
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.
As of December 28, 2013, there were 86 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
10 BUILD- A-BEAR WORKSHOP, INC. 2013 FORM 10 -K