Build-A-Bear Workshop 2014 Annual Report Download

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2014 ANNUAL REPORT
BUILD-A-BEAR WORKSHOP, INC.

Table of contents

  • Page 1
    2014 ANNUAL REPORT BUILD-A-BEAR WORKSHOP, INC.

  • Page 2
    ...percentage represents retail gross margin divided by net retail sales. 3. Store contribution represents net retail sales of store locations open for the full year minus cost of product, marketing and store related expenses divided by net retail sales. BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 3
    ...2. MORE People Grow the core and build new consumer segments 3. MORE Products Drive branded stories and enter new categories 4. MORE Profitability Focus on continued margin expansion while driving sales Sharon Price John Chief Executive Officer BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 1

  • Page 4
    ...OF GUESTS ARE BOYS We have the highest brand loyalty score** among key comparative retail brands * Since 1997. ** Loyalty is measured using an index of likelihood to recommend, likelihood to repurchase, overall satisfaction and preferred company. 2 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 5
    ... value for our partners. E XC ITE M E NT E We have a clear strategy that is working, a new leadership team and organizational structure as well as planned investments in store and IT infrastructure generating excitement for our future growth plans. 2014 ANNUAL REPORT 3 BUILD-A-BEAR WORKSHOP...

  • Page 6
    ...business approach. We made steady progress toward our stated longterm sales productivity and profitability goals culminating in a strong fourth quarter that represented the convergence of the strategies that we had been driving throughout the year. 4 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 7
    ... 2014 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF TOTAL REVENUES** 42.7% 41.0% 41.3% 2012 2013 2014 * North American stores open for the full year. ** Excluding management transition, store closing and, in 2012, asset impairment expenses 2014 ANNUAL REPORT 5 BUILD-A-BEAR...

  • Page 8
    ... we will evolve from a focus on "fixing" the business to one of "building" through a combination of continuous improvement of current initiatives and strategic expansion in additive areas in order to achieve our goal of sustained profitable growth. 6 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 9
    .... This consumer segment currently represents over 20% of sales and has a tendency to over-index on less price-sensitive "gift-able" and on-line purchases. Therefore, we will leverage our e-commerce business to efficiently target these consumers. BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 7

  • Page 10
    ...tend to garner higher price points, drive add-on purchases and create "play beyond the plush". S T R AT E G I C E X PA N S I O N : We will continuously improve our value engineering initiatives to further optimize product margins while implementing new systems that facilitate sales growth, increase...

  • Page 11
    ... these relationships evolve to include co-marketing and, in the case of Disney, real estate. We expect to continue to build on the cross-functional strength of our key relationships to expand our business and create incremental value for our partners. BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 9

  • Page 12
    ... points including a new store design and updated web site as we prepare to celebrate our upcoming 20th birthday in 2017. MORE places, MORE people, MORE products, MORE profitability - BBW is a company with an exciting future and even MORE to come! 10 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 13
    ...) 1954 Innerbelt Business Center Drive St. Louis, Missouri (Address of Principal Executive Offices) (314) 423-8000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, par value $0.01 per share Securities...

  • Page 14
    ... Stockholder Matters Certain Relationships and Related Transactions and Director Independence Principal Accountant Fees and Services 31 32 32 32 32 PART IV Item 15. Exhibits and Financial Statement Schedules 33 Exhibit Index Signatures 49 54 2 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 15
    ... expenditures; • our anticipated rate of store closures, relocations and openings; and • our anticipated costs related to store closures, relocations and openings. These statements are only predictions based on our current expectations and projections about future events. Because these forward...

  • Page 16
    ... Workshop, Inc., a Delaware corporation, was formed in 1997 and is primarily a specialty retailer offering a "make your own stuffed animal" interactive retail-entertainment experience. As of January 3, 2015, we operated 324 company-owned retail stores in the United States, Canada, the United Kingdom...

  • Page 17
    ... Build-A-Bear Workshop store experience as a distinctive combination of entertainment and retail with limited direct competition. Because our signature product is a stuffed animal, we compete with toy retailers, such as Wal-Mart, Toys "R" Us, Target, Kmart and other discount chains. Since we develop...

  • Page 18
    ....gov. Our Annual Reports to shareholders, press releases and investor updates are also available on our website, free of charge, in the Investor Relations section or by writing to the Investor Relations department at World Bearquarters, 1954 Innerbelt Business Center Dr., St. Louis, MO 63114. ITEM...

  • Page 19
    ..., operate our Web sites, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. There is a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or...

  • Page 20
    ... to close other stores in the future. In July 2005, we opened a flagship store in New York City. Because this store has much larger annual sales than our typical mall-based stores, closing this store could have an adverse impact on our revenues. 8 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 21
    ... this lease. We may not be able to operate our international company-owned stores profitably. We currently operate company-owned stores in the United Kingdom, Canada, Ireland and Denmark. Our future success in international markets may be impacted by differences in consumer demand, regulatory and...

  • Page 22
    .... As of January 3, 2015, there were 71 traditional Build-A-Bear Workshop international franchised stores. 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...

  • Page 23
    ... distribution center to receive, store and distribute merchandise for the majority of our North America stores. We rely on third parties to manage all of the warehousing and distribution aspects of our business on the West Coast of the United States BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT...

  • Page 24
    ..." teddy bear and stuffed animal experiences in retail stores and kiosks. Although we believe that currently none of these companies offers the breadth and depth of the Build-A-Bear Workshop products and experience, we cannot assure you that they will not compete directly with us in the future. Many...

  • Page 25
    ...stores located primarily in major malls throughout the United States, Canada, Puerto Rico, the United Kingdom and Ireland in our Retail segment. Our leases in the United Kingdom and Ireland typically have rent reviews every five years in which the base rental rate is adjusted to current market rates...

  • Page 26
    ... not involved in any pending legal proceedings that we believe would be likely, individually or in the aggregate, to have a material adverse effect on our financial condition or results of operations. ITEM 4. MINE SAFETY DISCLOSURE Not applicable 14 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 27
    ... the cumulative total return on the Russell 2000® Index and an SECdefined peer group of companies identified as SIC Code 5600-5699 (the "Peer Group"). The Peer Group consists of companies whose primary business is the operation of apparel and accessory retail stores. Build-A-Bear Workshop is not...

  • Page 28
    ... and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA Throughout this Annual Report on Form 10-K, we refer to our fiscal years ended January 3, 2015, December 28, 2013, December 29, 2012, December 31, 2011 and January 1, 2011, as fiscal years 2014, 2013, 2012, 2011 and 2010, respectively. Our...

  • Page 29
    ... the United Kingdom, Ireland and, prior to 2011, France. Square footage for stores located in Europe is estimated selling square footage. Average net retail sales per store represents net retail sales only from stores open throughout the entire period in North America divided by the total number of...

  • Page 30
    ...2015, we operated 324 Companyowned stores and had 71 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 sites, buildabear.com and buildabear.co.uk. We operate in three segments that share...

  • Page 31
    ... (3.3)% (1) Comparable store sales percentage changes are based on net retail sales and stores are considered comparable beginning in their thirteenth full month of operation. (2) Excludes our web stores and temporary and seasonal locations. BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 19

  • Page 32
    ... whereby third parties manufacture merchandise carrying the Build-A-Bear trademark and sell it to other retailers. Stores Company-owned stores: The number of Build-A-Bear Workshop stores in the United States, Canada, Puerto Rico, the United Kingdom and Ireland for the last three fiscal years can be...

  • Page 33
    ... each in a ballpark, a zoo and in Times Square in New York City. Additionally, we had eight locations located within other retailers' stores. Five of these shop-in-shop locations along with the Times Square location closed in the first week of fiscal 2015 as planned due to the seasonal nature of the...

  • Page 34
    ... remodels and relocations Increase from new stores Change in deferred revenue estimate Increase from non-traditional locations, including web sales Impact of foreign currency translation $ $ Fiscal 2014 (16.6) 16.4 5.1 4.7 1.7 1.3 1.9 14.5 22 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 35
    ...believe store contribution is useful to investors in evaluating our operating performance because it, along with the number of stores in operation, directly impacts our profitability. Revenue from international franchise fees were $3.6 million for fiscal 2013 and fiscal 2012. Commercial revenue was...

  • Page 36
    ... in their respective captions. (4) Other revenues from external customers are comprised of international franchising and commercial revenues. (5) Goodwill impairment represents the write-off of the goodwill associated with the UK reporting unit. 24 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 37
    ... in 2012 related primarily to the continued installation and upgrades of central office information technology systems, the opening of five new stores, the remodeling or relocation of 14 stores, offset by the maturity of short-term investments. BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 25

  • Page 38
    ...cases. Rents are charged monthly and paid in advance. Our leases in the United Kingdom and Ireland typically have terms of ten to fifteen years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide...

  • Page 39
    ... using necessary estimates. Our accounting policies are more fully described in Note 2 to our Consolidated Financial Statements, which appear elsewhere in this Annual Report on Form 10-K. We have identified the following critical accounting estimates: BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT...

  • Page 40
    ...Company's returns in the jurisdictions in which the Company does business. Management regularly assesses the tax risk of the Company's return filing positions and believes its accruals for uncertain tax benefits are adequate as of January 3, 2015. 28 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 41
    ...2015, the end of the period covered by this Quarterly Report. It should be noted that our management, including the Chief Executive Officer and Chief President Bear and the Chief Financial Officer... the individual acts of some persons, by collusion BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 29

  • Page 42
    ... be detected. Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Build-A-Bear Workshop, Inc. We have audited Build-A-Bear Workshop, Inc. and subsidiaries (collectively, the Company's) internal control over financial reporting as of January 3, 2015, based...

  • Page 43
    ...'s and the Snickers/M&M Mars business. Ms. John serves on the Board of Directors of Jack in the Box Inc., a publicly traded restaurant company. Gina Collins, 42, joined Build-A-Bear Workshop in January 2014 as Chief Marketing Officer and Brand Bear. Prior to joining the Company, Ms. Collins was at...

  • Page 44
    ... investment management and development firm. Ms. Klocke began her career in 1982 with Ernst & Young LLP. In 2014, Ms. Klocke announced her plans to leave the Company in the first half of fiscal 2015. Jennifer Kretchmar, 41, joined Build-A-Bear Workshop in August 2014 as Chief Product Officer...

  • Page 45
    ... Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 19, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP St. Louis, Missouri March 19, 2015 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 33

  • Page 46
    ... assets, net Total Assets $ 62,766 304 3,206 212,054 $ 70,163 518 3,847 195,611 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses Gift cards and customer deposits Deferred revenue Deferred tax liability Total current liabilities Deferred franchise revenue...

  • Page 47
    ..., except share and per share data) Fiscal Year 2014 2013 2012 Revenues: Net retail sales Franchise fees Commercial revenue Total revenues $ 387,725 2,531 2,098 392,354 $ 373,173 3,564 2,332 379,069 $ 374,553 3,598 2,790 380,941 Costs and expenses: Cost of merchandise sold Selling, general...

  • Page 48
    ...29, 2012 Share repurchase Stock-based compensation Shares issued under employee stock plans Other comprehensive income Net loss Balance, December 28, 2013 Share repurchase Stock-based compensation Shares issued under employee stock plans Other comprehensive income Net income Balance, January 3, 2015...

  • Page 49
    ...Lease related liabilities Gift cards and customer deposits Deferred revenue Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Purchases of other assets and other intangible assets Purchases of short term investments Proceeds from sale...

  • Page 50
    ... Build-A-Bear Workshop, Inc. (the Company) is a specialty retailer of plush animals and related products. The Company began operations in October 1997. The Company sells its products through its 324 company-owned stores operated primarily in leased locations in malls in the United States, Canada...

  • Page 51
    ... of the cost of merchandise portion of unredeemed gift cards over five years old. The difference between the value of gift cards and the amount escheated is recorded as income in the consolidated statement of operations. The Company has a customer loyalty program, the Stuff Fur Stuff club, whereby...

  • Page 52
    ... correspond to the funds offered in the Company's 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The fair value of the assets, classified as trading securities, and corresponding liabilities are based on unadjusted quoted market prices for the funds in...

  • Page 53
    ... cash flows over the remaining life of the related assets, the carrying value of the assets is reduced to fair value, calculated as the net present value of estimated future cash flows for each asset group, and asset impairment charges are 2014 ANNUAL REPORT 41 BUILD-A-BEAR WORKSHOP, INC.

  • Page 54
    ... the sale of the inventory was recorded at its cost in the Commercial segment. The trade credits expire in 2015. The Company evaluated its trade credits to determine if an impairment existed at January 3, 2015. Based on current utilization expectations, the Company determined that the full value of...

  • Page 55
    ...the Company's provision for income taxes and effective tax rate if recognized. Management estimates that it is reasonably possible that the total amount of uncertain tax benefits could decrease by as much as $0.5 million within the next 12 months. BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 43

  • Page 56
    ...Foreign Total $ $ 12,973 3,051 16,024 $ $ 2013 (1,134) (984) (2,118) 2012 $ (11,550) (36,879) $ (48,429) The following tax years remain open in the Company's major taxing jurisdictions as of January 3, 2015: United States (Federal) United Kingdom Canada Ireland 2011 through 2014 2008 through 2014...

  • Page 57
    ...exercise price of all options shall be the fair market value on the date of the grant. The vesting provision of individual awards is at the discretion of the compensation committee of the board of directors and generally ranges from one to four years. BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT...

  • Page 58
    ... of 65%; (c) risk-free interest rates ranging from 1.7% to 2.1%; and (d) an expected life ranging from 6 to 6.25 years. The grant date fair value of options granted in 2014 was approximately $0.6 million. The assumptions used in the option pricing model during fiscal 2013 were: (a) dividend yield of...

  • Page 59
    ... purchases in fiscal 2014, 2013 and 2012, respectively. (16) Segment Information The Company's operations are conducted through three operating segments consisting of retail, international franchising, and commercial. The retail segment includes the operating activities of company-owned stores...

  • Page 60
    ... (3) North America includes the United States, Canada, Puerto Rico and franchise business in Mexico Europe includes the United Kingdom, Ireland, franchise businesses in Europe Other includes franchise businesses outside of North America and Europe 48 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 61
    ... Exhibits. The following is a list of exhibits filed as a part of the Annual Report on Form 10-K: Exhibit Number Description 2.1 Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the Registrant (incorporated by reference from Exhibit 2.1 to our Registration...

  • Page 62
    ... between Maxine Clark and Build-A-Bear Workshop, Inc., dated January 28, 2013 (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K, filed on January 31, 2013) 10.3.2* 10.4.1* 10.3.3* 10.4.2* 10.3.4* 10.4.3* 10.3.5* 50 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 63
    ... 10.1 of our Current Report on Form 8-K, filed on July 10, 2006) Sixth Amendment to Loan Documents between Build-ABear Workshop, Inc., Build-A-Bear Workshop Franchise Holdings, Inc. Build-A-Bear Entertainment, LLC, Build-ABear Retail Management, Inc., and Build-A-Bear Workshop UK Holdings Ltd., as...

  • Page 64
    ... to our Current Report on Form 8-K, filed on October 3, 2005) Second Amended and Restated Revolving Credit Note dated May 31, 2005 by the Registrant, Shirts Illustrated, LLC, Build-A-Bear Workshop Franchise Holdings, Inc., Build-ABear Entertainment, LLC, and Build-A-Bear Retail Management, Inc., as...

  • Page 65
    ... Exhibit 21.1 to our Annual Report on Form 10-K, for the year ended December 29, 2012 Consent of Ernst & Young LLP Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Officer and Chief President Bear) Rule 13a-14(a)/15d...

  • Page 66
    ... this report to be signed on its behalf by the undersigned, thereunto duly authorized. BUILD-A-BEAR WORKSHOP, INC. (Registrant) Date: March 19, 2015 By: /s/ Sharon John Sharon John Chief Executive Officer and Chief President Bear By: /s/ Voin Todorovic Voin Todorovic Chief Financial Officer KNOW...

  • Page 67
    THIS PAGE INTENTIONALLY LEFT BLANK BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 55

  • Page 68
    ..., International & Strategic Assistant to CEO Counsel Bryan Cave LLP St. Louis, Mo. Roger Parry Sr. Managing Director, Stores - The United Kingdom and Republic of Ireland Form 10-K The Build-A-Bear Workshop Form 10-K may be requested by a letter to the Investor Relations department at the World...

  • Page 69
    ...58 252 Australia Bahrain Canada* Denmark Germany Japan Kuwait Mexico Norway Oman Republic of Ireland* Singapore South Africa Sweden Thailand Turkey United Arab Emirates United Kingdom* United States* 82% Company-Owned 18% Franchised * Company owned BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT

  • Page 70
    BUILD-A-BEAR WORKSHOP, INC. 1954 Innerbelt Business Center Drive St. Louis, MO 63114-5760 www.buildabear.com