Build-A-Bear Workshop 2014 Annual Report Download - page 22

Our compliance with the regulations is subject to interpretation
and review by applicable authorities. Change in regulations or
interpretation could negatively impact our operations by increasing
the cost of and reducing the supply of products available to us. In
addition, decreases in the value of the U.S. dollar against foreign
currencies, particularly the Chinese renminbi, could increase the cost
of products we purchase from overseas vendors. The pricing of our
products in our stores may also be aected by changes in foreign
currency rates and require us to make adjustments which would
impact our revenue and profit in various markets.
We may suer negative publicity or be sued if the manufacturers of
our merchandise ship any products that do not meet current safety
standards or production requirements or if our products are recalled
or cause injuries.
Although we require our manufacturers to meet our safety standards
and product specifications and submit our products for 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 six 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 eect on sales of our products and our business, and related
recalls or lawsuits with respect to such injuries could have a material
adverse eect 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 and our ability to attract and retain
qualified key employees. In June 2013, we hired a new Chief Executive
Ocer who replaced our retiring Founder and Chief Executive Bear.
In 2013 and 2014, four other executive ocers left the Company, three
executive ocers joined the Company and the Company is currently
conducting a search for a new Chief Operations Ocer. The success
of our business depends on eective transition of these positions.
During these transitions, organizational changes are likely to occur
and we may not be able to retain key managers or associates. We
may incur expenses related to the transition in these positions that
could negatively impact the profitability of our business. 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 eect 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 between 75% and 80% of our
merchandise from three vendors. These vendors in turn contract
for the production of merchandise with multiple manufacturing
facilities, located primarily in China and, beginning in 2014, in
Vietnam. 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 suer 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 eect on our
business, financial condition and results of operations. 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 oset the increases, which could have an adverse
eect on our business, financial condition and results of operations.
If we are unable to eectively manage our international franchises,
attract new franchisees or if the laws relating to our international
franchises change, our growth and profitability could be adversely
aected and we could be exposed to additional liability.
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 dierent demographic characteristics, competitive
conditions, consumer tastes and discretionary spending patterns
than our existing owned and operated markets, which impact the
performance of these stores. Additionally, our franchisees may
experience financing, merchandising and distribution expenses and
challenges that are dierent 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
10 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT