Build-A-Bear Workshop 2012 Annual Report Download - page 32

BUILD-A-BEAR WORKSHOP, INC. 2012 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 primarily 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 29, 2012, we
operated 283 traditional stores in the United States, Canada
and Puerto Rico, 58 stores in the United Kingdom and two
stores in Ireland, and had 91 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 a
Major League Baseball ballpark, a zoo, a science center, an
airport and other temporary locations.
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 web store 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 2012, 2011 and 2010, are set forth in Note 17 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 2012, fiscal 2011
and fiscal 2010 in net retail sales per store. For a discussion
of the changes in comparable store sales in fiscal years
2012, 2011 and 2010, see “— Revenues” below. Store
contribution, which consists of income (loss) before income tax
expense (benefit); interest; store depreciation, amortization
and impairment; goodwill impairment; losses from investment
in affiliate, preopening and general and administrative
expense, excluding franchise fees, income from commercial
activities and contribution from our web store, temporary and
seasonal event-based locations, as a percentage of net retail
sales, excluding revenue from our web store, temporary and
seasonal and event-based locations, was 13.2% for fiscal
2012, 15.2% for fiscal 2011 and 15.3% for fiscal 2010.
Total company net loss as a percentage of total revenues was
12.9% for fiscal 2012 and 4.3% for fiscal 2011. 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 2012 was primarily attributable
to the decrease in comparable store sales and the impairment
of the Company’s goodwill related to its UK operations. 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.
In 2012, our results were negatively impacted by the
declining sales in the UK. In North America, the results reflect
the early results of turnaround efforts, increased costs for
marketing, newly imagined store design remodels and
openings and store closings. In 2011, our results reflect
stabilizing 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 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.
Our 2013 plan builds on steps taken in 2012 to balance
our long term business goals while recognizing the continuing
challenges of the retail environment. We plan to improve store
productivity and profitability by strategically closing 50 to 60
stores during the next two years and reducing the square
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