Build-A-Bear Workshop(BBW) - 2024 Q4 - Annual Report

Forward-Looking Statements This section outlines forward-looking statements in the 10-K, reflecting current views on future events and financial performance, subject to various risks and uncertainties Overview of Forward-Looking Statements This section details the nature of forward-looking statements, their identification, and the inherent risks that may cause actual results to differ materially - Forward-looking statements are identified by words like 'may,' 'expect,' 'plan,' 'anticipate,' 'believe,' 'estimate,' 'intend,' 'predict,' 'future,' 'potential,' 'will,' 'could,' 'target,' 'project,' 'contemplate,' or 'continue'[5] - Key areas covered by forward-looking statements include future financial performance, operating strategies, capital expenditures, store relocations/openings/closures, and associated costs[5] - Actual results may differ materially due to important factors discussed under 'Risk Factors' and other parts of the report, operating in a competitive and rapidly changing environment[6][7] Item 1. Business Overview Build-A-Bear Workshop is an experiential retailer focused on interactive stuffed animal creation, expanding globally through diverse channels and strategic brand initiatives Company Profile and Brand Strategy Build-A-Bear Workshop, founded in 1997, leverages its interactive retail experience and strong brand to expand physical and e-commerce presence, targeting multi-generational audiences - Build-A-Bear Workshop was founded in 1997 as a mall-based, experiential specialty retailer[10] - The company has sold over 240 million furry friends globally, establishing high consumer awareness and positive brand affinity[10] - Strategy includes expanding brick-and-mortar beyond traditional malls (e.g., tourist destinations), growing e-commerce for gifting and collectibles, and targeting a multi-generational audience (children, teens, adults) with licensed products[10] Global Presence and Reportable Segments As of February 3, 2024, the company operated 525 global locations across three reportable segments: DTC, Commercial, and International Franchising Global Locations as of February 3, 2024 | Location Type | Count | | :---------------------- | :---- | | Total Global Locations | 525 | | Corporately-Managed | 359 | | Partner-Operated | 92 | | International-Franchise | 74 | - The company achieved a net new unit growth of 37 experience locations in fiscal 2023, comprising 9 corporately managed, 22 partner-operated, and 6 international franchise locations[11] - Reportable segments are Direct-to-Consumer (DTC), Commercial, and International Franchising, determined by customer types and product/service offerings[12] Operational Model and Consumer Engagement The company offers interactive experiences via physical stores and e-commerce, leveraging omnichannel capabilities and diverse digital platforms to engage various consumer segments - Operations include interactive physical stores and e-commerce sites (online 'Bear-Builder', age-gated 'Bear Cave', 'HeartBox' gift site)[13] - Retail stores primarily target families with children, while e-commerce focuses on tweens, teens, and adults for collectibles and gifting[13] - The company aims to create a continuous circle of engagement through expanded products, licensing, evolved experiences, and entertainment content to leverage brand equity[16] Strategic Priorities for Growth Strategic priorities include global expansion, digital transformation, and profitable growth, supported by non-traditional locations, e-commerce, and capital returns to shareholders - Strategic priorities are global expansion of unique experience locations, accelerating comprehensive digital transformation, and driving profitable growth with capital returns[17][18][19] - In fiscal 2023, the company opened a net 37 retail experience locations and expects at least 50 net new units in fiscal 2024, with over 35% of total stores now in non-traditional settings[17] - E-commerce sales in 2023 have tripled since 2018, supported by digital initiatives, marketing, loyalty programs (e.g., Count Your Candles), and content (e.g., 'Glisten and the Merry Mission')[18] - The company returned over $42 million to shareholders in fiscal 2023 through $20.5 million in share repurchases and a $22.0 million special dividend, and announced a new quarterly dividend program in March 2024[19] Sourcing, Quality, and Inventory Merchandise is sourced primarily from Vietnam and China, adhering to safety and ethical standards, with fiscal 2023 inventory decreasing by $7.0 million to $63.5 million - Merchandise is sourced from multiple vendors, primarily in Vietnam and China, and includes plush products, pre-stuffed items, sounds, scents, clothing, and accessories[21] - All toy products comply with governmental safety requirements (e.g., CPSC, CPSIA, ASTM-F963, EN71) and supplier factories must be ICTI Ethical Toy Program certified or comparable[22] Inventory Balance | Fiscal Year End | Inventory Balance (Millions USD) | | :-------------- | :------------------------------- | | Feb 3, 2024 | $63.5 | | Jan 28, 2023 | $70.5 | | Change | -$7.0 (Decrease) | Supply Chain and Fulfillment The company utilizes a 350,000 sq-ft Ohio distribution center and third-party warehouses globally, leveraging omnichannel strategies to optimize supply chain and fulfillment - Owns a 350,000 sq-ft distribution center in Groveport, Ohio, serving most U.S. and Canada stores and e-commerce fulfillment[24] - Utilizes third-party warehouses in Southern California (West Coast U.S.), Selby, England (Europe), and Shanghai, China (Asia)[24] - Introduced 'Buy Online, Ship From Store' and 'Buy Online, Pick Up In Store' (U.S.) and 'Click and Collect' (U.K.) in fiscal 2020, leveraging stores as mini distribution centers[27] Workforce Information As of February 3, 2024, the company employed approximately 1,000 full-time and 3,550 part-time non-unionized employees across its global operations Employee Count as of February 3, 2024 | Employee Type | Count | | :------------ | :---- | | Full-time | ~1,000 | | Part-time | ~3,550 | - Employees are located in the U.S., Canada, U.K., and Ireland, with part-time numbers fluctuating seasonally[28] - No employees are represented by a labor union, and the company reports good employee relations[28] Competitive Landscape The company faces diverse competition from direct 'make your own' stores, major toy manufacturers and retailers, entertainment venues, and gift-giving businesses - Direct competition is limited to small 'make your own' teddy bear stores/kiosks[29] - Indirect competition includes toy manufacturers (Ty, Mattel, Hasbro, Lego) and retailers (Amazon, Walmart, Target, specialty toy stores)[30] - Competes for family entertainment dollars with movie theaters, amusement parks, arcades, and other mall-based entertainment[30] - Gift-giving and affinity business competes with companies like Vermont Teddy Bear, Funko, and 1-800 Flowers[30] Brand Protection and Licensing Intellectual property, including patents expiring in 2032 and 2033, is critical, supported by licensing and strategic relationships with major entertainment and sports brands - Intellectual property (copyrights, service marks, trademarks, trade secrets, patents) is critical to success, with patents expiring in 2032 and 2033[31] - Maintains licensing and strategic relationships with family-oriented brands, including Disney, NBCUniversal, Lucasfilm, Warner Bros., Pokémon, ViacomCBS, Nintendo, and major professional sports leagues[32] Public Filings and Investor Relations The company complies with SEC reporting requirements, making periodic reports available on its investor relations website and the SEC's website - The company files periodic reports with the SEC under the Securities Exchange Act of 1934[33] - Filings are available free of charge on the company's investor relations website (http://ir.buildabear.com) and the SEC's website (http://www.sec.gov)[33](index=33&type=chunk) Item 1A. Risk Factors The company faces significant risks across macroeconomic, operational, international, legal, technology, and stock ownership categories, potentially impacting financial performance and business continuity Macroeconomic and Industry Risks Financial performance is sensitive to global economic conditions, inflation, changing consumer interests, intense competition, and potential disruptions from global health pandemics - Uncertainty or decline in global economic conditions (inflation, rising interest rates, geopolitical conflicts) can reduce discretionary consumer spending, adversely affecting liquidity and profitability[36][37] - Inflation impacted business operations in fiscal 2023, particularly rising store labor costs, and is expected to continue into fiscal 2024[38] - Success depends on adapting to rapidly changing consumer interests and effective marketing, with a shift towards digital outlets that may not always be as effective as traditional programs[41][43] - The company operates in a highly competitive environment with low barriers to entry, competing with other retailers, toy stores, manufacturers, and entertainment venues[47][48] - Global or regional health pandemics could negatively impact demand, supply chain, strategic execution, and financial performance[50] Operational Risks Operational risks include maintaining consumer interest, favorable lease terms, successful omnichannel execution, and mitigating technology and distribution center disruptions - Failure to generate interest in the interactive retail experience and products, or to respond to changing consumer preferences and licensed product demand, could adversely affect sales and profitability[53][54][55] - Inability to renew, renegotiate, or replace store leases on favorable terms, or violations of current lease terms, could harm revenue and profitability, especially with shorter-term leases in North America and 'upwards only' rent reviews in the U.K. and Ireland[56][57][59] - Failure to successfully execute omnichannel and brand expansion strategies, including e-commerce and digital transformation investments, may adversely affect financial condition and profitability[61][62][63] - Operations are subject to technology-related risks, including system failures, cyber-attacks, and the need to keep pace with rapid technological change[64][65] - Dependence on its own distribution center in Ohio and third-party centers in California and Europe means disruptions (natural disasters, labor issues, system failures) could impair inventory distribution and sales[69][70] International Operations and Supply Chain Risks International operations and supply chain face risks from vendor reliance, geopolitical factors, currency fluctuations, and partner performance in diverse regulatory environments - Reliance on five global supply chain vendors (73% of merchandise in 2023, 77% in 2022) primarily in Vietnam (29% in 2023) and China (63% in 2023) exposes the company to price increases or disruptions[71][72] - International corporately-managed locations (U.K., Canada, Ireland) face risks from differing consumer demand, regulatory/cultural differences, economic conditions, public health issues, and foreign currency fluctuations[73][74] - Merchandise manufactured by foreign manufacturers exposes the company to import restrictions, tariffs, labor strikes, and financial/political instability[75][76] - Growth and profitability could be adversely affected if international partner-operated locations (92 stores) and franchised stores (74 stores) are not effectively managed or if laws change[78][79][81][82][83] Legal, Technology, and Intellectual Property Risks Risks include IT infrastructure disruptions, data breaches, compliance with privacy laws, intellectual property infringement, product safety, and ESG initiative evolution - Risks include disruptions, failures, or security breaches of IT infrastructure, leading to business interruption, information theft, or reputational damage from cyber-attacks[84][85] - Storing and transmitting personal information exposes the company to privacy and security law violations (e.g., GDPR, CCPA), potentially resulting in liability, fines, and reputational harm[86][88] - Failure to protect trademarks or other intellectual property, or being sued for infringement, could be costly and damage reputation[90][91] - Product safety issues, recalls, or injuries, as well as manufacturers violating labor laws or engaging in unethical practices, could lead to negative publicity, lawsuits, and financial impact[92][93][94] - Failure to evolve environmental, social, and governance (ESG) initiatives in a timely manner could result in negative publicity and damage to brand reputation[95][96] Common Stock Ownership Risks Common stock price volatility is influenced by quarterly results, economic conditions, and operational fluctuations, while corporate provisions may limit stockholder influence - Quarterly results are subject to fluctuations from various factors (profitability, revenues, economic conditions, marketing, seasonality, store changes, consumer preferences, competition, weather, public health, 53rd week impact), which could cause stock price decline[98] - Fluctuations in operating results could reduce cash flow, restrict share repurchases, or lead to discontinuation of the quarterly dividend program[99][100] - The company's relatively low market capitalization can cause stock price volatility, attracting activist shareholders and incurring associated costs[102][103] - Corporate documents and Delaware law contain provisions that may prevent or frustrate stockholder attempts to replace management, potentially affecting stock value[104][105] General Business Risks General business risks include the loss of key personnel, inability to hire qualified staff, and potential negative impacts from unsuccessful acquisitions - Loss of key personnel, inability to hire qualified staff, or management turnover (e.g., termination of Chief Digital and Merchandising Officer) could materially harm business and operating strategies[106] - Unsuccessful acquisitions or strategic transactions, including integration challenges, may negatively affect financial condition and profitability[107] Item 1B. Unresolved Staff Comments This section indicates there are no unresolved comments from the SEC staff regarding the company's periodic reports Item 1C. Cybersecurity This section details the company's cybersecurity risk management, strategy, and governance framework, including board oversight and incident response protocols Cybersecurity Risk, Management, and Strategy The company's cybersecurity strategy, aligned with NIST and PCI DSS, involves a dedicated team, regular audits, a 24/7 SOC, and employee training to manage ongoing threats - Cybersecurity strategy is guided by NIST Cybersecurity Framework and complies with Payment Card Industry Data Security Standards[109] - The cybersecurity team, led by the CTO, is responsible for risk assessments, monitoring, and employee training, collaborating with external partners[110] - Internal teams conduct regular audits and penetration testing, while external experts annually assess cybersecurity maturity. A 24/7 Security Operations Center (SOC) identifies, lessens, and reacts to cyber threats[111] - The Incident Response Team (IRT) manages and communicates cybersecurity incidents, conducting regular tabletop exercises. All employees receive annual data security and privacy training[112] - Cybersecurity threats have not materially affected the company's business strategy, results of operations, or financial condition through the filing date, with no significant incidents in the past fiscal year[114] Cybersecurity Governance Cybersecurity governance involves Board oversight delegated to the Audit Committee, with regular discussions and leadership from qualified CTO and Director of Security - The Board of Directors delegates cybersecurity risk management oversight to the Audit Committee, which has a member with extensive technology experience[115] - The Audit Committee engages in regular, at least quarterly, discussions on cybersecurity, receiving reports from the IT Security Team and presentations from third-party experts[115] - Cybersecurity initiatives are led by the CTO and Director of Security, both holding relevant degrees and certifications (e.g., Computer Hacking Forensics Investigator, Certified Ethical Hacker)[116] - The Security and Technology Risk Leadership Committee and the Privacy, Data Governance, and Artificial Intelligence Committee oversee related strategies[117] Item 2. Properties This section details the company's owned and leased properties, including retail stores, corporate offices, and distribution centers across its global operations Store Locations As of February 3, 2024, the company operated 359 corporately-managed retail stores, primarily in leased mall locations across North America and Europe - As of February 3, 2024, the company operated 359 corporately-managed retail stores[118] - Stores are primarily located in leased mall locations in the U.S., Canada, the U.K., and Ireland[118] Non-Store Properties Non-store properties include a 350,000 sq-ft Ohio distribution center, leased corporate headquarters, and third-party distribution centers globally - Owns a 350,000 sq-ft warehouse and distribution center in Groveport, Ohio, for North American operations and e-commerce fulfillment[119] - Leases 58,000 sq-ft for corporate headquarters in St. Louis, Missouri, and approximately 6,500 sq-ft for regional headquarters in Slough, England[119] - Contracts with third-party distribution centers in Southern California (U.S. West Coast), Selby, England (Europe), and Shanghai, China (Asia)[119] Item 3. Legal Proceedings This section outlines the company's legal proceedings, including routine matters and specific disputes, and their potential financial implications Item 4. Mine Safety Disclosure This section indicates that mine safety disclosures are not applicable to the company's operations Item 5. Market for Common Equity, Stockholder Matters, and Equity Purchases This section covers information regarding the company's common stock, including market listing, shareholder matters, dividends, and share repurchase programs Common Stock and Holders Common stock is listed on the NYSE under 'BBW' since 2004, with 1,864 holders of record and 13,980,206 shares outstanding as of April 15, 2024 - Common stock is listed on the New York Stock Exchange (NYSE) under the symbol 'BBW' since October 28, 2004[122] Common Stock Holders and Shares Outstanding | Metric | Value | | :----------------------------------- | :----------- | | Holders of Record (as of Apr 15, 2024) | ~1,864 | | Shares Outstanding (as of Apr 15, 2024) | 13,980,206 | Dividends and Issuer Purchases of Equity Securities The company declared a $1.50 special dividend in fiscal 2023, initiated a $0.20 quarterly dividend in 2024, and repurchased 223,869 shares in Q4 2023 - A special cash dividend of $1.50 per share was paid on April 6, 2023[123] - A new quarterly dividend program was approved on March 13, 2024, with an initial quarterly dividend of $0.20 per share paid on April 11, 2024[123] Issuer Purchases of Equity Securities (Fiscal Q4 2023) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | Remaining Authorized ($) | | :-------------------------- | :--------------------- | :------------------------------- | :----------------------- | | Oct 29, 2023 - Nov 25, 2023 | 71,178 | 24.45 | 29,579,380 | | Nov 26, 2023 - Dec 30, 2023 | 52,493 | 23.58 | 28,341,639 | | Dec 31, 2023 - Feb 3, 2024 | 100,198 | 22.32 | 26,105,492 | | Total | 223,869 | 23.29 | 26,105,492 | - The $50 million share repurchase program, authorized in August 2022, allows repurchases through August 31, 2025[125] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, operational results, liquidity, and capital resources for the reported fiscal periods Business Overview (MD&A) The company's strategy leverages brand strength to evolve retail, expand internationally, and grow e-commerce, targeting a broader consumer base through entertainment and licensing - Strategy involves evolving brick-and-mortar beyond traditional malls, expanding internationally via partner/franchise models, and growing e-commerce[132] - Aims to broaden consumer base to tweens, teens, and adults through entertainment, sports licensing, collectibles, and gifting[132] Store Count as of February 3, 2024 | Store Type | Count | | :---------------------- | :---- | | Corporate-managed | 359 | | Third-party retail | 92 | | International franchised | 74 | Segments and Fiscal 2023 Financial Highlights The company operates in three segments, with fiscal 2023 net income increasing to $52.8 million and $44.3 million cash, while returning over $42 million to shareholders - Operates in three segments: Direct to Consumer (DTC), Commercial, and International Franchising, sharing management, systems, merchandising, and marketing infrastructure[135] - Fiscal 2023 was a 53-week period, compared to 52 weeks in fiscal 2022[136] Fiscal Year Net Income | Fiscal Year | Net Income (Millions USD) | | :---------- | :------------------------ | | 2023 | $52.8 | | 2022 | $48.0 | | Change | +$4.8 (10.0%) | - Ended fiscal 2023 with $44.3 million in cash, cash equivalents, and restricted cash, with no borrowings under its credit agreement[136] - Utilized $20.5 million for share repurchases and paid a $22.0 million special dividend in fiscal 2023[136][153] Revenue Performance Total revenues increased by 3.9% to $486.1 million in fiscal 2023, driven by growth in retail, commercial, and international franchising segments Revenue Breakdown (Fiscal 2023 vs. 2022) | Revenue Type | Fiscal 2023 (Millions USD) | Fiscal 2022 (Millions USD) | Change (Millions USD) | Change (%) | | :------------------------ | :------------------------- | :------------------------- | :-------------------- | :--------- | | Net Retail Sales | $456.2 | $446.2 | $10.0 | 2.2% | | Commercial Revenue | $25.4 | $18.5 | $6.9 | 37.2% | | International Franchising | $4.5 | $3.2 | $1.3 | 40.6% | | Total Revenues | $486.1 | $467.9 | $18.2 | 3.9% | Net Retail Sales per Square Foot | Region | Fiscal 2023 ($/£) | Fiscal 2022 ($/£) | | :----------- | :---------------- | :---------------- | | North America | $495 | $479 | | United Kingdom | £629 | £679 | - Retail revenue increase was primarily due to the 53rd week ($6.9 million), new store openings ($7.3 million), and gift card breakage ($1.2 million), partially offset by a decrease in e-commerce sales ($3.2 million)[157][159] Costs and Expenses Analysis Consolidated gross profit rose to 54.4% in fiscal 2023 due to lower freight, while SGA expenses increased to $199.0 million due to wages and advertising Key Cost and Expense Metrics (as % of Total Revenues) | Metric | Fiscal 2023 (%) | Fiscal 2022 (%) | | :------------------------------------- | :-------------- | :-------------- | | Total Cost of Merchandise Sold | 45.6% | 47.5% | | Consolidated Gross Profit | 54.4% | 52.5% | | Selling, General and Administrative | 40.9% | 39.3% | | Income Before Income Taxes | 13.6% | 13.2% | | Net Income | 10.9% | 10.3% | | Retail Gross Margin (as % of Net Retail Sales) | 54.7% | 52.6% | - Retail gross margin increased by 200 basis points to 54.6% in fiscal 2023, primarily due to lower freight expenses[160] - SGA expenses increased by $15.1 million, driven by higher store-level wages, talent investments, and a $4.7 million (23.9%) increase in advertising[160] - Interest expense (income), net, shifted from an immaterial expense in fiscal 2022 to $0.9 million income in fiscal 2023 due to higher interest rates[161] - The effective income tax rate for fiscal 2023 was 20.4%, lower than 22.5% in fiscal 2022, primarily due to the reversal of a valuation allowance in the U.K[161] Store Portfolio Evolution The retail portfolio is evolving with 359 corporately-managed stores (47% Discovery format), 92 third-party, and 74 international franchised locations Corporately-Managed Store Count (Fiscal 2023 vs. 2022) | Region | Feb 3, 2024 | Jan 28, 2023 | | :------------ | :---------- | :----------- | | North America | 320 | 312 | | Europe | 39 | 38 | | Total | 359 | 350 | - 47% of corporately-managed stores are now in the Discovery format, with a focus on non-traditional locations like tourist sites[144] Third-Party Retail Locations | Fiscal Year End | Count | | :-------------- | :---- | | Feb 3, 2024 | 92 | | Jan 28, 2023 | 70 | - Third-party retail model is capital-light, with partners covering real estate, labor, and inventory costs, and is heavily weighted to the hospitality industry (e.g., Carnival Cruise Line, Great Wolf Lodge)[148] International Franchise Locations | Fiscal Year End | Count | | :-------------- | :---- | | Feb 3, 2024 | 74 | | Jan 28, 2023 | 68 | - As of Feb 3, 2024, franchised locations are distributed across five master franchise agreements covering eight countries, including South Africa, Australia, China, Gulf States, and Chile[149][151] Non-GAAP Financial Measure: EBITDA EBITDA, a non-GAAP measure, increased by $4.7 million to $79.1 million in fiscal 2023, driven by lower freight and warehouse cost leverage EBITDA (Millions USD) | Metric | Fiscal 2023 | Fiscal 2022 | | :----- | :---------- | :---------- | | EBITDA | $79.1 | $74.4 | | Change | +$4.7 | | - EBITDA increase was driven by lower freight expense, leverage of warehouse costs, and the impact of the 53rd week in fiscal 2023[164] - EBITDA is used for portions of the company's incentive compensation structure[163] Liquidity and Capital Resources Operating cash flow increased to $64.3 million in fiscal 2023, with $43.9 million used in financing for repurchases and dividends, ending with $44.3 million cash Cash Flow Summary (Millions USD) | Activity | Fiscal 2023 | Fiscal 2022 | | :------------------------ | :---------- | :---------- | | Operating Activities | $64.3 | $47.3 | | Investing Activities | ($18.3) | ($13.6) | | Financing Activities | ($43.9) | ($25.1) | | Effect of Exchange Rates | $0.015 | $0.767 | | Net Increase (Decrease) | $2.1 | $9.4 | - Operating cash flow increase in fiscal 2023 was driven by decreased inventory purchases and increased sales volume[166] - Investing cash flow increase was due to higher spending on information technology projects and new store openings[167] - Financing cash flow increase was primarily due to $20.5 million in share repurchases and $22.1 million in dividends paid[167] - As of February 3, 2024, the company had a cash balance of $44.3 million and $24.7 million available for borrowing under its $25.0 million revolving credit facility[167][169] - Capital spending in fiscal 2023 totaled $18.3 million, primarily for digital initiatives and new store openings[172] - Purchase obligations totaled $84.7 million as of February 3, 2024, with $26.0 million due in the next 12 months[173] Inflation Impact Inflation adversely impacted fiscal 2023 operations, primarily through rising labor costs, with mitigating actions including strategic price increases and distribution cost leverage - Inflation adversely affected business in fiscal 2023, primarily through rising store labor costs[174] - Mitigating actions include strategic price increases on highly sought-after products and leveraging distribution costs[174] - Future volatility in inflation, transportation costs (exacerbated by geopolitical conflicts), and material availability could negatively impact financial results and gross margins[174] Critical Accounting Policies and Estimates Critical accounting policies involve estimates for asset impairments, revenue recognition (gift cards, loyalty), leases, and income taxes, with a $5.1 million tax benefit from a U.K. valuation allowance reversal in fiscal 2023 - Key estimates include long-lived asset impairments, revenue from gift card breakage, loyalty program deferred revenue, and income tax valuation allowances[175][176][275] - Long-lived assets are assessed for impairment quarterly, with each store location considered an asset group. Immaterial impairment charges were recorded in fiscal 2023 and 2022[177][179][300] - Gift card breakage revenue is recorded based on estimated redemption patterns; in fiscal 2023, it was $6.3 million. A hypothetical 1% change in breakage rate would impact revenue by $1.0 million[181][284] - For leases, the incremental borrowing discount rate is estimated periodically, as implicit rates are often unavailable[184] - In fiscal 2023, a $5.1 million benefit was recorded for the reversal of the U.K. deferred tax asset valuation allowance due to significant positive cumulative income[186][306] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section provides quantitative and qualitative disclosures regarding the company's exposure to market risks, including interest rate and foreign currency risks Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and related notes, along with supplementary financial data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section reports any changes in the company's independent accountants or disagreements on accounting and financial disclosure matters Item 9A. Controls and Procedures This section details management's evaluation of disclosure controls and procedures and internal control over financial reporting, including any changes Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of February 3, 2024, acknowledging inherent limitations in any control system - Disclosure controls and procedures were evaluated and deemed effective as of February 3, 2024[189] - Control systems provide reasonable, not absolute, assurance due to inherent limitations such as resource constraints, faulty judgments, simple errors, circumvention by individuals or collusion, and management override[190] Management's Report on Internal Control Over Financial Reporting Management affirmed the effectiveness of internal control over financial reporting as of February 3, 2024, with an unqualified opinion from Ernst & Young LLP - Management concluded that internal control over financial reporting was effective as of February 3, 2024, based on the COSO (2013 framework) criteria[191][192] - Ernst & Young LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[192][195] Changes in Internal Control over Financial Reporting New software and control processes for retail store inventory were implemented in fiscal 2023, with minimal expected impact on internal controls over financial reporting - New software and control processes for inventory management at corporately-operated retail stores were implemented within the ERP system during fiscal 2023[193] - This change is expected to have minimal effects on inventory accounting controls and processes[193] - No other material changes in internal control over financial reporting occurred during the reported quarter[193] Item 9B. Other Information This section includes any other information required to be disclosed that was not reported under other items Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section addresses disclosures related to foreign jurisdictions that may prevent PCAOB inspections, if applicable Item 10. Directors, Executive Officers and Corporate Governance This section provides information on the company's directors, executive officers, and corporate governance practices, including policies and key personnel Business Conduct Policy The Board adopted a Business Conduct Policy for all personnel, available on the Investor Relations website, with amendments publicly disclosed - A Business Conduct Policy applies to directors, officers, and employees[205] - The policy is posted on the Investor Relations section of the corporate website (http://ir.buildabear.com), where amendments or waivers will also be disclosed[205] Executive Officers and Key Employees Key executive officers include the President and CEO, CAO, COO, and CFO, with a recent change in the Chief Digital and Merchandising Officer role - Sharon Price John serves as President and Chief Executive Officer, appointed to the Board in 2013[205] - Eric Fencl is Chief Administrative Officer, General Counsel and Secretary, joining in 2008[206] - J. Christopher Hurt is Chief Operations and Experience Officer, joining in 2015[207] - Jennifer Kretchmar's employment as Chief Digital and Merchandising Officer was terminated on February 3, 2024[208] - Voin Todorovic is Chief Financial Officer, joining in 2014[212] Item 11. Executive Compensation This section details the compensation of the company's executive officers and directors, including various components and incentive plans Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on the security ownership of beneficial owners, management, and related stockholder matters Item 13. Certain Relationships and Related Transactions, and Director Independence This section discloses certain relationships, related party transactions, and the independence of the company's directors Item 14. Principal Accountant Fees and Services This section details the fees paid to the principal independent accountant for audit and other services Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the Annual Report on Form 10-K Financial Statements This section presents the audited consolidated financial statements, including balance sheets, income statements, equity, and cash flows, with an unqualified opinion from Ernst & Young LLP - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the periods ended February 3, 2024, and January 28, 2023[220] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of February 3, 2024[221] Consolidated Balance Sheets (Thousands USD) | Asset/Liability Category | Feb 3, 2024 | Jan 28, 2023 | | :----------------------- | :---------- | :----------- | | Total Current Assets | $127,772 | $147,431 | | Total Assets | $272,325 | $280,794 | | Total Current Liabilities | $83,733 | $101,151 | | Total Stockholders' Equity | $129,662 | $119,117 | Consolidated Statements of Operations (Thousands USD) | Metric | Fiscal 2023 | Fiscal 2022 | | :------------------------- | :---------- | :---------- | | Total Revenues | $486,114 | $467,937 | | Consolidated Gross Profit | $264,392 | $245,872 | | Income Before Income Taxes | $66,329 | $61,924 | | Net Income | $52,805 | $47,985 | | Basic Income Per Share | $3.68 | $3.21 | | Diluted Income Per Share | $3.65 | $3.15 | Consolidated Statements of Cash Flows (Thousands USD) | Activity | Fiscal 2023 | Fiscal 2022 | | :------------------------------------- | :---------- | :---------- | | Net Cash Provided by Operating Activities | $64,310 | $47,276 | | Net Cash Used in Investing Activities | ($18,295) | ($13,634) | | Net Cash Used in Financing Activities | ($43,901) | ($25,056) | | Cash, Cash Equivalents, and Restricted Cash, End of Period | $44,327 | $42,198 | Note 1. Description of Business and Basis of Preparation This note describes Build-A-Bear Workshop's multi-channel retail business and the basis for preparing its consolidated financial statements - Build-A-Bear Workshop, Inc. is a multi-channel retailer of plush animals and related products, operating since October 1997[242] - Sells products through 359 corporately-managed locations (U.S., Canada, Ireland, U.K.), e-commerce sites, and 92 'third-party retail' model stores[242] - Consolidated financial statements are prepared in accordance with U.S. GAAP[243] Note 2. Summary of Significant Accounting Policies This note outlines the company's significant accounting policies, including fiscal year, cash equivalents, inventory valuation, asset impairment, and recent accounting standard adoptions - The company's fiscal year ends on the Saturday closest to January 31; fiscal 2023 was 53 weeks, fiscal 2022 was 52 weeks[246] - Cash and cash equivalents include cash, money market funds, and short-term highly liquid investments with original maturities of three months or less[247] - Inventories are stated at the lower of cost or net realizable value, using an average-cost basis, with a reserve for estimated shortage of $1.1 million as of Feb 3, 2024, and Jan 28, 2023[249] - Adopted ASU No. 2016-13 (Credit Losses) at the beginning of fiscal 2023, recognizing an $0.8 million charge to retained earnings for expected credit losses[250][278] - Long-lived assets (property, plant, equipment, ROU assets) are reviewed for impairment when circumstances indicate carrying value may not be recoverable; immaterial impairment charges were recorded in fiscal 2023 and 2022[255][256] - Capitalized entertainment production costs (e.g., film 'Glisten and the Merry Mission') are amortized using the individual film-forecast-computation method and are subject to recoverability assessments. A $0.6 million film asset impairment was recorded in fiscal 2023[261][262] - Advertising expense was $24.3 million in fiscal 2023 and $19.6 million in fiscal 2022[265] - The company adopted ASU No. 2016-13 (Credit Losses) at the beginning of fiscal 2023, recognizing an $0.8 million charge to retained earnings for expected credit losses[278] - Pending adoption of ASU No. 2023-07 (Segment Reporting) and ASU No. 2023-09 (Income Tax Disclosures) in future fiscal years[279][280] Note 3. Revenue This note details the company's revenue recognition policies across retail, e-commerce, gift cards, loyalty programs, commercial, and international franchising segments - Nearly all revenue is from retail sales (including e-commerce) and recognized when control of merchandise transfers to the customer[281] - Gift card revenue is deferred until redemption; unredeemed gift card breakage revenue was $6.3 million in fiscal 2023 and $5.1 million in fiscal 2022[283][284] - Loyalty program revenue is deferred for points earned and recognized upon redemption, forfeiture, or expiration[285] - Commercial segment revenue includes wholesale sales, intellectual property licensing, and entertainment activities[286] - International franchising revenue includes development fees (recognized straight-line over agreement term), sales-based royalties, and merchandise/fixture sales[287] Note 4. Leases This note provides details on the company's operating lease costs, cash flows, weighted-average lease terms, and discount rates Operating Lease Costs (Thousands USD) | Lease Cost Category | Fiscal 2023 | Fiscal 2022 | | :------------------ | :---------- | :---------- | | Operating Lease Costs | $36,849 | $34,738 | | Variable Lease Costs | $10,782 | $10,081 | | Short Term Lease Costs | $110 | $47 | | Total | $47,741 | $44,866 | - Operating cash flows for operating leases increased in fiscal 2023 to $39.6 million from $37.3 million in fiscal 2022, due to increased store count and market rent[292] - As of February 3, 2024, the weighted-average remaining operating lease term was 4.3 years, and the weighted-average discount rate was 6.7%[292] Operating Lease Undiscounted Cash Flows (Thousands USD) | Year | Amount | | :--------- | :----- | | 2024 | $29,604 | | 2025 | $24,102 | | 2026 | $15,223 | | 2027 | $10,172 | | 2028 | $5,652 | | Thereafter | $13,141 | | Total Minimum Lease Payments | $97,894 | - Additional executed leases totaling $6.3 million are expected to commence in Q1 fiscal 2024 with terms of seven to ten years[294] Note 5. Prepaid Expenses and Other Current Assets This note presents a breakdown of prepaid expenses and other current and non-current assets, including entertainment production assets Prepaid Expenses and Other Current Assets (Thousands USD) | Category | Feb 3, 2024 | Jan 28, 2023 | | :----------------------- | :---------- | :----------- | | Prepaid Occupancy | $2,442 | $2,196 | | Prepaid Insurance | $1,250 | $1,221 | | Prepaid Gift Card Fees | $699 | $835 | | Prepaid Royalties | $319 | $301 | | Prepaid Taxes | $199 | $73 | | Prepaid Merchandise | $- | $6,047 | | Other | $6,468 | $8,701 | | Total | $11,377 | $19,374 | Other Non-Current Assets (Thousands USD) | Category | Feb 3, 2024 | Jan 28, 2023 | | :--------------------------- | :---------- | :----------- | | Entertainment Production Asset | $4,734 | $2,939 | | Deferred Compensation | $2,121 | $853 | | Other | $311 | $429 | | Total | $7,166 | $4,221 | Note 6. Property and Equipment, net This note details the components of property and equipment, net, including land, fixtures, machinery, leasehold improvements, and depreciation expense Property and Equipment, Net (Thousands USD) | Category | Feb 3, 2024 | Jan 28, 2023 | | :------------------------- | :---------- | :----------- | | Land | $2,261 | $2,261 | | Furniture and Fixtures | $26,129 | $26,134 | | Machinery and Equipment | $16,296 | $15,556 | | Leasehold Improvements | $101,126 | $98,808 | | Building | $14,970 | $14,969 | | Computer Hardware | $25,920 | $21,509 | | Computer Software | $31,132 | $25,696 | | Construction in Progress | $7,821 | $10,895 | | Less Accumulated Depreciation | ($170,393) | ($165,069) | | Total, Net | $55,262 | $50,759 | - Depreciation expense was $13.7 million in fiscal 2023 and $12.5 million in fiscal 2022[299] - Immaterial impairment charges were recorded for long-lived assets in the DTC segment during fiscal 2023 and 2022[300] Note 7. Accrued Expenses This note provides a breakdown of accrued expenses, including wages, sales tax, rent, and current income taxes payable Accrued Expenses (Thousands USD) | Category | Feb 3, 2024 | Jan 28, 2023 | | :------------------------------------- | :---------- | :----------- | | Accrued Wages, Bonuses and Related Expenses | $14,549 | $23,767 | | Sales Tax Payable | $2,447 | $4,561 | | Accrued Rent and Related Expenses | $1,356 | $1,512 | | Current Income Taxes Payable | $1,602 | $3,418 | | Accrued Expense - Other | $- | $4,100 | | Total | $19,954 | $37,358 | - Defined contribution expense was $1.5 million in fiscal 2023 and $1.4 million in fiscal 2022[302] Note 8. Income Taxes This note details income before taxes by region, income tax expense components, effective tax rate reconciliation, and net deferred tax assets Income Before Income Taxes (Thousands USD) | Region | Fiscal 2023 | Fiscal 2022 | | :------- | :---------- | :---------- | | Domestic | $61,110 | $57,595 | | Foreign | $5,219 | $4,329 | | Total | $66,329 | $61,924 | Income Tax Expense Components (Thousands USD) | Category | Fiscal 2023 | Fiscal 2022 | | :------------ | :---------- | :---------- | | Current U.S. Federal | $12,080 | $10,190 | | Current U.S. State | $3,205 | $2,617 | | Current Foreign | $145 | $30 | | Deferred U.S. Federal | ($537) | $368 | | Deferred U.S. State | ($212) | $285 | | Deferred Foreign | ($1,157) | $449 | | Total Income Tax Expense | $13,524 | $13,939 | Effective Tax Rate Reconciliation | Item | Fiscal 2023 (%) | Fiscal 2022 (%) | | :--------------------------------------- | :-------------- | :-------------- | | U.S. Federal Statutory Income Tax Rate | 21% | 21% | | Valuation Allowance | (7.7%) | (0.5%) | | State and Local Income Taxes, net | 3.5% | 3.6% | | Non-Deductible Executive Compensation | 1.6% | 1.8% | | Effect of Lower Foreign Taxes | 1.0% | (0.1%) | | Other Items, net | 1.0% | (3.2%) | | Effective Tax Rate | 20.4% | 22.5% | - In fiscal 2023, a $5.1 million benefit was recorded for the reversal of the valuation allowance on U.K. deferred tax assets due to sustained profitability[306] Net Deferred Tax Assets (Thousands USD) | Category | Feb 3, 2024 | Jan 28, 2023 | | :------------------------------------- | :---------- | :----------- | | Total Gross Deferred Tax Assets | $34,597 | $38,402 | | Less: Valuation Allowance | ($1,546) | ($8,000) | | Total Deferred Tax Assets, Net | $33,051 | $30,402 | | Total Deferred Tax Liabilities | ($24,369) | ($23,810) | | Net Deferred Tax Assets | $8,682 | $6,592 | - As of February 3, 2024, total unrecognized tax benefits were $0.1 million, which would favorably impact income tax provision if recognized[310] Note 9. Line of Credit This note describes the company's revolving credit facility with PNC Bank, including its limit, availability, and compliance with covenants - The company has a revolving credit and security agreement with PNC Bank for up to $25.0 million, expiring December 17, 2026[315] - As of February 3, 2024, the borrowing base was $25.0 million, with approximately $24.7 million available for borrowing after a $250,000 letter of credit[319] - The company had no outstanding borrowings as of February 3, 2024, and is in compliance with all credit agreement covenants[319] Note 10. Commitments and Contingencies This note outlines the company's commitments and contingencies, including routine legal proceedings and specific disputes like the U.K. customs authority matter - The company is subject to routine legal proceedings, government inquiries, and commercial disputes[320] - A dispute with the U.K. customs authority regarding duty assessments from 2012 is ongoing; as of February 3, 2024, the company had a net receivable of $0.9 million after a $3.7 million reserve[321] - A putative class action lawsuit under the TCPA was dismissed in October 2023 after a settlement with the plaintiff and an insurance carrier, resulting in no significant expense for the company[323] Note 11. Net Income Per Share This note presents the basic and diluted net income per common share, along with the corresponding share counts for fiscal 2023 and 2022 Income Per Common Share | Metric | Fiscal 2023 | Fiscal 2022 | | :------------------------- | :---------- | :---------- | | Basic Income Per Common Share | $3.68 | $3.21 | | Diluted Income Per Common Share | $3.65 | $3.15 | | Basic Shares Outstanding | 14,342,931 | 14,940,770 | | Diluted Shares Outstanding | 14,471,875 | 15,249,819 | - Options to purchase 31,343 shares in fiscal 2023 and 49,133 shares in fiscal 2022 were anti-dilutive and excluded from diluted EPS computation[324] Note 12. Stock Incentive Plans This note details the company's stock incentive plans, including authorized shares, stock-based compensation expense, and activity for stock options and restricted stock - The Restated 2020 Omnibus Incentive Plan, approved by stockholders in June 2023, authorizes up to 1,800,000 shares for various equity awards[326] - Stock-based compensation expense was $2.1 million in fiscal 2023 and $2.6 million in fiscal 2022[329] - As of February 3, 2024, $2.0 million of unrecognized compensation expense related to unvested stock awards is expected to be recognized over 1.3 years[329] Stock Options Activity (Fiscal 2023) | Metric | Shares | Weighted Average Exercise Price ($) | | :----------------------------------- | :------- | :---------------------------------- | | Outstanding, Jan 28, 2023 | 177,519 | 14.20 | | Exercised | (165,144) | 13.93 | | Outstanding, Feb 3, 2024 | 12,375 | 17.84 | - No stock options were granted in fiscal 2023 or 2022[331] - The total intrinsic value of options exercised was $1.2 million in fiscal 2023 and $1.3 million in fiscal 2022[332] Restricted Stock Activity (Fiscal 2023) | Category | Time-Based Shares | Performance-Based Shares | | :----------------------- | :---------------- | :----------------------- | | Outstanding, Jan 28, 2023 | 287,983 | 295,048 | | Granted | 65,759 | 65,254 | | Vested | (208,621) | (215,130) | | Adjusted for Performance | - | 57,756 | | Canceled or Expired | (22,512) | (17,846) | | Outstanding, Feb 3, 2024 | 122,609 | 185,082 | - Performance-based restricted stock awards for fiscal 2023, 2024, and 2025 are tied to profitability (consolidated EBITDA CAGR) and revenue growth (total revenue CAGR), with payout opportunities from 25% to 200% of target shares[335] Note 13. Stockholders' Equity This note provides information on common stock shares outstanding and recent dividend declarations impacting stockholders' equity Common Stock Shares Outstanding | Date | Shares Outstanding | | :--------------- | :----------------- | | Jan 29, 2022 | 16,146,332 | | Jan 28, 2023 | 14,802,338 | | Feb 3, 2024 | 14,172,362 | - The Board declared an initial quarterly dividend of $0.20 per share, paid on April 11, 2024[340] Note 14. Major Vendors This note identifies the company's major vendors, primarily located in Asia, and their percentage contribution to inventory purchases - Five vendors, primarily located in Asia, accounted for approximately 73% of inventory purchases in 2023 and 77% in 2022[342] Note 15. Segment Information This note provides detailed financial information for the Direct-to-Consumer, Commercial, and International Franchising segments, including sales, income, and assets - The company operates in three reportable segments: Direct-to-Consumer (DTC), Commercial, and International Franchising[343] Segment Financial Information (Thousands USD) | Metric / Segment | DTC | Commercial | International Franchising | Total | | :----------------------- | :---------- | :--------- | :------------------------ | :---------- | | Fiscal 2023 | | | | | | Net Sales to External Customers | $456,163 | $25,413 | $4,538 | $486,114 | | Income Before Income Taxes | $56,613 | $8,160 | $1,556 | $66,329 | | Capital Expenditures | $18,295 | $- | $- | $18,295 | | Depreciation and Amortization | $13,264 | $393 | $- | $13,657 | | Fiscal 2022 | | | | | | Net Sales to External Customers | $446,181 | $18,523 | $3,233 | $467,937 | | Income Before Income Taxes | $51,663 | $8,318 | $1,943 | $61,924 | | Capital Expenditures | $13,634 | $- | $- | $13,634 | | Depreciation and Amortization | $11,972 | $510 | $- | $12,482 | | Total Assets as of Feb 3, 2024 | $262,299 | $8,801 | $1,225 | $272,325 | | Total Assets as of Jan 28, 2023 | $272,221 | $7,466 | $1,107 | $280,794 | Sales to External Customers by Geographic Area (Thousands USD) | Geographic Area | Fiscal 2023 | Fiscal 2022 | | :---------------- | :---------- | :---------- | | North America | $426,244 | $408,881 | | Europe | $56,141 | $55,854 | | Other | $3,729 | $3,202 | | Total | $486,114 | $467,937 | Property and Equipment, Net by Geographic Area (Thousands USD) | Geographic Area | Feb 3, 2024 | Jan 28, 2023 | | :---------------- | :---------- | :----------- | | North America | $51,707 | $48,242 | | Europe | $3,555 | $2,517 | | Other | $- | $- | | Total | $55,262 | $50,759 | Financial Statement Schedules This section includes Schedule II – Valuation and Qualifying Accounts, detailing changes in the deferred tax asset valuation allowance Deferred Tax Asset Valuation Allowance (Thousands USD) | Fiscal Year | Beginning Balance | Charged to Cost and Expenses | Other | Ending Balance | | :---------- | :---------------- | :--------------------------- | :-------- | :------------- | | 2023 | $8,000 | ($5,500) | ($954) | $1,546 | | 2022 | $9,795 | ($478) | ($1,317) | $8,000 | Exhibits This section lists all exhibits filed as part of the Annual Report on Form 10-K, including various agreements, plans, and certifications - Includes various agreements such as the Agreement and Plan of Merger, Amended and Restated Certificate of Incorporation, and Amended and Restated Bylaws[351] - Lists several stock incentive plans, including the Build-A-Bear Workshop, Inc. Amended and Restated 2020 Omnibus Incentive Plan[351][352] - Contains employment, confidentiality, and noncompete agreements for executive officers, and a separation agreement for Jennifer Kretchmar[352] - Includes the Revolving Credit and Security Agreement and its amendments[353] - Also lists certifications (Rule 13a-14(a)/15d-14(a), Section 1350) and XBRL documents[353][354] Item 16. Form 10-K Summary This section provides an optional summary of the information contained in the Annual Report on Form 10-K