Annual Report
SEC Form 10-K Filing for Fiscal Year 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
☒
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 30, 2017
OR
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number: 001-32320
BUILD-A-BEAR WORKSHOP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
43-1883836
(I.R.S. Employer Identification No.)
1954 Innerbelt Business Center Drive
St. Louis, Missouri
(Address of Principal Executive Offices)
63114
(Zip Code)
(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
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
There is no non-voting common equity. The aggregate market value of the common stock held by non-affiliates (based upon the closing price
of $10.45 for the shares on the New York Stock Exchange on June 30, 2017) was $142.0 million as of June 30, 2017, the last business day
of the registrant’s most recently completed second fiscal quarter.
As of March 9, 2018, there were 14,900,452 issued and outstanding shares of the registrant’s common stock.
Portions of the registrant’s Proxy Statement for its May 10, 2018 Annual Meeting of Stockholders are incorporated herein by reference.
DOCUMENTS INCORPORATED BY REFERENCE
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BUILD-A-BEAR WORKSHOP, INC.
INDEX TO FORM 10-K
Forward-Looking Statements .........................................................................................................................
Page
ii
Part I
Item 1. Business ........................................................................................................................................... 1
Item 1A. Risk Factors ..................................................................................................................................... 4
Item 1B. Unresolved Staff Comments ............................................................................................................ 13
Item 2. Properties ......................................................................................................................................... 13
Item 3. Legal Proceedings ........................................................................................................................... 13
Item 4. Mine Safety Disclosure .................................................................................................................... 13
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ........................................................................................................................... 14
Item 6. Selected Financial Data ................................................................................................................... 16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ........... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................................................... 32
Item 8. Financial Statements and Supplementary Data .............................................................................. 33
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ......... 33
Item 9A. Controls and Procedures ................................................................................................................. 33
Item 9B. Other Information ............................................................................................................................. 36
Part III
Item 10. Directors, Executive Officers and Corporate Governance ............................................................... 36
Item 11. Executive Compensation ................................................................................................................. 38
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .......................................................................................................................................... 38
Item 13. Certain Relationships and Related Transactions and Director Independence ................................ 38
Item 14. Principal Accountant Fees and Services ......................................................................................... 38
Part IV
Item 15. Exhibits and Financial Statement Schedules ................................................................................... 39
Exhibit Index ................................................................................................................................................... 64
Signatures ...................................................................................................................................................... 69
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain statements that are, or may be considered to be, “forward-
looking statements” for the purpose of federal securities laws, including, but not limited to, statements that reflect
our current views with respect to future events and financial performance. We generally identify these statements
by words or phrases such as “may,” “might,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,”
“predict,” “future,” “potential” or “continue,” the negative or any derivative of these terms and other comparable
terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about
us, may include, among other things, projections or statements regarding:
•
our future financial performance;
•
our anticipated operating strategies and future strategic expansion initiatives;
•
our future capital expenditures;
•
our anticipated rate of store relocations, openings and closures; and
•
our anticipated costs related to store relocations, openings and closures.
These statements are only predictions based on our current expectations and projections about future
events. Because these forward-looking statements involve risks and uncertainties, there are important factors that
could cause our actual results, level of activity, performance or achievements to differ materially from the results,
level of activity, performance or achievements expressed or implied by these forward-looking statements,
including those factors discussed under the caption entitled “Risk Factors” as well as other places in this Annual
Report on Form 10-K.
We operate in a competitive and rapidly changing environment. New risk factors emerge from time to time
and it is not possible for management to predict all the risk factors, nor can it assess the impact of all the risk
factors on our business or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you
should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K, as a prediction of actual results.
You should read this Annual Report on Form 10-K completely and with the understanding that our
actual results may be materially different from what we expect. Except as required by law, we undertake
no duty to update these forward-looking statements, even though our situation may change in the future.
We qualify all of our forward-looking statements by these cautionary statements.
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ITEM 1. BUSINESS
Overview
PART I
Build-A-Bear Workshop, Inc. and subsidiaries (collectively, the “Company”), 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 December 30, 2017, we operated 361 corporately-managed locations, including
301 stores in the United States and Canada, 60 stores in the United Kingdom, Ireland, Denmark, and China and
had 102 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our
stores, we sold product on our company-owned e-commerce sites and franchisee sites and through third parties
under wholesale agreements.
Segments and Geographic Areas
Business is conducted through three reportable segments consisting of direct-to-consumer (“DTC”),
commercial, and international franchising. Our reportable segments are primarily determined by the types of
customers they serve and the types of products and services that they offer. Each reportable segment may
operate in many geographic areas. Financial information related to our segments and the geographic areas in
which we operate is contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” See Note 15 – Segment Information to the Consolidated Financial Statements for
information regarding sales, results of operations and identifiable assets of the Company by business segment
and geographic area.
Description of Operations
Currently, we primarily operate specialty stores that provide a “make your own stuffed animal” interactive
entertainment experience in which guests, with the help of our associates, visit a variety of stations to “assemble”
and customize a stuffed animal. Our concept is a unique combination of experience and product and we are
focused on enhancing our brand equity while meeting the needs of consumers by offering a relevant selection of
premium products that meet high quality standards and are on trend. In addition, products are sold through our
e-commerce sites. Our store experience appeals to a broad range of age groups and demographics, including
children, as well as their parents and grandparents, teens, adult collector and affinity consumers. We seek to
provide outstanding guest service and experiences across all channels and touch points including our stores, our
websites, our mobile sites and apps as well as traditional and social media. Our sales are historically highest in
our fourth quarter, followed by the first quarter and relatively balanced through each quarter of our fiscal year.
Guests visit our stores for multiple reasons including interactive family experiences, birthdays, parties and other
milestone occasions as well as to purchase gifts including the “gift of experience” that comes with a gift card. We
believe the hands-on and interactive nature of our store and high touch service model result in guests forming an
emotional connection with our brand.
We believe there are opportunities to leverage the strength of the Build-A-Bear brand and generate
incremental revenue and profits given the high consumer recognition and strong positioning as a trusted, high
quality brand that is emotionally connected with both kids and their parents.
Operating Strategies
Our company has been executing a multi-year turnaround plan that was initiated in 2013 to improve both
sales and profitability with the goal of achieving sustained profitability. In 2017, we continued to evolve and
execute our strategic plan with key initiatives in the areas outlined below, which are intended to drive long-term
shareholder value:
Channel Evolution through Diversifying Real Estate and Upgrading E-Commerce Capabilities
We continued to make improvements to an aged store fleet by leveraging the new Discovery format in
conjunction with select natural lease events. We also continued to diversify our store portfolio into non-traditional
locations inclusive of a new, lower capital, more flexible “concourse shop” model. As of December 30, 2017, we
finished the year with 26 concourse shop locations and 105 stores in a Discovery format.
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In 2017, we added one new franchise agreement covering China, Hong Kong and Macau. We intend to add
new franchise agreements covering other markets in the future. Separately, we launched a comprehensive
enhancement of our website platform and upgrade of e-commerce systems in the fourth quarter of 2017 in order
to capitalize on changing macro consumer shopping patterns and add future enterprise selling options.
Product Expansion through Owned Intellectual Property Development, Relevant Licensing and Outbound Brand
Licensing into New Categories
To meet the needs of our core consumer base (boys and girls ages 3 to 12) while systematically building
secondary consumer segments (including collectors, gift-givers and teen-plus target), we continued to develop
and expand offerings of successful intellectual properties balanced with core products and a comprehensive
program of key licensed products. We also continued to expand our initiatives to sell pre-stuffed plush products
for corporate promotions or to other companies for resell and to further develop outbound licensed programs
leveraging the power of the Build-A-Bear brand and other owned intellectual properties.
Brand and Experience Amplification through Marketing and Entertainment Integration
We adjusted marketing programs to elevate and integrate efforts to create more synergy across channels
while leveraging our content development strategy, which includes mobile apps, music videos and other
entertainment opportunities to increase engagement, improve efficiency and lead to profitable sales growth.
Continued Focus on Delivering Long-Term Profitability Improvement
We remained focused on improving profitability through the execution of our stated strategies summarized
above as well as disciplined expense management and on-going efforts in process and systems upgrades.
Merchandise Sourcing and Inventory Management
Our stores offer an extensive and coordinated selection of merchandise, including a wide range of different
styles of plush products to be stuffed, sounds and scents that can be added to the stuffed animals and a broad
variety of clothing, shoes and accessories, as well as other brand appropriate toy and novelty items. Our stuffed
animal products and clothing are produced from high quality, man-made materials or natural fibers, and the
stuffing is made of a high-grade polyester fiber.
We believe we comply with governmental toy safety requirements specific to each country where we have
stores. Specifically, we believe all of the products in our stores and e-commerce sites meet Consumer Product
Safety Commission (CPSC) requirements including the Consumer Product Safety Improvement Act (CPSIA) for
children’s products. We also comply with American Society for Testing and Materials (ASTM-F963), European
Toy Safety Standards (EN71), China National Toy Standards (GB6675/GB5296.5), China Compulsory
Certification (CCC), Australian/New Zealand Standard AS/NZS 8124 and Canadian Consumer Product Safety
Act Toys Regulation (CCPSA). Our products are tested through independent third-party testing labs for
compliance with toy safety standards. Packaging and labels for each product indicate the age grading for the
product and any special warnings in accordance with guidelines established by the CPSC. We require our supplier
factories to be compliant with the International Council of Toy Industries (ICTI) Ethical Toy Program certification
or with other third party social compliance programs. The ICTI Ethical Toy Program process is the social
compliance program to promote ethical manufacturing in the form of fair labor treatment, as well as employee
health and safety in the toy industry supply chain worldwide. In order to obtain this certification, each factory
completes a rigorous evaluation performed by an accredited ICTI agent on an annual basis.
The average time from product conception to the arrival in stores is approximately 12 months, including
approximately 90 to 120 days from the beginning of production to in-store delivery. Through an ongoing analysis
of selling trends, we regularly update our product assortment by increasing quantities of productive styles and
eliminating less productive items. 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.
Distribution and Logistics
We own a 350,000 square-foot distribution center near Columbus, Ohio which serves the majority of our
stores in the United States and Canada. We also contract with a third-party warehouse in southern California to
service our West Coast stores. The contract has a one-year term and is renewable. In Europe, we contract with
a third-party distribution center in Selby, England under an agreement that ends in December 2019. This
agreement contains clauses that allow for termination if certain performance criteria are not met.
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Transportation from the warehouses to stores is managed by several third-party logistics providers. In the
United States, Canada and Europe, merchandise is shipped by a variety of distribution methods, depending on
the store and seasonal inventory demand. Shipments from our distribution centers are scheduled throughout the
week in order to smooth workflow and stores are grouped together by shipping route to reduce freight costs. All
items in our assortment are eligible for distribution, depending on allocation and fulfillment requirements, and we
typically distribute merchandise and supplies to each store once or twice a week on a regular schedule, which
allows us to consolidate shipments in order to reduce distribution and shipping costs. Back-up supplies, such as
stuffing for the plush animals, are often stored in limited amounts at regional pool points.
Employees
As of December 30, 2017, we had approximately 1,000 full-time and 3,200 regular part-time employees in
the United States, Canada, the United Kingdom, Ireland, Denmark and China. The number of part-time employees
at all locations fluctuates depending on our seasonal needs. None of our employees are represented by a labor
union, and we believe our relationship with our employees is good.
Competition
We view the Build-A-Bear Workshop store experience as a distinctive combination of entertainment and
retail with limited direct competition. Since we develop proprietary products, we compete indirectly with a number
of brands that sell stuffed animals or premium children’s toys in the United States, including, but not limited to, Ty,
Fisher Price, Mattel, Ganz, Applause, Hasbro, Commonwealth and Vermont Teddy Bear. Since we sell a product
that integrates merchandise and experience, we also view our competition as any company that competes for
family time and entertainment dollars, such as movie theaters, amusement parks and arcades, other mall-based
entertainment venues and online entertainment. With the majority of our stores currently operating in traditional
shopping malls, we also compete with other mall-based retailers for prime mall locations, including various
apparel, footwear and specialty retailers.
We are aware of several small companies that operate “make your own” teddy bear and stuffed animal
stores or kiosks in retail locations, but we believe none of those companies offer the breadth of assortment nor
depth of experience or operate as a national or international retail company.
Intellectual Property and Trademarks
We believe our copyrights, service marks, trademarks, trade secrets, patents and similar intellectual property
are critical to our success, and we intend, directly or indirectly, to maintain and protect these marks and, where
applicable, license the intellectual property. Our patents have expirations ranging from 2018 to 2033.
We have developed licensing and strategic relationships with leading retail and cultural organizations. We
plan to continue to add partnerships with companies that have strong, family-oriented brands and provide us with
attractive marketing and merchandising opportunities. These relationships for specific products are generally
reflected in contractual arrangements for limited terms that are terminable by either party upon specified notice.
Specifically, we have key strategic relationships with select companies in which we feature their brands on
products sold in our stores, including Disney®, DreamWorks Animation, Hasbro, and major professional and
collegiate sports along with other culturally relevant brands.
Availability of Information
We make certain filings with the Securities and Exchange Commission (the “SEC”), including our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments and
exhibits to those reports, available free of charge in the Investor Relations section of our corporate website,
http://ir.buildabear.com, as soon as reasonably practicable after they are filed with the SEC. The filings are also
available through the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549
or by calling 1-800-SEC-0330. Also, these filings are available on the Internet at http://www.sec.gov. Our Annual
Reports on Form 10-K, 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.
3
ITEM 1A. RISK FACTORS
We operate in a changing environment that involves numerous known and unknown risks and uncertainties
that could materially affect our operations. The risks, uncertainties and other factors set forth below may cause
our actual results, performances or achievements to be materially different from those expressed or implied by
our forward-looking statements. If any of these risks or events occur, our business, financial condition or results
of operations may be adversely affected.
Risks Related to Our Business
We depend upon the shopping malls in which we are located to attract guests to our stores and a decline
in mall traffic could adversely affect our financial performance and profitability.
While we invest in integrated marketing efforts and believe we are more of a destination location than other
retailers, we rely to a great extent on consumer traffic in the malls in which our stores are located. We rely on the
ability of the malls’ anchor tenants, generally large department stores, and on the continuing popularity of malls
as shopping destinations to attract high levels of consumer traffic. We cannot control the development of new
shopping malls nor the closure of existing malls, the addition or loss of anchors and co-tenants, the availability or
cost of appropriate locations within existing or new shopping malls or the desirability, safety or success of
shopping malls. Additionally, in recent years, there has been a trend of consumers preferring to purchase products
from online merchants rather than traditional brick and mortar stores, and while we have e-commerce sales and
continue to develop our online business, we continue to depend heavily on sales at our physical store locations.
Consumer mall traffic may also be reduced due to factors such as the economy, civil unrest, actual or threatened
acts of terrorism to shopping malls, the impact of weather or natural disasters or a decline in consumer confidence
resulting from international conflicts or war. A decrease in shopping mall traffic could have an adverse effect on
our financial condition and profitability.
If we are unable to generate interest in and demand for our interactive retail experience and products,
including being able to identify and respond to consumer preferences in a timely manner, our sales,
financial condition and profitability could be adversely affected.
We believe that our success depends in large part upon our ability to continue to attract new and repeat
guests with our interactive shopping experience, and our ability to anticipate, gauge and respond in a timely
manner to changing consumer preferences, including online buying, and fashion trends. We cannot assure you
that there will continue to be a demand for our “make-your-own stuffed animal” interactive experience, including
our store design and brand appearance, or for our stuffed animals, related apparel and accessories. A decline in
demand for our interactive shopping experience, our stuffed animals, related apparel or accessories, or a
misjudgment of consumer preferences, fashion trends or the demand for licensed products, including those that
are associated with new movie releases, could have a negative impact on our business, financial condition and
results of operations. Our future success depends, in part, on the popularity and consumer demand for brands of
licensors such as Disney, LucasFilm, Marvel, Hasbro and The Pokémon Company. If we are not able to meet our
contractual commitments or are unable to maintain licensing agreements with key brands, our business would be
adversely affected. There can be no certainty that licensed brands will continue to be successful or maintain high
levels of sales in the future and the timing of future entertainment projects may not coincide with the timing of
previous successes impacting our ability to maintain sales levels. In addition, if we miscalculate the market for our
merchandise or the purchasing preferences of our guests, we may be required to sell a significant amount of our
inventory at discounted prices or even below costs, thereby adversely affecting our financial condition and
profitability.
4
Consumer interests change rapidly and our success depends on the ongoing effectiveness of our
marketing and online initiatives to build consumer affinity for our brand, drive consumer demand for key
products and generate traffic for our stores.
We continue to update and evaluate our marketing initiatives, which are focused on building our brand,
sharing relevant product news, executing timely promotions and adapting to rapidly changing consumer
preferences. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of
our integrated marketing and advertising programs and future marketing and advertising efforts that we undertake,
including our ability to:
•
•
•
•
•
•
create greater awareness of our brand, interactive shopping experience and products;
convert consumer awareness into store visits and product purchases;
identify the most effective and efficient level of marketing spend;
select the right geographic areas in which to market;
determine the appropriate creative message and media mix for marketing expenditures both locally,
nationally and internationally; and
effectively manage marketing costs (including creative and media) to maintain acceptable operating margins
and return on marketing investment.
Our planned marketing expenditures may not result in increased total or comparable sales or generate
sufficient levels of product and brand awareness, which could have a material adverse effect on our financial
condition and profitability.
A decline in general global economic conditions could lead to disproportionately reduced consumer
demand for our products, which represent relatively discretionary spending, and have an adverse effect
on our liquidity and profitability.
Since purchases of our merchandise are dependent upon discretionary spending by our guests, our financial
performance is sensitive to changes in overall economic conditions that affect consumer spending. Consumer
spending habits are affected by, among other things, prevailing economic conditions, levels of employment,
salaries and wage rates, consumer confidence and consumer perception of economic conditions. A slowdown in
the United States, Canadian or European economies or in the economies of the countries in which our franchisees
operate or uncertainty as to the economic outlook could reduce discretionary spending or cause a shift in
consumer discretionary spending to other products. Any of these factors would likely result in lower net retail sales
and could also result in excess inventories, which could, in turn, lead to increased merchandise markdowns and
related costs associated with higher levels of inventory and adversely affect our liquidity and profitability. In
addition, economic uncertainty can affect the credit and capital markets and might impact our access to capital
resources at an affordable cost to meet our needs. These capital market conditions may affect the renewal or
replacement of our credit agreement, which was originally entered in fiscal 2000 and has been extended annually
since then and currently expires December 31, 2018. Although we believe that our capital structure and credit
facilities will provide sufficient liquidity, there can be no assurance that our liquidity will not be affected by changes
in the access to capital markets or that our access to capital will at all times be sufficient or at an acceptable cost
to satisfy our needs.
Our merchandise is manufactured by foreign manufacturers and we transact business in various foreign
countries; therefore, the availability and costs of our products, as well as our product pricing, may be
negatively affected by risks associated with international manufacturing and trade and foreign currency
fluctuations.
We purchase our merchandise from both domestic vendors who contract with manufacturers in foreign
countries and directly from factories in foreign countries, primarily in China and Vietnam. Any event causing a
disruption of imports, including the imposition of import restrictions, taxes or fees or labor strikes or lock-outs,
could adversely affect our business. The flow of merchandise from our vendors could also be adversely affected
by financial or political instability in any of the countries in which the goods we purchase are manufactured,
especially China, if the instability affects the production or export of merchandise from those countries. We are
subject to trade restrictions in the form of tariffs or quotas, or both, applicable to the products we sell as well as to
raw material imported to manufacture those products. Such tariffs or quotas are subject to change. 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,
5
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 affected by changes in foreign currency rates and require us to
make adjustments that would impact our revenue and profit in various markets. Additionally, because most of our
foreign subsidiaries buy their inventory in U.S. dollars, we are also exposed to risk when their functional currencies
fluctuate relative to the U.S dollar. For example, we believe that the significant movement in the British pound
sterling relative to the U.S. dollar, as a result of the United Kingdom’s referendum vote to leave the European
Union in 2016 had a negative impact on our revenues and pre-tax income with most of the impact resulting from
higher retail cost of merchandise sold.
If we are unable to renew, renegotiate or replace our store leases or enter into leases for new stores on
favorable terms, or if we violate any of the terms of our current leases, our growth and profitability could
be harmed.
We lease all of our store locations. The majority of our store leases contain provisions for base rent plus
percentage rent based on sales in excess of an agreed upon minimum annual sales level. A number of our leases
include a termination provision which applies if we do not meet certain sales levels during a specified period,
typically in the third to fourth year and the sixth to seventh year of the lease, which may be at either the landlord’s
option or ours. Furthermore, some of our leases contain various restrictions relating to change of control of our
company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of
discretion by our landlords on various matters within the malls. We may not be able to maintain or obtain favorable
locations in desirable malls. The terms of new leases may not be as favorable, which could cause an increase in
store expenses negatively impacting overall profitability. If we execute termination rights, we may have expenses
and charges associated with those closures that could negatively impact our profitability. Additionally, several
large landlords dominate the ownership of prime malls, particularly in the United States and Canada, and because
of our dependence on these landlords for a substantial number of our locations, any significant erosion in their
financial conditions or our relationships with these landlords could negatively affect our ability to obtain and retain
store locations. Further landlord consolidation may negatively impact our results of operations.
Our leases in the United Kingdom and Ireland also typically contain provisions requiring rent reviews every
five years in which the base rent that we pay is adjusted to current market rates. These rent reviews require that
base rents cannot be reduced if market conditions have deteriorated but can be changed “upwards only.” We may
be required to pay base rents that are significantly higher than we have projected. As a result of these and other
factors, we may not be able to operate our European store locations profitably. If we are unable to do so, our
results of operations and financial condition could be harmed and we may be required to record significant
additional impairment charges.
We are subject to a number of risks related to disruptions, failures or security breaches of our information
technology infrastructure. If we improperly obtain or are unable to protect our data or violate privacy or
security laws or expectations, we could be subject to liability and damage to our reputation.
Information technology is a critically important part of our business operations. We depend on information
systems to process transactions, manage inventory, operate our websites, 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 data leakage of confidential information either internally or at our third-party providers. We may
experience operational problems with our information systems as a result of system failures, system
implementation issues, viruses, malicious hackers, sabotage, or other causes.
Our business involves the storage and transmission of consumers’ personal information, such as personal
preferences and credit card information. We invest in industry-standard security technology to protect the
Company’s data and business processes against the risk of data security breaches and cyber-attacks. Our data
security management program includes identity, trust, vulnerability and threat management business processes,
as well as enforcement of standard data protection policies such as Payment Card Industry compliance. We
measure our data security effectiveness through industry accepted methods and remediate critical findings.
Additionally, we certify our major technology suppliers and any outsourced services through accepted security
certification measures. We maintain and routinely test backup systems and disaster recovery, along with external
network security penetration testing by an independent third party as part of our business continuity preparedness.
Internet privacy is a rapidly changing area and we may be subject to future requirements and legislation that are
costly to implement and may negatively impact our results.
6
While we believe that our security technology and processes are adequate in preventing security breaches
and in reducing cyber security risks, given the ever-increasing abilities of those intent on breaching cyber security
measures and given our reliance on the security and other efforts of third-party vendors, the total security effort
at any point in time may not be completely effective, and any such security breaches and cyber incidents could
adversely affect our business. Failure of our systems, including failures due to cyber-attacks that would prevent
the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and
could have negative consequences to us, our employees, and those with whom we do business. Any security
breach involving the misappropriation, loss, or other unauthorized disclosure of confidential information could also
severely damage our reputation, expose us to the risks of litigation and liability, and harm our business. While we
carry insurance that would mitigate the losses to an extent, such insurance may be insufficient to compensate us
for potentially significant losses.
We currently obtain and retain personal information about our website users, store shoppers and loyalty
program members. Federal, state and foreign governments have enacted or may enact laws or regulations
regarding the collection and use of personal information, with particular emphasis on the collection of information
regarding minors. Such regulation may also include enforcement and redress provisions. We have a stringent,
comprehensive privacy policy covering the information we collect from our guests and have established security
features to protect our consumer database and websites. While we have implemented programs and procedures
designed to protect the privacy of people, including children, from whom we collect information, and our websites
are designed to be fully compliant with all applicable regulations including the Federal Children’s Online Privacy
Protection Act, there can be no assurance that such programs will conform to all applicable laws or regulations.
If we fail to fully comply, we may be subjected to liability and damage to our reputation. In addition, because our
guest database primarily includes personal information of young children and young children frequently interact
with our websites, we are potentially vulnerable to charges from parents, children’s organizations, governmental
entities, and the media of engaging in inappropriate collection, distribution or other use of data collected from
children. Additionally, while we have security features, our security measures may not protect users’ identities
and our online safety measures may be questioned, which may result in negative publicity or a decrease in visitors
to our sites. If site users act inappropriately or seek unauthorized contact with other users of the site, it could harm
our reputation and, therefore, our business and we could be subject to liability.
We may not be able to evolve our store locations to align with market trends or to effectively manage our
overall portfolio of stores which could adversely affect our ability to grow and could significantly harm
our profitability.
Our future results will largely depend on our ability to optimize store productivity and profitability by
strategically evolving our real estate portfolio to align with market trends while selectively opening new locations
and systematically refreshing our store base. For example, our strategy includes a focus on tourist locations due
to changing consumer preferences and declining traditional mall traffic and we cannot be certain that this strategy
will be successful. Our ability to manage our portfolio of stores in future years, in desirable locations as well as
operate stores profitably, particularly in multi-store markets, is a key factor in our ability to achieve sustained
profitable growth. We cannot be certain when or whether desirable locations will become available, the number
of Build-A-Bear Workshop stores that we can or will ultimately open, or whether any such new or relocated stores
can be profitably operated. We may decide to close other stores in the future. For example, in January 2018, we
closed a flagship store in the Downtown Disney® District at the Disneyland® Resort in Anaheim, California. This
store had much larger annual sales than our typical mall-based stores. We believe that this store closure will have
a short-term adverse impact on our revenues as we reposition our presence in the Los Angeles metropolitan area.
Additionally, in 2017 we operated 8 stores located within other retailers’ stores and as such are subject to
the operational risks of these retailers, including but not limited to, ineffective store operations, labor disputes and
negative publicity. If other retailers in which we have stores are impacted by these factors, it could have a negative
impact on our sales and operating performance.
7
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 Officer who
replaced our retiring Founder and Chief Executive Bear. Since then, six other executive officers left the Company
and four executive officers joined the Company. The success of our business depends on effective 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 effect on our business, financial condition and results of operations.
We may suffer negative publicity or be sued if the manufacturers of our merchandise or of Build-A-Bear
branded merchandise sold by our licensees ship any products that do not meet current safety standards
or production requirements or if such products are recalled or cause injuries.
Although we require our manufacturers to meet governmental safety standards, including food safety
regulations for certain locations, and our product specifications as well as submit our products for testing, we
cannot control the materials used by our manufacturers. Additionally, through our agreements, our licensees are
required to ensure that their manufacturers meet applicable safety and testing standards. If any of these
manufacturers ship 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 six products in the past nine years due to possible
safety issues. While our 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. While our licensing agreements typically indemnify us against financial
losses resulting from a safety or quality issue from Build-A-Bear branded products sold by our licensees, our
brand may be negatively impacted.
We may not be able to operate our international corporately-managed locations profitably.
We currently operate locations in the United Kingdom, Canada, Ireland, Denmark and China. Our future
success in international markets may be impacted by differences in consumer demand, regulatory and cultural
differences, economic conditions, changes in foreign government policies and regulations, changes in trading
status, compliance with U.S. laws affecting operations outside the U.S., such as the Foreign Corrupt Practices
Act, as well as other risks that we may not anticipate. Brand awareness in international markets may be lower
than in the U.S. and we may face higher labor and rent costs, as well as different holiday schedules. Although we
have realized benefits from our operations in the United Kingdom and Ireland, we may be unable to continue to
do so on a consistent basis. In 2016, we opened our first corporately-managed location in China and subsequently
recognized an impairment charge on a substantial portion of the store’s assets. In February 2015, we converted
a previously franchised store in Denmark into a corporately-managed location. In 2013 and 2014, we closed eight
stores in Canada. In 2012, we recognized an impairment charge on all of the goodwill associated with our UK
acquisition along with the store assets at certain store locations with poor operating results.
Additionally, we conduct business globally in many different jurisdictions with currencies other than U.S.
dollars. Our results could be negatively impacted by changes or fluctuations in currency exchange rates since we
report our consolidated financial results in U.S. dollars. In addition, we could experience restrictions on the transfer
of funds to and from foreign countries, including potentially negative tax consequences.
8
We are subject to risks associated with technology and digital operations.
Our operations are subject to numerous technology related risks, including risks related to the failure of the
computer systems that operate our point of sale and inventory systems, websites and mobile sites and their
related support systems. We are also subject to risks related to computer viruses, telecommunications failures,
and similar disruptions. Also, we may require additional capital in the future to sustain or grow our technological
infrastructure and digital commerce capabilities.
Business risks related to technology and digital commerce include risks associated with the need to keep
pace with rapid technological change, Internet security risks, risks of system failure or inadequacy, governmental
regulation and legal uncertainties with respect to the Internet, and collection of sales or other taxes by additional
states or foreign jurisdictions. If any of these risks materialize, it could have a material adverse effect on our
business.
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 factories that produce our skins, clothing, shoes or accessories. For the past
three years, we purchased between 73% and 85% of our merchandise from four 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 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. 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.
We may fail to renew, register or otherwise protect our trademarks or other intellectual property and may
be sued by third parties for infringement or, misappropriation of their proprietary rights, which could be
costly, distract our management and personnel and which could result in the diminution in value of our
trademarks and other important intellectual property.
Other parties have asserted in the past, and may assert in the future, trademark, patent, copyright or other
intellectual property rights that are important to our business. We cannot assure you that others will not seek to
block the use of or seek monetary damages or other remedies for the prior use of our brand names or other
intellectual property or the sale of our products or services as a violation of their trademark, patent or other
proprietary rights. Defending any claims, even claims without merit, could be time-consuming, result in costly
settlements, litigation or restrictions on our business and damage our reputation.
In addition, there may be prior registrations or use of intellectual property in the U.S. or foreign countries for
similar or competing marks or other proprietary rights of which we are not aware. In all such countries it may be
possible for any third-party owner of a national trademark registration or other proprietary right to enjoin or limit
our expansion into those countries or to seek damages for our use of such intellectual property in such countries.
In the event a claim against us were successful and we could not obtain a license to the relevant intellectual
property or redesign or rename our products or operations to avoid infringement, our business, financial condition
or results of operations could be harmed. Securing registrations does not fully insulate us against intellectual
property claims, as another party may have rights superior to our registration or our registration may be vulnerable
to attack on various grounds.
We may suffer negative publicity or be sued if the manufacturers of our merchandise violate labor laws
or engage in practices that consumers believe are unethical.
We rely on our sourcing personnel to select manufacturers with legal and ethical labor practices, but we
cannot control the business and labor practices of our manufacturers. If one of these manufacturers violates labor
laws or other applicable regulations or is accused of violating these laws and regulations, or if such a manufacturer
9
engages in labor or other practices that diverge from those typically acceptable in the United States, we could in
turn experience negative publicity or be sued.
Our company-owned distribution center which services the majority of our stores in North America and
our third-party distribution center providers used in the western United States and Europe may
experience disruptions in their ability to support our stores or they may operate inefficiently.
The operation of our stores is dependent on our ability to distribute merchandise to locations throughout the
United States, Canada, Europe and China in a timely manner. We own a 350,000-square-foot distribution center
in Groveport, Ohio and rely on this warehouse to receive, store and distribute merchandise for the majority of our
North America stores. To operate this location, our ability to meet our changing labor needs while controlling our
costs is subject to external factors such as labor laws, regulations, unemployment levels, prevailing wage rates,
and changing demographics. In addition, 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 and in Europe. Any significant interruption in the
operation of the distribution centers due to natural disasters or severe weather, as well as events such as fire,
accidents, power outages, system failures or other unforeseen causes could damage a significant portion of our
inventory. These factors may also impair our ability to adequately stock our stores and could decrease our sales
and increase our costs associated with our supply chain.
Our profitability could be adversely affected by fluctuations in petroleum products prices.
The profitability of our business depends to a certain degree upon the price of petroleum products, both as
a component of the transportation costs for delivery of inventory from our vendors to our stores and as a raw
material used in the production of our animal skins and stuffing. We are unable to predict what the price of crude
oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers
the increased costs that would result from higher petroleum prices. Therefore, any such increase could have an
adverse impact on our business and profitability.
If we are unable to effectively manage our international franchises, attract new franchisees 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 30, 2017, there were 102 Build-A-Bear Workshop international franchised stores. We
cannot ensure 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 operated markets, which impact the
performance of these stores. Additionally, our franchisees may experience financing, merchandising and
distribution expenses and challenges that are different from those we 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 depends upon our ability to attract and maintain qualified franchisees
with sufficient financial resources to develop and grow their operations and upon the ability of those franchisees
to successfully develop and operate their franchised stores. Franchisees may not operate stores in a manner
consistent with our standards and requirements, may not hire and train qualified managers and other store
personnel, may not operate their stores profitably and may not pay amounts due to us. As a result, our franchising
operations may not be profitable. Moreover, our brand image and reputation may suffer. When franchisees
perform below expectations we may transfer those agreements to other parties, take over the operations directly
or discontinue the franchise agreement. For example, in 2015, we terminated the franchise agreement in
Scandinavia leading to the closure of stores in Norway and Sweden. In 2016, we consented to the sale of the
South African franchise to new owners. Furthermore, the interests of franchisees might sometimes conflict with
our interests. For example, whereas franchisees are concerned with their individual business objectives, we are
responsible for ensuring the success of the Build-A-Bear brand and all of our stores.
The laws of the various foreign countries in which our franchisees operate as well as compliance with U.S.
laws affecting operations outside the U.S., such as the Foreign Corrupt Practices Act govern our relationships
with our franchisees. These laws, and any new laws that may be enacted, may detrimentally affect the rights and
obligations between us and our franchisees and could expose us to additional liability.
10
Our business may be adversely impacted at any time by a significant variety of competitive threats.
We operate in a highly competitive environment characterized by low barriers to entry. We compete against
a diverse group of competitors. Because we are primarily mall-based, we see our competition as those mall-based
retailers that compete for prime mall locations, including various apparel, footwear and specialty retailers. As a
retailer whose signature product is a stuffed animal that is typically purchased as a toy or gift, we also compete
with big box retailers and toy stores, as well as manufacturers that sell plush toys. Since we offer our guests an
experience as well as merchandise, we also view our competition as any company that competes for our guests’
time and entertainment dollars, such as movie theaters, restaurants, amusement parks and arcades. In addition,
there are several small companies that operate “make your own” teddy bear and stuffed animal experiences in
retail stores and kiosks. Although we believe that none of these companies currently offer 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 of our competitors have longer operating histories, significantly greater financial, marketing and other
resources, and greater name recognition. We cannot assure you that we will be able to compete successfully with
them in the future, particularly in geographic locations that represent new markets for us. If we fail to compete
successfully, our market share and results of operations could be materially and adversely affected.
We may suffer negative publicity or a decrease in sales or profitability if the products from other
companies that we sell in our stores do not meet our quality standards or fail to achieve our sales
expectations.
We may expand our product assortment to include products manufactured by other companies. If sales of
such products do not meet our expectations or are impacted by competitors’ pricing, we may have to take
markdowns or employ other strategies to liquidate the product. If other companies do not meet quality or safety
standards or violate any manufacturing or labor laws, we may suffer negative publicity and may not realize our
sales plans.
We may be unsuccessful in acquiring businesses or engaging in other strategic transactions, which may
negatively affect our financial condition and profitability.
We may from time to time engage in discussions and negotiations regarding acquisitions or other strategic
transactions that could affect our financial condition, profitability or other aspects of our business. There can be
no assurance that we will be able to identify suitable acquisition targets that we believe may complement our
existing business. There can also be no assurance that if we acquire a business we will be successful in integrating
it into our overall operations, or that any such acquired company will operate profitably or will not otherwise
adversely impact our financial condition.
Risks Related to Owning Our Common Stock
Fluctuations in our operating results could reduce our cash flow and we may be unable to repurchase
shares at all or at the times or in the amounts we desire or the results of the share repurchase program
may not be as beneficial as we would like.
In August 2017, our Board of Directors authorized a $20 million share repurchase program. The program
does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated
at any time without prior notice. Shares repurchased under the program will be subsequently retired. If our cash
flow decreases as a result of decreased sales, increased expenses or capital expenditures or other uses of cash,
we may not be able to repurchase shares of our common stock at all or at times or in the amounts we desire. As
a result, the results of the share repurchase program may not be as beneficial as expected.
11
Fluctuations in our quarterly results of operations could cause the price of our common stock to
substantially decline.
Retailers generally are subject to fluctuations in quarterly results. Our operating results for one period may
not be indicative of results for other periods, and may fluctuate significantly due to a variety of factors, including:
the profitability of our stores;
increases or decreases in comparable sales;
increases or decreases in total revenues;
changes in general economic conditions and consumer spending patterns;
the timing and frequency of our marketing initiatives;
changes in foreign currency exchange rates;
seasonal shopping patterns;
the timing of store closures, relocations and openings and related expenses;
the effectiveness of our inventory management;
changes in consumer preferences;
the continued introduction and expansion of merchandise offerings;
actions of competitors or mall anchors and co-tenants;
•
•
•
•
•
•
•
•
•
•
•
•
• weather conditions and natural disasters;
•
•
the timing and frequency of national media appearances and other public relations events; and
the impact of a 53rd week in our fiscal year, which occurs approximately every six years, (i.e. fiscal 2014
and fiscal 2023).
If our future quarterly results fluctuate significantly or fail to meet the expectations of the investment
community, then the market price of our common stock could decline substantially.
The limited public float and trading volume for our common stock may have an adverse impact and cause
significant fluctuation of market price.
Historically, ownership of a significant portion of our outstanding shares of common stock has been
concentrated in a small number of institutional stockholders. The members of our Board of Directors, officers and
other members of management own stock acquired as a result of incentive compensation equity grants or
otherwise. Consequently, our common stock has a relatively small float and low average daily trading volume,
which could affect a stockholder’s ability to sell our stock or the price at which it can be sold. In addition, future
sales of substantial amounts of our common stock in the public market by those larger stockholders, or the
perception that these sales could occur, may adversely impact the market price of the stock and our stock could
be difficult for a stockholder to liquidate.
Our certificate of incorporation and bylaws and Delaware law contain provisions that may prevent or
frustrate attempts to replace or remove our current management by our stockholders, even if such
replacement or removal may be in our stockholders’ best interests.
Our basic corporate documents and Delaware law contain provisions that might enable our management to
resist a takeover. These provisions:
restrict various types of business combinations with significant stockholders;
•
• provide for a classified board of directors;
•
•
•
limit the right of stockholders to remove directors or change the size of the board of directors;
limit the right of stockholders to fill vacancies on the board of directors;
limit the right of stockholders to act by written consent and to call a special meeting of stockholders or
propose other actions;
require a higher percentage of stockholders than would otherwise be required to amend, alter, change or
repeal our bylaws and certain provisions of our certificate of incorporation; and
•
• authorize the issuance of preferred stock with any voting rights, dividend rights, conversion privileges,
redemption rights and liquidation rights and other rights, preferences, privileges, powers, qualifications,
limitations or restrictions as may be specified by our board of directors.
12
These provisions may:
• discourage, delay or prevent a change in the control of our company or a change in our management, even
if such change may be in the best interests of our stockholders;
• adversely affect the voting power of holders of common stock; and
•
limit the price that investors might be willing to pay in the future for shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Stores
We lease all of our store locations. As of December 30, 2017, we operated 361 retail stores located primarily
in major malls throughout the United States, Canada, Puerto Rico, the United Kingdom, Ireland, Denmark and
China in our DTC segment.
Non-Store Properties
In addition to leasing all of our store locations, we own a warehouse and distribution center in Groveport,
Ohio, which is utilized primarily by our DTC segment. The facility is approximately 350,000 square feet and
includes our North American e-commerce fulfillment site. We also lease approximately 59,000 square feet for our
corporate headquarters in St. Louis, Missouri which houses our corporate staff, our call center and our on-site
training facilities. The lease was amended, effective January 3, 2018, with a one-year term. In the United Kingdom,
we lease approximately 6,500 square feet for our regional headquarters in Slough, England under a lease that
commenced in March 2016 with a term of 10 years.
ITEM 3.
LEGAL PROCEEDINGS
From time to time we are involved in ordinary routine litigation typical for companies engaged in our line of
business, including actions seeking to enforce our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. As of the date of this Annual Report on Form 10-K, we are 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.
13
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “BBW.” Our common
stock commenced trading on the NYSE on October 28, 2004. The following table sets forth the high and low sale
prices of our common stock for the periods indicated.
Fiscal 2017
Fiscal 2016
High
Low
High
Low
First Quarter ..................................... $
Second Quarter ................................ $
Third Quarter .................................... $
Fourth Quarter .................................. $
14.65 $
11.90 $
11.00 $
10.05 $
8.05 $
8.25 $
8.10 $
7.25 $
14.74 $
14.52 $
14.27 $
15.85 $
10.74
12.28
10.01
10.35
As of March 9, 2018, the number of holders of record of the Company’s common stock totaled approximately
1,797.
PERFORMANCE GRAPH
The following performance graph compares the 60-month cumulative total stockholder return of our common
stock, with the cumulative total return on the Russell 2000® Index and an SEC-defined 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 strictly a
merchandise retailer and there is a strong interactive, entertainment component to our business which
differentiates us from retailers in the Peer Group. However, in the absence of any other readily identifiable peer
group, we believe the use of the Peer Group is appropriate.
The performance graph starts on December 29, 2012, and ends on December 29, 2017, the last trading day
prior to December 30, 2017, the end of our fiscal 2017. The graph assumes that $100 was invested on
December 29, 2012, in each of our common stock, the Russell 2000 Index and the Peer Group, and that all
dividends were reinvested.
These indices are included only for comparative purposes as required by SEC rules and do not necessarily
reflect management’s opinion that such indices are an appropriate measure of the relative performance of our
common stock. They are not intended to forecast the possible future performance of our common stock.
14
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Purchased (1)
(a)
Total
Number of
Shares
(or Units)
(c)
Total Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs (3)
(d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs (3)
(b)
Average
Price Paid
Per Share (or
Unit) (2)
Oct. 1, 2017 – Oct. 28, 2017 .................
Oct. 29, 2017 – Nov. 25, 2017 ...............
Nov. 26, 2017 – Dec. 30, 2017 ..............
Total ......................................................
174 $
89 $
401,400 $
401,663 $
8.59
7.95
9.14
9.14
- $
- $
401,400 $
401,400 $
19,002,247
19,002,247
15,334,448
15,334,448
(1)
Includes shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of
restricted shares which vested during the quarter. Our equity incentive plans provide that the value of shares delivered
to us to pay the withholding tax obligations is calculated at the closing trading price of our common stock on the date the
relevant transaction occurs.
(2) Average Price Paid Per Share includes commissions.
(3)
In August 2017, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to
$20 million of our common stock. This program authorizes the Company to repurchase shares through
September 30, 2020 and does not require the Company to repurchase any specific number of shares, and may be
modified, suspended or terminated at any time without prior notice. Shares repurchased under the program will be
subsequently retired.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the past three years.
Dividend Policy
No dividends were paid in 2017, 2016 or 2015. We anticipate that we will retain any future earnings to
support operations, to finance the growth and development of our business and to repurchase shares of our
common stock from time to time and we do not expect, at this time, to pay cash dividends. Any future determination
relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number
of factors, including future earnings, capital requirements, financial conditions, future prospects and other factors
that the Board of Directors may deem relevant. Additionally, under our credit agreement, we are prohibited from
declaring dividends without the prior consent of our lender, subject to certain exceptions, as described in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital
Resources.”
15
ITEM 6.
SELECTED FINANCIAL DATA
Throughout this Annual Report on Form 10-K, we refer to our fiscal years ended December 30, 2017,
December 31, 2016, January 2, 2016, January 3, 2015 and December 28, 2013, as fiscal years 2017, 2016, 2015,
2014 and 2013, respectively. Through fiscal year 2017, our fiscal year consisted of 52 or 53 weeks and ends on
the Saturday nearest December 31 in each year. The 2014 fiscal year included 53 weeks and fiscal years 2017,
2016, 2015, and 2013 included 52 weeks. All of our fiscal quarters presented in this Annual Report on
Form 10-K included 13 weeks. When we refer to our fiscal quarters, or any three-month period ending as of a
specified date, we are referring to the 13-week period prior to that date. On January 9, 2018, the Company's
Board of Directors approved a change in the Company’s fiscal year-end, which previously ended on the Saturday
closest to December 31, to the Saturday closest to January 31. See Note 16 – Subsequent Event to the
Consolidated Financial Statements for additional information.
The following table sets forth, for the periods and dates indicated, our selected consolidated financial and
operating data. The balance sheet data for fiscal 2017 and 2016 and the statement of operations and other
financial data for fiscal 2017, 2016 and 2015 are derived from our audited financial statements included elsewhere
in this Annual Report on Form 10-K. The balance sheet data for fiscal 2015, 2014 and 2013, and the statement
of operations and other financial data for fiscal 2014 and 2013 are derived from our audited consolidated financial
statements that are not included in this Annual Report on Form 10-K. You should read our selected consolidated
financial and operating data in conjunction with our consolidated financial statements and related notes and with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing
elsewhere in this Annual Report on Form 10-K.
Fiscal Year
2013
2015
2017
(Dollars in thousands, except share and per share data)
2014
2016
Statement of operations data:
Total revenues ..................................... $ 357,866 $
Costs and expenses:
364,204 $
377,694 $
392,354 $
379,069
Cost of merchandise sold – retail ..
Cost of merchandise sold –
commercial .................................
Selling, general and administrative
Store preopening ...........................
Interest expense (income), net ......
Total costs and expenses .............
Income (loss) before income taxes ......
Income tax expense (benefit) ..............
Net income (loss) ................................. $
Income (loss) per common share:
185,481
195,914
197,101
210,887
219,696
3,412
152,653
2,496
11
344,053
13,813
5,897
7,916 $
2,253
157,174
3,549
5
358,895
5,309
3,932
1,377 $
1,375
159,612
1,851
(143)
359,796
17,898
(9,447)
27,345 $
945
163,262
1,183
53
376,330
16,024
1,662
14,362 $
1,042
158,397
2,311
(259)
381,187
(2,118)
(6)
(2,112)
Basic .............................................. $
Diluted ........................................... $
0.50 $
0.50 $
0.09 $
0.09 $
1.61 $
1.59 $
0.82 $
0.81 $
(0.13)
(0.13)
Shares used in computing common
per share amounts:
Basic .............................................. 15,572,045 15,442,086 16,642,269 16,908,001 16,465,138
Diluted ........................................... 15,757,060 15,622,273 16,867,356 17,133,811 16,465,138
16
Other financial data:
Fiscal Year (1)
2015
(Dollars in thousands, except per store and per square foot data)
2017
2014
2016
2013
Retail gross margin ($) (2) .............................. $ 163,927
Retail gross margin (%) (2) .............................
Capital expenditures (3) .................................. $
Depreciation and amortization .......................
18,073
16,165
46.9%
$
$ 161,679
$ 175,614 $ 176,838 $ 153,477
45.2%
$
28,118
16,171
47.1%
24,388 $
16,419
45.6%
10,890 $
18,128
41.1%
19,362
19,216
Cash flow data:
Cash flows provided by operating activities ... $
Cash flows used in investing activities ........... $
Cash flows (used in) provided by financing
21,088
(17,763)
$
$
16,014
(26,657)
$
$
32,047 $
(25,146) $
34,884 $
(11,789) $
19,058
(19,362)
activities ..................................................... $
(4,775)
$
(1,948)
$
(26,390) $
(1,783) $
132
Store data:
Number of stores at end of period (4)
North America ........................................
Europe ....................................................
China ......................................................
Total stores .....................................
301
59
1
361
285
60
1
346
269
60
-
329
265
59
-
324
263
60
-
323
Square footage at end of period (5)
North America ........................................ 733,894
81,101
Europe ....................................................
1,750
China ......................................................
Total square footage ....................... 816,745
749,197
85,900
1,750
836,847
719,535 725,942 735,605
86,859
-
805,443 810,731 822,464
84,789
-
85,908
-
Average net retail sales per store: (6)
North America ........................................ $
United Kingdom ...................................... £
Net retail sales per square foot:
North America (7) ..................................... $
United Kingdom (8) .................................. £
Consolidated comparable sales .....................
Change (%) (9) ........................................
918
744
343
523
$
£
$
£
1,007
783
371
547
$
£
$
£
1,075 $
781 £
1,158 $
809 £
1,080
755
394 $
551 £
409 $
567 £
381
525
(6.5)%
(4.4)%
1.0%
1.7%
4.9%
Balance sheet data:
30,445
Cash and cash equivalents ........................... $
Working capital (10) .........................................
40,366
Total assets ................................................... 197,989
Total stockholders' equity .............................. 107,315
$
32,483
27,187
199,595
99,112
$
45,196 $
28,870
44,665
30,353
213,334 212,054 195,611
84,390
65,389 $
45,313
97,625
99,414
(1) Fiscal 2017, 2016, 2015 and 2013 included 52 weeks; fiscal 2014 included 53 weeks.
(2) Retail gross margin represents net retail sales less cost of merchandise sold - retail. Retail gross margin percentage
represents retail gross margin divided by net retail sales.
(3) Capital expenditures consist of leasehold improvements, furniture and fixtures, land, buildings, computer equipment and
software purchases, as well as trademarks, intellectual property and deferred leasing fees.
(4) Excludes our e-commerce sites. North American stores are located in the United States, Canada and Puerto Rico. In
Europe, stores are located in the United Kingdom, Ireland, and beginning in 2015, Denmark.
(5) Square footage for stores located in North America is leased square footage. Square footage for stores located in Europe
and China is estimated selling square footage.
(6) Average net retail sales per store represents net retail sales only from stores open throughout the entire period, excluding
e-commerce locations, divided by the total number of such stores.
(7) Net retail sales per square foot in North America represents net retail sales from stores open throughout the entire period
in North America, excluding e-commerce location, divided by the total leased square footage of such stores.
(8) Net retail sales per square foot in the United Kingdom represents net retail sales from stores open throughout the entire
period in the United Kingdom, excluding e-commerce location, divided by the total selling square footage of such stores.
(9) Consolidated comparable sales percentage changes are based on net retail sales, including e-commerce, and exclude
the impact of foreign exchange. Store locations are considered comparable beginning in their thirteenth full month of
operation. Comparable sales percentage changes for 2015 are based on net retail sales as compared to the 52-week
period ended January 3, 2015.
(10) Working Capital is defined as current assets less current liabilities.
17
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 only global company that offers an interactive “make your own stuffed animal” retail
entertainment experience under the Build-A-Bear Workshop brand, in which guests participate in the stuffing,
fluffing, dressing, accessorizing and naming of their own teddy bears and other stuffed animals. As of December
30, 2017, we operated 361 stores globally and had 102 franchised stores operating internationally under the Build-
A-Bear Workshop brand. In addition to our stores, we sell products on our company-owned e-commerce sites
and franchisee sites and through third parties under wholesale agreements.
We operate in three segments that share the same infrastructure, including management, systems,
merchandising and marketing, and generate revenues as follows:
• Direct to Consumer (“DTC”) – Corporately-managed retail stores located in the United States, Canada,
Puerto Rico, the United Kingdom, Ireland, Denmark and China and two e-commerce sites;
• Commercial – Transactions with other businesses, mainly comprised of wholesale product sales and
•
licensing our intellectual property, including entertainment properties, for third-party use; and
International franchising – Royalties and other fees from other international operations under franchise
agreements.
Selected financial data attributable to each segment for fiscal 2017, 2016 and 2015, are set forth in Note 15
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 “Stores” subsections of this Overview, along with the “Risk
Factors” and “Results of Operations.”
We believe that we have an appealing retail store concept that has broad demographic appeal which, for
North American stores open for the entire year, averaged net retail sales per store of $0.9 million in fiscal 2017,
$1.0 million in fiscal 2016 and $1.1 million in fiscal 2015. Consolidated store contribution consists of store location
net retail sales less cost of product, marketing and store related expenses. Non-store general and administrative
expenses are excluded as are our e-commerce sites, locations not open for the full fiscal year and adjustments
to deferred revenue related to gift card breakage and our loyalty program. See “Non-GAAP Financial Measures”
for a reconciliation of store contribution to net income. Consolidated store contribution as a percentage of net
retail sales was 15.7%, 15.9% and 18.2% for fiscal 2017, 2016 and 2015, respectively. Consolidated net income
as a percentage of total revenues was 2.2%, 0.4%, and 7.2% for fiscal 2017, 2016 and 2015, respectively.
The decrease in consolidated store contribution in fiscal 2017 was primarily due to the revenue impact of
declines in traditional mall traffic, which lowered consolidated comparable sales throughout the year and during
the peak selling month of December. In contrast, consolidated net income increased primarily due to reduced
selling, general and administrative expenses, an increase in gift card breakage revenue and lower store
impairment charges taken in fiscal 2017 compared to fiscal 2016.
The decline in consolidated store contribution in fiscal 2016 was primarily the result of the decrease in
consolidated comparable sales primarily in North America in the fourth quarter. Additionally, our store results were
negatively impacted by the deleverage of fixed occupancy costs and the impact of currency fluctuations,
particularly in Europe. The decline in fiscal 2016 followed three consecutive years of consolidated comparable
sales increases and improved profitability from fiscal years 2013 through 2015.
In fiscal 2015, our results reflected the impact from the following activities as we updated existing stores and
expanded our real estate portfolio with our new Discovery store design, opened our first ever value-driven outlet
18
format stores, extended engagement with core consumer segments, expanded business with the teen-plus affinity
and gift-giving segment, introduced new intellectual property collections and drove e-commerce sales while
making investments in infrastructure and personnel.
We expect 2018 to be another transitional year as key aspects of our longer-term strategies continue to be
implemented. In January 2018, we closed a flagship store in the Downtown Disney® District at the Disneyland®
Resort in Anaheim, California. This store had much larger annual sales than our typical mall-based stores. We
believe that this store closure will have a short-term adverse impact on our revenues as we reposition our
presence in the Los Angeles metropolitan area. We are committed to the ongoing plan to address our aged store
portfolio by diversifying locations and formats to focus on places where families go for entertainment, including
tourist locations. We relaunched our web platform in the fourth quarter of fiscal 2017 which paves the way for
increased omni-channel capabilities and the ability to connect more closely with consumers through a repositioned
loyalty program which provides rich data to leverage in order to drive incremental sales. We also intend to increase
consumer interest in store visits using brand connections to drive traffic, while building relevance and affinity
among secondary targets and expanding our wholesale and corporate sales programs. Additionally, we expect to
make adjustments to marketing programs to create synergy across channels and leverage entertainment content
to extend brand interaction with “play beyond the plush”. For our global footprint, we expect to continue to expand
and refine our franchise portfolio with the anticipated addition of new markets internationally. Through a
combination of these strategies and our continued disciplined expense management, we remain focused on
growing total revenues and improving profitability in 2018 and beyond.
We ended fiscal 2017 with no borrowings under our bank loan agreement and with $30.4 million in cash and
cash equivalents after investing $18.1 million in capital projects throughout the year. During 2017, we repurchased
$4.7 million in shares of our common stock.
Following is a description and discussion of the major components of our statement of operations:
Revenues
Net retail sales: Net retail sales, less discounts and excluding sales tax, are recognized at the time of sale.
Merchandise returns have not been significant. For e-commerce sales, revenue is recognized at the time of
shipment. We sell gift cards to our guests in our retail stores, through our e-commerce sites, and through select
third parties. Revenues from gift cards are recognized at the time of redemption or breakage. Our guests use
third-party credit cards, gift cards and cash to make purchases. We classify stores as new, comparable and non-
comparable stores. Stores enter the comparable sales calculation in their thirteenth full month of operation. Our
temporary and seasonal locations are not included in our comparable calculations, unless they are open for
thirteen months. Non-comparable stores also result from a store relocation or remodel that results in a significant
change in square footage or temporary closure. The net retail sales for a location with a significant change in
square footage are excluded from comparable sales calculations until the thirteenth full month of operation after
the date of the change. The net retail sales for a location with temporary closure are excluded from comparable
sales calculations for each month or partial month that the location is closed.
In December 2015, we changed the manner in which we operated our U.S. gift card business by establishing
a new legal entity in Virginia to issue and administer gift cards resulting in gift cards that are subject to different
terms and conditions promulgated by different state laws. For gift cards issued in the United States prior to
December 2015, we recorded income from unredeemed gift cards or breakage under the delayed recognition
method which defers the recognition of breakage until the likelihood of redemption by a customer is considered
remote. In fiscal 2015 and prior, this gift card breakage was recorded as an offset to selling, general and
administration given its immateriality. For gift cards issued in the United States during and after December 2015,
we began to recognize breakage revenue using the redemption recognition method based on historical
redemption patterns, which results in breakage being recognized sooner, and recorded within net retail sales. In
fiscal 2016 and 2017, breakage revenue for all unredeemed U.S. gift cards was recognized in net retail sales.
We have a loyalty program with a frequent shopper reward feature, the Build-A-Bear Workshop Bonus Club.
Members of the program receive one point for every dollar or British pound sterling spent and receive awards
after reaching certain point thresholds. On a quarterly basis, an estimate of the obligation related to the program,
based on actual points and awards outstanding and historical point conversion and award redemption patterns,
is recorded as an adjustment to the deferred revenue liability and net retail sales. See “Critical Accounting
Estimates” for additional information regarding the accounting for gift card breakage and the deferred revenue
related to our customer loyalty program.
19
Gift cards can be purchased and redeemed, and awards can be earned or redeemed at any of our store
locations. Accordingly, we account for gift card breakage and changes in the deferred revenue account at the total
company level only. Therefore, when we refer to net retail sales by location, such as comparable stores or new
stores, these amounts do not include gift card breakage or any changes in deferred revenue.
We use net retail sales per square foot and comparable sales as performance measures for our business.
The following table details net retail sales per square foot for stores open throughout the fiscal year for the periods
presented:
Net retail sales per square foot
Fiscal
2017
Fiscal
2016
Fiscal
2015
North America (1) .............................................................. $
United Kingdom (2) ............................................................ £
343 $
523 £
371 $
547 £
394
551
(1) Net retail sales per square foot in North America represents net retail sales from stores open throughout the
entire period in North America, excluding e-commerce sales, divided by the total leased square footage of
such stores.
(2) Net retail sales per square foot in the United Kingdom represents net retail sales from stores open throughout
the entire period in the United Kingdom, excluding e-commerce sales, divided by the total selling square
footage of such stores.
The percentage increase (or decrease) in comparable sales for the periods presented below is as follows:
Comparable sales change (%) (1)
North America .................................................
Europe .............................................................
Consolidated ................................................
Stores ..............................................................
E-commerce ....................................................
Consolidated ................................................
Fiscal
2017
Fiscal
2016
Fiscal
2015
(6.5)%
(6.5)%
(6.5)%
(7.0)%
2.8%
(6.5)%
(4.5)%
(3.8)%
(4.4)%
(4.9)%
7.2%
(4.4)%
(0.0)%
4.8%
1.0%
0.5%
11.8%
1.0%
(1) Consolidated comparable sales percentage changes are based on net retail sales, including e-commerce,
and exclude the impact of foreign exchange. Store locations are considered comparable beginning in their
thirteenth full month of operation.
The decrease in consolidated comparable sales in 2017 was primarily attributable to the continued decline
in traditional mall traffic throughout the year and during the peak selling month of December, as well as an
unusually bad hurricane season in North America. Offsetting these impacts, our stores had increased conversion,
or customers’ in-store acquisition rates, and higher dollars per transaction as compared to the prior year period
as well as the benefit from e-commerce sales.
The decrease in consolidated comparable sales in 2016 was primarily attributable to a double-digit decline
in North America in the fourth quarter. In addition to the impact of the overall reported declines in North American
mall traffic in December, other significant drivers of the decrease included changes in media and marketing tactics,
shifts in licensed product sales and the execution of unplanned promotional activities, a decrease in gift card
redemptions and missed e-commerce sales in the fourth quarter due to the inability of our e-commerce systems
to process the increased traffic to our site.
Commercial revenue: Commercial revenue includes the company’s transactions with other businesses,
mainly through wholesale and licensing transactions. Revenue from wholesale product sales includes revenue
from sales of merchandise to third parties that operate stores under licensing agreements. In addition, we have
historically entered into a number of outbound licensing arrangements whereby third parties manufacture
merchandise carrying the Build-A-Bear trademark and sell it to other retailers. Revenue from outbound licensing
activities is generally based on a percentage of sales made by licensees to third parties and is recognized at the
time of sale by the licensee.
20
Franchise fees: Typically, we receive an initial, one-time franchise fee for each master franchise agreement
which is amortized to revenue over the initial term of the respective franchise agreement, which may extend for
periods up to 25 years and include a renewal option if certain conditions are met. Master franchise rights are
typically granted to a franchisee for an entire country or countries. Continuing franchise fees are based on a
percentage of sales made by the franchisees’ stores and are recognized as revenue at the time of those sales as
well as fees for sale of fixtures and equipment required to open and operate stores.
Costs and Expenses
Cost of merchandise sold - retail and retail gross margin: Cost of merchandise sold – retail includes the cost
of the merchandise, including royalties paid to licensors of third party branded merchandise; store occupancy
cost, including store depreciation and store asset impairment charges; cost of warehousing and distribution;
packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to customers.
Retail gross margin is defined as net retail sales less the cost of merchandise sold - retail.
Selling, general and administrative expense: These expenses include store payroll and benefits, advertising,
credit card fees, store supplies and normal store closing expenses as well as central office general and
administrative expenses, including costs for management payroll, benefits, incentive compensation, travel,
information systems, accounting, insurance, legal and public relations. These expenses also include depreciation
of central office assets as well as the amortization of intellectual property and other assets. Certain store expenses
such as credit card fees historically have increased or decreased proportionately with net retail sales.
Preopening: These expenses include costs incurred prior to store openings, remodels and relocations
including certain store set-up, labor and hiring costs, rental charges, payroll, marketing, travel and relocation
costs. They are expensed as incurred.
Stores
Corporately-managed locations:
The number of Build-A-Bear Workshop stores in the United States, Canada, Puerto Rico (collectively, North
America), the United Kingdom, Ireland and Denmark (collectively, Europe) and China for the last three fiscal years
are summarized as follows:
North
America
Europe
China
Total
January 3, 2015 .....................................
Opened ...............................................
Closed .................................................
January 2, 2016 .....................................
Opened ...............................................
Closed .................................................
December 31, 2016 ...............................
Opened ...............................................
Closed ................................................
December 30, 2017 ...............................
265
22
(18)
269
29
(13)
285
39
(23)
301
59
3
(2)
60
5
(5)
60
2
(3)
59
—
—
—
—
1
—
1
—
—
1
324
25
(20)
329
35
(18)
346
41
(26)
361
During 2017, we continued to make improvements to an aged store portfolio by leveraging new
Discovery formats including the concourse shops in conjunction with select natural lease events as well as to
focus on places where families go for entertainment, including tourist locations. We also expect to close certain
stores in accordance with natural lease events as an ongoing part of our real estate management and day-to-day
operational plans. As of December 30, 2017, we operated 105 Discovery format stores, including 26 concourse
shops.
We also operate in a number of other non-traditional locations, such as a ballpark and science center.
Additionally, we operate shop-in-shop locations within other retailers’ stores. We also operate temporary stores,
which generally have lease terms of six to eighteen months. These specific locations are designed to capitalize
on short-term opportunities.
21
International Franchise Locations:
Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store
layout and merchandise assortments as our corporately-managed stores. As of December 30, 2017, we had nine
master franchise agreements, which typically grant franchise rights for a particular country or group of countries,
covering an aggregate of 17 countries. The number of international, franchised stores opened and closed for the
periods presented below are summarized as follows:
2017
Fiscal year
2016
2015
Beginning of period ..................................................
Opened ....................................................................
Closed ......................................................................
End of period ............................................................
92
27
(17)
102
77
22
(7)
92
The distribution of franchised locations among these countries is as follows:
Australia ....................................................................................................................................
Mexico .......................................................................................................................................
Gulf States (1) .............................................................................................................................
Germany (2) ................................................................................................................................
South Africa ...............................................................................................................................
Thailand ....................................................................................................................................
Singapore ..................................................................................................................................
Turkey .......................................................................................................................................
China/Hong Kong ......................................................................................................................
Total .......................................................................................................................................
73
10
(6 )
77
29
17
15
14
14
6
3
3
1
102
(1) Gulf States master franchise agreement includes Kuwait, Bahrain, Qatar, and the United Arab Emirates
which all have stores as well as Oman where we do not currently have a store open
(2) Germany master franchise agreement also includes Austria and Switzerland where stores have not yet
opened
In the ordinary course of business, we anticipate signing additional master franchise agreements in the
future and terminating other such agreements. We believe there is a total market potential for approximately 300
international stores outside of the United States, Canada, the United Kingdom, Ireland and Denmark. In 2016, we
began to source fixtures and other supplies for our franchisees from China which significantly reduced the capital
and lowered the expenses required to open franchises. We are leveraging new formats that have been developed
for our corporately-managed locations such as concourses and shop-in-shops with our franchisees. In 2017, we
opened our first franchise in China. We expect to develop market expansion through both new and existing
franchisees in 2018 and beyond.
Results of Operations
2017 Overview
We continued to make significant progress on key platforms of our long-term strategic plan in 2017. We
maintained the commitment to position ourselves for the future through the continued development and
implementation of our four key strategic initiatives of channel evolution inclusive of international franchising,
product expansion, brand and experience amplification and long-term profitability improvement. In 2017, we
advanced our retail portfolio diversification strategy into 26 new concourse shop formats as well as tourist
locations including a new location in New York City adjacent to the Empire State Building. In the fourth quarter of
2017, our relaunched web platform paved the way for increased omni-channel capabilities and supported our
focus on channel evolution and brand amplification. Regarding long-term profitability, we recorded our fourth
straight year of net income and improved on the prior year’s results. However, our comparable sales decreased
and were impacted negatively by the overall traffic declines at traditional malls throughout the year including the
critically important gift-buying month of December. We are evolving our tactics to make the necessary adjustments
to drive total revenue growth and to deliver sustained profit to enhance long-term shareholder value.
22
The following table sets forth, for the periods indicated, selected statement of operations data expressed as
a percentage of total revenues, except where otherwise indicated. Percentages will not total due to cost of
merchandise sold being expressed as a percentage of net retail sales and commercial revenue and immaterial
rounding:
Fiscal 2017
Fiscal 2016
Fiscal 2015
Revenues:
Net retail sales .............................................
Commercial revenue ....................................
Franchise fees .............................................
Total revenues .......................................
Costs and expenses:
Cost of merchandise sold - retail (1) .............
Cost of merchandise sold - commercial (1)...
Selling, general and administrative ..............
Store preopening .........................................
Interest expense (income), net .................
Total costs and expenses .....................
Income (loss) before income taxes .......
Income tax (benefit) expense ...................
Net income (loss) ..................................
97.6%
1.7
0.7
100.0
53.1
56.8
42.7
0.7
0.0
96.1
3.9
1.6
2.2%
98.2%
1.2
0.6
100.0
54.8
52.2
43.2
1.0
0.0
98.5
1.5
1.1
0.4%
Retail gross margin % (2) .....................................
46.9%
45.2%
98.7%
0.7
0.6
100.0
52.9
49.4
42.3
0.5
(0.0)
95.3
4.7
(2.5)
7.2%
47.1%
(1) Cost of merchandise sold – retail and cost of merchandise sold – commercial are expressed as a percentage
of net retail sales and commercial revenue, respectively.
(2) Retail gross margin represents net retail sales less cost of merchandise sold – retail; retail gross margin
percentage represents retail gross margin divided by net retail sales.
Fiscal Year Ended December 30, 2017 Compared to Fiscal Year Ended December 31, 2016
Total revenues. Net retail sales were $349.4 million for fiscal 2017, compared to $357.6 million for fiscal
2016, a decrease of $8.2 million. The components of this decrease are as follows:
Decrease in comparable sales ......................................................................................... $
Increase from new stores .................................................................................................
Impact of store closures ...................................................................................................
Impact of foreign currency translation ..............................................................................
Change in deferred revenue estimates, including breakage ...........................................
Decrease in non-comparable stores, primarily remodels and relocations .......................
$
Fiscal 2017
(dollars in millions)
(21.8)
20.1
(7.8)
(1.5)
3.8
(1.0)
(8.2)
In fiscal 2017, our estimate of deferred revenue increased net retail sales by $3.8 million compared to fiscal
2016 primarily due to breakage. The increase in breakage revenue was primarily the result of a larger gift card
base, favorable historical redemption rates and changes in the estimate of liabilities for older gift cards. See
“Critical Accounting Estimates Revenue Recognition” discussion for additional breakage discussion.
Commercial revenue was $6.0 million for fiscal 2017 compared to $4.3 million for fiscal 2016, an increase
of $1.7 million. This increase was primarily due to the addition of new wholesale customers and growth in outbound
licensing activity in 2017. Revenue from international franchise fees was $2.5 million for fiscal 2017 compared to
$2.3 million for fiscal 2016. This $0.2 million increase was primarily the result of having more franchise locations
in fiscal 2017.
23
Retail gross margin. Retail gross margin was $163.9 million in fiscal 2017 compared to $161.7 million in
fiscal 2016, an increase of $2.2 million, or 1.4%. As a percentage of net retail sales, retail gross margin increased
to 46.9% for fiscal 2017 from 45.2% for fiscal 2016, an increase of 170 basis points as a percentage of net retail
sales. Retail gross margin improved primarily due to a $3.8 million increase in gift card breakage, cost efficiencies
and the absence of a prior year $2.3 million store asset impairment charge.
Selling, general and administrative. Selling, general and administrative expenses were $152.7 million for
fiscal 2017 as compared to $157.2 million for fiscal 2016, a decrease of $4.5 million, or 2.9%. Selling, general and
administrative expenses were lower primarily due to the absence of the charge associated with the prior year duty
dispute in the UK, the positive impact of foreign currency translation and lower marketing expenses, partially offset
by higher incentive compensation in fiscal 2017. As a percentage of total revenues, selling, general and
administrative expenses were 42.7% for fiscal 2017, compared to 43.2% for fiscal 2016.
Store preopening. Store preopening expenses were $2.5 million in fiscal 2017 as compared to $3.5 million
in fiscal 2016. The decrease was attributable to the lower number of new and remodeled Discovery format stores
opened in fiscal 2017 as compared to fiscal 2016 as well as the reduced cost associated with concourse shop
openings.
Interest expense (income), net. Interest expense, net of interest income, was flat for fiscal 2017 as compared
to fiscal 2016.
Provision for income taxes. Income tax expense in fiscal 2017 was $5.9 million compared to income tax
expense of $3.9 million in fiscal 2016. The 2017 effective rate of 42.7% differed from the statutory rate of 34%
primarily due to the effect of the provisional tax charge of $1.4 million for the re-measurement of U.S. net deferred
tax assets as a result of the enactment of the Tax Cuts and Jobs Act (P.L. 115-97, the “Act”) reducing the U.S.
federal statutory rate to 21% effective January 1, 2018. The Act also includes provisions that may partially offset
the benefit of such rate reduction, including the repeal of the deduction for domestic production activities and
changes to the non-deductibility of certain covered employee compensation pursuant to IRC section 162(m). The
international provisions of the Act, which generally establish a territorial-style system for taxing foreign-source
income of domestic multinational corporations, are expected to have a negligible impact on the company. The
2016 effective rate of 74.1% differed from the statutory rate of 34% primarily due to the effect of establishing a full
valuation allowance in certain foreign jurisdictions and other discrete tax adjustments.
Fiscal Year Ended December 31, 2016 Compared to Fiscal Year Ended January 2, 2016
Total revenues. Net retail sales were $357.6 million for fiscal 2016, compared to $372.7 million for fiscal
2015, a decrease of $15.1 million. The components of this decrease are as follows:
Decrease in comparable sales ......................................................................................... $
Increase from new stores .................................................................................................
Impact of store closures ...................................................................................................
Impact of foreign currency translation ..............................................................................
Change in deferred revenue estimates, including breakage ...........................................
Increase in non-comparable stores, primarily remodels and relocations ........................
$
Fiscal 2016
(dollars in millions)
(14.7)
12.1
(11.1)
(9.5)
4.4
3.7
(15.1)
In fiscal 2016, our estimate of deferred revenue increased net retail sales by $4.4 million compared to fiscal
2015 and was primarily driven by $4.5 million of gift card breakage. The increase in breakage revenue was
primarily the result of a higher gift card balance, and in the prior year, breakage revenue was recognized as an
offset to selling, general and administrative expenses due to immateriality. See “Critical Accounting Estimates
Revenue Recognition” discussion for additional breakage discussion.
Commercial revenue was $4.3 million for fiscal 2016 compared to $2.8 million for fiscal 2015, an increase
of $1.5 million. This increase was primarily due to the addition of new wholesale customers and growth in outbound
licensing activity in 2016. Revenue from international franchise fees was $2.3 million for fiscal 2016 compared to
$2.2 million for fiscal 2015. This $0.1 million increase was primarily the result of having more franchise locations
open throughout the majority of the year.
24
Retail gross margin. Retail gross margin was $161.7 million in fiscal 2016 compared to $175.6 million in
fiscal 2015, a decrease of $13.9 million, or 7.9%. As a percentage of net retail sales, retail gross margin decreased
to 45.2% for fiscal 2016 from 47.1% for fiscal 2015, a decrease of 190 basis points as a percentage of net retail
sales. This decline in margin was primarily attributable to deleverage on fixed occupancy expenses, including
store asset impairments and the negative impact of currency on margin in the United Kingdom partially offset by
$4.4 million in gift card breakage.
Selling, general and administrative. Selling, general and administrative expenses were $157.2 million for
fiscal 2016 as compared to $159.6 million for fiscal 2015, a decrease of $2.4 million, or 1.5%. As a percentage of
total revenues, selling, general and administrative expenses were 43.2% for fiscal 2016, compared to 42.3% in
fiscal 2015. The decrease in dollars was primarily attributable to lower marketing expenses and incentive
compensation partially offset by charges related to a duty dispute in the UK, China start-up costs, and other costs
associated with restructuring and a review of strategic alternatives. The decrease as a percentage of total
revenues was driven by the deleverage of these expenses given the revenue decline in fiscal 2016 as compared
to fiscal 2015.
Store preopening. Store preopening expenses were $3.5 million in fiscal 2016 as compared to $1.9 million
in fiscal 2015. The increase was attributable to the increase in the number of new and remodeled Discovery format
stores opened in fiscal 2016 as compared to the prior year.
Interest expense (income), net. Interest expense, net of interest income, was $5,000 for fiscal 2016. In fiscal
2015, interest income, net of interest expense, was $0.1 million.
Provision for income taxes. Income tax expense in fiscal 2016 was $3.9 million compared to an income tax
benefit of $9.4 million in fiscal 2015. The 2016 effective rate of 74.1% differed from the statutory rate of 34%
primarily due to the effect of establishing a full valuation allowance in certain foreign jurisdictions and other discrete
tax adjustments. The 2015 effective tax rate of negative 52.8% differed from the statutory rate of 34% primarily
due to the reversal of all of the valuation allowance on U.S. deferred tax assets at January 2, 2016.
Non-GAAP Financial Measures
We use the term “store contribution” throughout this Annual Report on Form 10-K. Store contribution consists
of income before income tax expense, interest, general and administrative expense, excluding income from
franchise and commercial activities and contribution from our e-commerce sites, locations not open for the full
fiscal year and adjustments to deferred revenue related to our loyalty program and gift card breakage. This term,
as we define it, may not be comparable to similarly titled measures used by other companies and is not a measure
of performance presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We use
store contribution as a measure of our stores’ operating performance. Store contribution should not be considered
a substitute for net income, net income per store, cash flows provided by operating activities, cash flows provided
by operating activities per store, or other income or cash flow data prepared in accordance with U.S. GAAP.
Additionally, store-level performance measures are inherently limited in that they exclude certain expenses that
are recurring in nature and are necessary to support the operation and development of our stores. We 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.
25
The following table sets forth a reconciliation of store contribution to net income for our corporately-managed
stores, open throughout the entire period, located in the United States, Canada and Puerto Rico (“North America”);
stores located in the United Kingdom, Ireland and Denmark (“Europe”) and; beginning in 2017, China, for our
consolidated store base (dollars in thousands).
Net income (loss) ................................................. $ 8,246 $
5,425
Income tax expense (benefit) ..............................
Interest expense (income) ...................................
13
General and administrative expense (1) ............... 46,892
Contribution from other retail activities(2) .............. (11,777)
Other contribution (3) ............................................
(4,783)
Store contribution ................................................. $ 44,016 $
Fiscal 2017
North Europe
America and China
(330)
472
(2)
4,726
329
(1,092)
4,103
Fiscal 2016
5,897
11
North
America Europe
Total
$ 7,916 $ 6,416 $ (5,039)
4,976 (1,044)
(13)
51,618 48,716 9,457
(11,448)
305
(5,875)
(197)
$ 48,119 $ 46,563 $ 3,469
(8,450)
(5,113)
18
Total
$ 1,377
3,932
5
58,173
(8,145)
(5,310)
$ 50,032
Total revenues from external customers .............. $ 294,285 $ 63,581
Revenues from other retail activities (2) ................ (38,302)
(5,511)
Other revenues from external customers (4) .........
(1,221)
(7,237)
Store location net retail sales ............................... $ 248,746 $ 56,849
Store contribution as a percentage of store
$ 357,866 $ 296,784 $ 67,420
(43,813) (34,291) (8,273)
(5,449) (1,162)
$ 305,595 $ 257,044 $ 57,985
(8,458)
$ 364,204
(42,564)
(6,611)
$ 315,029
location net retail sales .....................................
17.7%
7.2%
15.7%
18.1%
6.0%
15.9%
Total net income (loss) as a percentage of total
revenues ..........................................................
2.8%
(0.5)%
2.2%
2.2%
(7.5)%
0.4%
Fiscal 2015
North
America
Europe
Total
Net income ................................................................ $
Income tax expense (benefit) ....................................
Interest expense (income) .........................................
General and administrative expense (1) .....................
Contribution from other retail activities(2) ....................
Other contribution (3) ..................................................
Store contribution ....................................................... $
Total revenues from external customers .................... $
Revenues from other retail activities (2) ......................
Other revenues from external customers (4) ...............
Store location net retail sales ..................................... $
Store contribution as a percentage of store location
net retail sales ........................................................
Total net income as a percentage of total revenues ..
24,472
(10,276)
(40)
49,509
(2,301)
(6,980)
54,384
299,210
(26,549)
(4,979)
267,682
$
$
$
$
20.3%
8.2%
2,873
829
(103)
4,645
(1,314)
-
6,930
78,484
(9,830)
-
68,654
$
$
$
$
10.1%
3.7%
27,345
(9,447)
(143)
54,154
(3,615)
(6,980)
61,314
377,694
(36,379)
(4,979)
336,336
18.2%
7.2%
(1) General and administrative expenses consist of non-store, central office general and administrative functions such as
management payroll and related benefits, travel, information systems, accounting, purchasing and legal costs,
depreciation of central office assets as well as the amortization of intellectual property and other assets, store closing
and pre-opening expenses. Certain intercompany charges are included in general and administrative expenses in
Europe. General and administrative expenses also include a central office marketing department, primarily payroll and
related benefits expense, but exclude advertising expenses, which are included in store contribution.
(2) Other retail activities are comprised primarily of our e-commerce sites, stores not open for the full year and
adjustments to deferred revenue related to our loyalty program and gift card breakage.
(3) Other contribution includes franchising, commercial revenues and intercompany revenues and all expenses attributable
to the international franchising and commercial segments, excluding interest expense (income) and income tax expense
(benefit). Interest expense (income) and income tax expense (benefit) related to franchising and commercial activities
are included in their respective captions.
(4) Other revenues from external customers are comprised of international franchising and commercial revenues.
26
Seasonality and Quarterly Results
The following is a summary of certain unaudited quarterly results of operations data for each of the last two
fiscal years.
(Dollars in millions, except per share data)
Fiscal 2017
Fiscal 2016
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Total revenues ............................................... $ 90.6 $ 77.2 $ 82.4 $ 107.7 $ 95.0 $ 75.1 $ 83.7 $ 110.3
34.1
Consolidated gross profit ...............................
51.1
Retail gross margin(1) .....................................
32.5
49.6
(1.1)
Income tax expense (benefit) ........................
3.2
Net income (loss) ...........................................
(1.5)
0.3
Income (loss) per common share:
32.0
31.2
(1.9)
(4.3)
55.1
54.1
4.5
5.2
36.9
35.6
0.7
1.4
46.2
45.5
1.8
3.5
36.8
35.4
1.0
1.8
42.9
41.7
1.8
2.8
Basic ...................................................
Diluted .................................................
Number of stores (end of quarter) ..................
0.17
0.17
336
(0.10)
(0.10)
353
0.09
0.09
353
0.34
0.33
361
0.22
0.22
321
(0.28)
(0.28)
321
0.12
0.11
330
0.02
0.02
346
(1) Retail gross margin represents net retail sales less cost of retail merchandise sold.
Our operating results for one period may not be indicative of results for other periods, and may fluctuate
significantly because of a variety of factors, including, but not limited to: (1) fluctuations in the profitability of our
stores; (2)increases or decreases in comparable sales and total revenues; (3) changes in general economic
conditions and consumer spending patterns; (4) the timing and frequency of our marketing initiatives including
national media appearances and other public relations events; (5) changes in foreign currency exchange rates;
(6) seasonal shopping patterns and holiday and vacation schedules; (7) the timing of store closures, relocations
and openings and related expenses; (8) the effectiveness of our inventory management; (9) changes in consumer
preferences; (10) the continued introduction and expansion of merchandise offerings; (11) actions of competitors
or mall anchors and co-tenants; (12) weather conditions; and (13) the impact of a 53rd week in our fiscal year,
which occurs approximately every six years.
The timing of store openings, closures and remodels may cause fluctuations in quarterly results due to the
changes in revenues and expenses associated with each store location. We typically incur most preopening costs
for a new store, remodeled or relocated store in the three months immediately preceding the store’s opening.
Expenses related to store closings are typically incurred in stages: when the decision is made to close the store,
when the closure is communicated to store associates and at the time of closure.
As a specialty retailer, our sales are historically highest in our fourth quarter, followed by the first quarter.
The timing of holidays and school vacations can impact our quarterly results. We cannot ensure that this will
continue to be the case. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks,
although we will have a 14-week quarter approximately once every six years. The 2014 fiscal fourth quarter had
14 weeks.
Liquidity and Capital Resources
Our cash requirements are primarily for the opening of new stores, installation and upgrades of information
systems and working capital. Over the past several years, we have met these requirements through cash
generated from operations. We have access to additional cash through a revolving line of credit that has been in
place since 2000.
Operating Activities. Cash flows provided by operating activities were $21.1 million in fiscal 2017,
$16.0 million in fiscal 2016 and $32.0 million in fiscal 2015. Cash flows from operating activities increased in fiscal
2017 as compared to 2016 primarily due to an increase in net income and the timing of inventory payments,
partially offset by the reduction in balances of gift cards and deposits. Cash flows from operating activities
decreased in fiscal 2016 as compared to 2015 primarily due to decreased store contribution and the timing of
inventory receipts and payments.
Investing Activities. Cash flows used in investing activities were $17.8 million in fiscal 2017, $26.7 million in
fiscal 2016 and $25.1 million in fiscal 2015. Cash used in investing activities in 2017 related primarily to the
opening of 41 new locations, the remodeling or relocation of 23 stores, and the continued installation and upgrades
27
of central office information technology systems including the relaunched web platform. Cash used in investing
activities in 2016 related primarily to the opening of 35 new locations, the remodeling or relocation of 24 stores,
and the continued installation and upgrades of central office information technology systems, partially offset by
the maturity of short-term investments. Cash used in investing activities in 2015 related primarily to the continued
installation and upgrades of central office information technology systems, the opening of 25 new stores, the
remodeling or relocation of eight stores and the net purchases of short-term investments.
Financing Activities. Financing activities used cash of $4.8 million, $1.9 million and $26.4 million in fiscal
years 2017, 2016 and 2015, respectively. Borrowings under our credit facility and subsequent repayments totaled
$4.0 million and $5.4 million in fiscal years 2017 and 2016, respectively. In fiscal 2017, we had stock repurchases
of $4.7 million including a $4.2 million use of cash plus an additional $0.5 million commitment to be settled in fiscal
2018. In fiscal 2016 and 2015, we had stock repurchases of $1.5 million and $25.9 million, respectively. In fiscal
2017, 2016 and 2015, the exercises of employee stock options, net of shares used for withholding tax payments
related to vesting of restricted stock used cash of $0.5 million.
Capital Resources. As of December 30, 2017, we had a cash balance of $30.4 million, of which
approximately one-third was domiciled outside of the United States. As noted above, we also have a line of credit,
which we can use to finance capital expenditures and working capital needs throughout the year. The bank line
provides availability of up to $35 million. Borrowings under the credit agreement are secured by our assets and a
pledge of 66% of our ownership interest in certain of our foreign subsidiaries. The credit agreement expires on
December 31, 2018 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers,
acquisitions or sale of assets, loans, transactions with affiliates and investments. It also prohibits us from declaring
dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the
credit agreement. We are also prohibited from repurchasing shares of our common stock unless such repurchase
of shares would not violate any terms of the credit agreement; we may not use the proceeds of the line of credit
to repurchase shares. Borrowings bear interest at LIBOR plus 1.8%. Financial covenants include maintaining a
minimum tangible net worth, maintaining a minimum fixed charge coverage ratio (as defined in the credit
agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization
ratio. In 2017, we amended the credit agreement and as of December 30, 2017: (i) we were in compliance with
all covenants; (ii) there were no borrowings under the line of credit; and (iii) there was $35.0 million available for
borrowing under the line of credit.
Most of our retail stores are located within shopping malls and all are operated under leases classified as
operating leases. Our leases in North America typically have a ten-year term and contain provisions for base rent
plus percentage rent based on defined sales levels. Our leases typically require us to pay personal property taxes,
our pro rata share of real property taxes of the shopping mall, our own utilities, repairs and maintenance in our
store, a pro rata share of the malls’ common area maintenance and, in some instances, merchant association
fees and media fund contributions. Many of the leases contain a provision whereby either we or the landlord may
terminate the lease after a certain time, typically in the third or fourth year and sixth or seventh year of the lease,
if a certain minimum sales volume is not achieved. Many leases contain incentives to help defray the cost of
construction of a new store. Typically, a portion of the incentive must be repaid to the landlord if we choose to
terminate the lease. In addition, some of these leases contain various restrictions relating to change in control of
our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise
of discretion by our landlords on various matters, including rights of termination in some cases. Rents are invoiced
monthly and paid in advance.
Our leases in the United Kingdom and Ireland typically have terms of ten 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 the lessee with the first right for renewal at the end of the lease. We may also be required to
make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according
to government time schedules to reflect current market rental rates for the locations we lease. Rents are invoiced
quarterly and paid in advance.
In fiscal 2018, we expect to spend approximately $15 million to $18 million on capital expenditures. Capital
spending in fiscal 2017 totaled $18.1 million, primarily to support the refresh and repositioning of stores in our
Discovery format and investment in infrastructure.
In February 2015 and July 2015, the Board of Directors adopted share repurchase programs, each
authorizing the repurchase of $10 million of our common stock. In November 2015, the Board of Directors adopted
a share repurchase program authorizing the repurchase of up to $15 million of our common stock until
28
March 31, 2016. These programs authorized us to purchase our common stock in the open market (including
through 10b5-1 trading plans) or through privately negotiated transactions. The primary source of funding was
cash on hand. The timing and amount of share repurchases depended on price, market conditions, applicable
regulatory requirements, and other factors. Shares repurchased under these programs were subsequently retired.
Under the programs approved in February 2015 and July 2015, we repurchased a total of approximately 1,224,000
shares at an average price of $16.32 per share for an aggregate amount of $20.0 million, and as a result, these
programs had no further capacity. Under the program approved in November 2015, we repurchased a total of
approximately 615,000 shares at an average price of $12.05 per share for an aggregate amount of $7.4 million.
This program expired on March 31, 2016.
In August 2017, our Board of Directors adopted a share repurchase program authorizing the repurchase of
up to $20 million of our common stock. Under the program approved in August 2017, we repurchased a total of
513,725 shares at an average price of $9.08 per share for an aggregate amount of $4.7 million in fiscal 2017. As
of March 15, 2018, we had repurchased approximately 1.1 million shares at an average price of $8.86 per share
for an aggregate amount of $10.0 million, leaving $10.0 million of availability under the 2017 Share Repurchase
Programs.
We believe that cash generated from operations and borrowings under our credit agreement will be sufficient
to fund our working capital and other cash flow requirements for the near future. Our credit agreement expires on
December 31, 2018.
Off-Balance Sheet Arrangements
None.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments include future minimum obligations under
operating leases and purchase obligations. Our purchase obligations primarily consist of purchase orders for
merchandise inventory. The future minimum payments for these obligations as of December 30, 2017 for periods
subsequent to this date are as follows:
Payments Due by Fiscal Period as of December 30, 2017
Beyond
(Dollars in thousands)
Operating lease obligations ......... $ 233,896 $ 40,849 $ 34,041 $ 31,723 $ 29,477 $ 27,738 $ 70,068
-
Purchase obligations ................... 23,736 23,736
-
Total ........ $ 257,632 $ 64,585 $ 34,041 $ 31,723 $ 29,477 $ 27,738 $ 70,068
Total 2018
2021
2020
2022
2019
-
-
Our total liability for unrecognized tax benefits under the Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) 740-10-25 was $0.7 million as of December 30, 2017. Management estimates it
is reasonably possible that the amount of unrecognized tax benefits could decrease by as much as $0.6 million
in the next twelve months as a result of the resolution of audits currently in progress involving issues common to
multinational corporations and the lapsing of the statute of limitations. See Note 7 – Income Taxes to the
Consolidated Financial Statements for additional information.
Inflation
We do not believe that inflation has had a material adverse impact on our business or operating results
during the periods presented. However, we can provide no assurance that our business will not be affected by
inflation in the future.
Critical Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires
the appropriate application of certain accounting policies, which require us to make estimates and assumptions
about future events and their impact on amounts reported in our financial statements and related notes. Since
future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our
estimates. Such differences could be material to the financial statements.
29
We believe application of accounting policies, and the estimates inherently required therein, are reasonable.
These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found our application of accounting policies to be
appropriate, and actual results have not differed materially from those determined 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:
Long-Lived Assets
In accordance with ASC 360-10-35 we assess the potential impairment of long-lived assets annually or when
events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is
measured by comparing the carrying amount of an asset, or asset group, to expected future net cash flows
generated by the asset, or asset group. If the carrying amount exceeds its estimated undiscounted future cash
flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of
the difference. Fair value is calculated as the present value of estimated future cash flows for each asset group.
The calculation of fair value could increase or decrease depending on changes in the inputs and assumptions
used, such as changes in the financial performance of the asset group, future growth rate and discount rate.
For purposes of evaluating store assets for impairment, we have determined that each store location is an
asset group. Factors that we consider important which could individually or in combination trigger an impairment
review include, but are not limited to, the following: (1) significant underperformance relative to historical or
projected future operating results; (2) significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and (3) significant changes in our business strategies and/or negative industry
or economic trends. We assess events and changes in circumstances or strategy that could potentially indicate
that the carrying value of long-lived assets may not be recoverable as they occur. Due to the significance of the
fourth quarter to individual store locations, we assess store performance annually, using the full year’s results.
We consider a historical and/or projected negative cash flow trend for a store location to be an indicator that the
carrying value of that asset group may not be recoverable. Impairment charges related to this assessment are
included in cost of merchandise sold – retail as a component of net income before income taxes in the DTC
segment.
As a result of our 2017 review, we determined that a store would not be able to recover the carrying value
of certain store assets through expected undiscounted cash flows over the remaining life of the related assets.
Accordingly, we reduced the carrying value of the assets to fair value, calculated as the present value of estimated
future cash flows for each asset group and recorded asset impairment charges of less than $0.1 million in the
fourth quarter of fiscal 2017, $2.3 million in fiscal 2016 and which is included in cost of merchandise sold – retail.
In order to evaluate the sensitivity of the fair value assumptions on store asset impairment, we applied a
hypothetical decrease of 1% in the comparable stores sales trend and in margin. Based on the analysis performed
as of December 30, 2017, the changes in our assumptions would not have resulted in a material difference in the
calculated impairment charge. Impairment charges were $2.3 million in 2016 and immaterial in 2015.
Additionally, we consider a more likely than not assessment that an individual location will close prior to the
end of its lease term as a triggering event to review the store asset group for recoverability. These assessments
are reviewed on a quarterly basis. When indicated, the carrying value of the assets is reduced to fair value,
calculated as the estimated future cash flows for each asset group. Asset impairment charges resulting from these
assessments totaled $0.1 million, $0.4 million and $0.3 million in 2017, 2016 and 2015, respectively, and are
included in selling, general and administrative expenses as a component of income before income taxes in the
DTC segment.
In the event that we decide to close any or all of these stores in the future, we may be required to record
additional impairments, lease termination fees, severance and other charges. Impairment losses in the future are
dependent on a number of factors such as site selection and general economic trends, and thus could be
significantly different than historical results. The assumptions used in future calculations of fair value may change
significantly which could result in further impairment charges in future periods.
30
Revenue Recognition
Revenues from retail sales, net of discounts and excluding sales tax, are recognized at the time of sale.
Merchandise returns have not been significant. For e-commerce sales, revenue is recognized at the time of
shipment. We sell gift cards to our customers in our retail stores, through our e-commerce sites, and through
select third parties. We do not charge administrative fees on unused gift cards. Our gift cards issued in the United
States do not have an expiration date. Beginning in 2016, gift cards issued in the United Kingdom expire 24
months from the activation date. A current liability is recorded upon purchase of a gift card, and revenue is
recognized when the gift card is redeemed for merchandise. Revenue from various licensing and international
franchising arrangements is recognized when earned in accordance with the terms of the underlying agreement,
generally based upon the greater of the contractually earned or guaranteed minimum levels.
In December 2015, we established a new legal entity, Card Services, to issue and administer all gift cards
in the United States. The escheatment requirements, of the jurisdiction where Card Services was established,
differ from those that the Company has historically been subject to. Given the change in legal requirements for
this new entity, we began to recognize breakage income on these unredeemed gift cards under the redemption
recognition method based on historical redemption patterns and as a component of net retail sales. For gift cards
issued prior to December 2015, the Company recorded income from unredeemed gift cards under the delayed
recognition method, when the likelihood of redemption by a customer is considered remote and we are released
from our legal obligation related to the gift cards. In the fourth quarter of 2017, we reviewed our historical
redemption patterns and breakage rates and adjusted the breakage rates for current redemption patterns. Gift
card redemption rates were lower in fiscal 2017 as compared to fiscal 2016 and less card redemptions resulted
in a higher breakage percentage. We have no reason to believe that there will be a material change in the future
estimates or assumptions we use to measure gift card breakage. However, if actual results are not consistent with
our estimates or assumptions, we may be exposed to losses or gains that could be material. A 100-basis point
change in our gift card breakage rate as of December 30, 2017 would have resulted in a $0.5 million change in
the gift card liability and net retail sales.
We have a customer loyalty program, Build-A-Bear Bonus Club. In North America, guests receive 1 point
for every dollar spent and a $10 reward certificate for every 100 points earned in a twelve-month period. In the
UK, guests receive a £5 certificate for every 50 points they earn. Points accumulate and expire after twelve months
of inactivity. An estimate of the obligation related to the program, based on historical redemption patterns, is
recorded as deferred revenue and a reduction of net retail sales.
We assess the adequacy of the deferred revenue liability based upon our review of point conversion and
award redemption patterns at the end of each fiscal quarter. Due to the estimates involved in these assessments,
adjustments to the historical rates are generally made no more often than annually in order to allow time for more
definite trends to emerge. Based on this assessment at the end of fiscal 2017, we evaluated conversion patterns
that resulted in updated rates used in our calculation of the liability. Due to an offsetting change in outstanding
points and certificates as of the end of 2016, a $0.1 million adjustment was made to the fiscal 2017 liability. Based
on this assessment at the end of fiscal 2016 and 2015, the deferred revenue liability was flat and adjusted
downward by $0.1 million respectively, with a corresponding increase to net retail sales.
The calculation of the deferred revenue liability could increase or decrease depending on changes in the
inputs and assumptions used, specifically, expected conversion and redemption rates. In order to evaluate the
sensitivity of the estimates used in the recognition of deferred revenue, we applied a hypothetical increase of 100
basis points in the conversion and redemption rates. Based on the analysis performed as of December 30, 2017,
the changes in our assumptions would have resulted in a $0.1 million change in the deferred revenue liability and
net retail sales.
Income Taxes
We recognize deferred tax assets resulting from tax credit carryforwards and deductible temporary
differences between taxable income on our income tax returns and income before taxes under GAAP. Deferred
tax assets generally represent future tax benefits to be received when these carryforwards can be applied against
future taxable income or when expenses previously reported in our consolidated financial statements become
deductible for income tax purposes. A deferred tax asset valuation allowance is required when some portion or
all of the deferred tax assets may not be realized. We consider the weight of all available evidence, both positive
and negative, in assessing the realizability of the deferred tax assets by each taxing jurisdiction. We consider the
31
Company’s ability to carry back its tax losses or credits for refunds, the availability of tax planning strategies and
reversals of existing taxable temporary differences as well as projections of future taxable income
Significant judgment is required in evaluating our uncertain tax positions. We establish accruals for uncertain
tax positions when we believe that the full amount of the associated tax benefit may not be realized. In the future,
if we prevail in matters for which accruals have been established previously or pay amounts in excess of reserves,
there could be an effect on our income tax provisions in the period in which such determination is made. Tax
authorities regularly examine the 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 December 30, 2017 and December 31, 2016.
On December 22, 2017, the Tax Cuts and Jobs Act (“Act”) was enacted, which significantly changes U.S.
tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and
imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Act permanently reduces
the U.S. federal statutory tax rate to 21%, effective January 1, 2018. We recorded a provisional tax charge of
$1.4 million for the re-measurement of our U.S. net deferred tax assets. The Act also provided for a one-time
deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year
ended December 30, 2017. Management does not anticipate a cost for this one-time deemed repatriation at this
time. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Act require a company to include in its
U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s
tangible assets. The Base-Eroding Anti-abuse Tax (“BEAT”) provisions of the Act assess tax on certain payments
made by a U.S. company to a related foreign company. Management does not expect the impact of GILTI or
BEAT will be material to the consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the
application of U.S. GAAP in situations when a registrant does not have the necessary information available,
prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income
tax effects of the Act. We have recognized the provisional tax impacts related to the tax charge for the revaluation
of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the
year ended December 30, 2017. The final impact may differ from these provisional amounts, possibly materially,
due to, among other things, additional analysis, changes in interpretations and assumptions we made, additional
regulatory guidance that may be issued, and actions we may take as a result of the Act. In accordance with SAB
118 the financial reporting impact of the Act will be completed and any adjustment will be recorded to income tax
expense in fiscal 2018.
Recent Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies for additional information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates, and we bear this risk in two specific ways. First,
our revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, our results
of operations and our cash flows can be impacted by changes in interest rates. Outstanding balances under our
credit facility bear interest at LIBOR plus 1.8%. Our borrowings during fiscal 2017 were limited to a short period
during the middle of the fourth quarter. Accordingly, a 100-basis point change in interest rates would result in no
material change to our annual interest expense. The second component of interest rate risk involves the
investment of excess cash in short term, investment grade interest-bearing securities. If there are changes in
interest rates, those changes would affect the investment income we earn on these investments and, therefore,
impact our cash flows and results of operations. We had no such investments as of December 30, 2017.
We conduct operations in various countries, which expose us to changes in foreign exchange rates. The
financial results of our foreign subsidiaries and franchisees may be materially impacted by exposure to fluctuating
exchange rates. Reported sales, costs and expenses at our foreign subsidiaries, when translated into U.S. dollars
for financial reporting purposes, can fluctuate due to exchange rate movement. While exchange rate fluctuations
can have a material impact on reported revenues, costs and expenses, and earnings, this impact is principally the
result of the translation effect and does not materially impact our short-term cash flows.
Although we enter into a significant amount of purchase obligations outside of the U.S., these obligations
are settled primarily in U.S. dollars and, therefore, we believe we have only minimal exposure at present to foreign
32
currency exchange risks for our purchase obligations. However, because our foreign subsidiaries also purchase
their inventory in U.S. dollars, we are exposed to some risk when their functional currencies fluctuate relative to
the U.S dollar. We estimate that the significant movement in the British pound sterling relative to the U.S. dollar
in fiscal 2017 had a negative impact on our revenues of approximately $1.9 million as compared to fiscal 2016.
This is separate from the transactional impact of the change in rates that is a component of selling, general and
administrative expenses. Historically, we have not hedged our currency risk.
We do not engage in financial transactions for trading or speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules are listed under Item 15(a) and filed as part of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as
of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure
that information we are required to disclose in the reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is
accumulated and communicated to management, including our certifying officers, as appropriate to allow timely
decisions regarding required disclosure. Based on the foregoing evaluation, our management, including the
President and Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and
procedures were effective as of December 30, 2017, the end of the period covered by this Annual Report.
It should be noted that our management, including the President and Chief Executive Officer and the Chief
Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all
error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and
with the participation of our management, including the President and Chief Executive Officer and the Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
as of December 30, 2017. Our management, with the participation of our President and Chief Executive Officer
and our Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to
determine whether any changes occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting. All internal control systems
33
have inherent limitations, including the possibility of circumvention and overriding the control. Accordingly, even
effective internal control can provide only reasonable assurance as to the reliability of financial statement
preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may
vary over time.
In making its evaluation, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013
framework). Based upon this evaluation, our management has concluded that our internal control over financial
reporting as of December 30, 2017 is effective.
Our independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of our
internal control over financial reporting, as stated in its report which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the fiscal 2017 fourth quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
34
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Build-A-Bear Workshop, Inc.
We have audited Build-A-Bear Workshop, Inc. and Subsidiaries’ internal control over financial reporting as of
December 30, 2017, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In
our opinion, Build-A-Bear Workshop, Inc. and Subsidiaries (the Company) maintained, in all material respects,
effective internal control over financial reporting as of December 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 30, 2017 and
December 31, 2016, the related consolidated statements of income, comprehensive income (loss), stockholders'
equity and cash flows for each of the three years in the period ended December 30, 2017, and the related notes
and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated March 15, 2018
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 15, 2018
35
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning directors, appearing in the sections titled “Directors,” “The Board of Directors and its
Committees,” “Committee Charters, Corporate Governance Guidelines, Business Conduct Policy and Code of
Ethics” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement (the “Proxy
Statement”) to be filed with the SEC in connection with our Annual Meeting of Stockholders scheduled to be held
on May 10, 2018, is incorporated by reference in response to this Item 10.
Business Conduct Policy
The Board of Directors has adopted a Business Conduct Policy applicable to our directors, officers and
employees, including all executive officers. The Business Conduct Policy has been posted in the Investor
Relations section of our corporate website at http://ir.buildabear.com. We intend to satisfy the amendment and
waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers
to, the Business Conduct Policy on our website.
The information appearing in the sections titled “Committee Charters, Corporate Governance Guidelines,
Business Conduct Policy and Code of Ethics” in the Proxy Statement is incorporated by reference in response to
this Item 10.
36
Executive Officers and Key Employees
Sharon Price John, 54, was appointed to the Board of Directors on June 3, 2013, in connection with her
employment as Chief Executive Officer and Chief President Bear of the Company. Effective March 2016, she now
holds the title of President and Chief Executive Officer. From January 2010 through May 2013, Ms. John served
as President of Stride Rite Children’s Group LLC, a division of Wolverine World Wide, Inc., which designs and
markets footwear for children. From 2002 through 2009, she held positions of broadened portfolio and increased
responsibility at Hasbro, Inc., a multinational toy and board game company, including as General Manager &
Senior Vice President of its U.S. Toy Division from 2006 to 2008 and General Manager & Senior Vice President
of its Global Preschool unit from June 2008 through 2009. Ms. John also founded and served as Chief Executive
Officer of Checkerboard Toys, served as Vice President, U.S. Toy Division with VTech Industries, Inc., and served
in a range of roles at Mattel, Inc. She started her career in advertising, overseeing accounts such as Hershey’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.
Eric Fencl, 55, joined Build-A-Bear Workshop in July 2008 as Chief Bearrister—General Counsel. Effective
October 2015, he now holds the title of Chief Administrative Officer, General Counsel and Secretary. Prior to
joining the Company, Mr. Fencl was Executive Vice President, General Counsel and Secretary for Outsourcing
Solutions Inc., a national accounts receivable management firm from August 1998 to June 2008. From September
1990 to August 1998, he held legal positions at Monsanto Company, McDonnell Douglas Corporation and Bryan
Cave LLP. Mr. Fencl began his career as an auditor with Arthur Young & Company.
J. Christopher Hurt, 51, joined Build-A-Bear Workshop in April 2015 as Chief Operations Officer. Prior to
joining the Company, Mr. Hurt was at American Eagle Outfitters, Inc. from 2002 to April 2015 in various senior
leadership roles of increasing responsibility, including Senior Vice President, North America and Vice
President/General Manager—Factory, Canada, Mexico Retail from 2011 to April 2015, and East Zone Vice
President and Regional Director from 2002 to 2011. Before joining American Eagle Outfitters, Mr. Hurt held
positions of increasing responsibility at companies including Polo Ralph Lauren and The Procter & Gamble
Company.
Jennifer Kretchmar, 44, joined Build-A-Bear Workshop in August 2014 as Chief Product Officer and
Innovation Bear. Effective March 2016, she now holds the title of Chief Merchandising Officer. Prior to joining the
Company, Ms. Kretchmar was Senior Vice President of Product and Brand Management with the Stride Rite
Children’s Group of Wolverine World Wide, Inc. where since 2004 she was responsible for the global product
creation strategy for a diverse portfolio of children’s footwear brands, including Stride Rite, Sperry Top- Sider®,
Saucony®, Keds®, Merrell®, Robeez®, Jessica Simpson® and Hush Puppies®. Before joining Stride Rite, Ms.
Kretchmar held positions of increasing responsibility at The Timberland Company, Goldbug, and the United States
Department of Agriculture Foreign Service.
Voin Todorovic, 43, joined Build-A-Bear Workshop in September 2014 as Chief Financial Officer. Prior to
joining the Company, Mr. Todorovic was employed at Wolverine World Wide, Inc., a leading global footwear and
apparel company, where since September 2013 he served as the head of finance and operations for its Lifestyle
Group, which includes a portfolio of iconic brands such as Sperry Top-Sider®, Hush Puppies®, Keds®, and Stride
Rite®. From 2011 to 2013 he was Vice President—Finance and Administration of the Stride Rite Children’s Group
business, operating in wholesale, direct to consumer and international franchising, and from 2010 to 2011 he was
Vice President of the Performance + Lifestyle Group. Prior to his tenure at Wolverine World Wide he held positions
of increasing responsibility at Collective Brands, Inc. and Payless ShoeSource.
37
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the sections titled “Executive Compensation” and “Board of Directors
Compensation” in the Proxy Statement is incorporated herein by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in the section titled “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by reference in response to this Item 12.
Equity Compensation Plan Information
(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
Plan category
(c)
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans
approved by security
holders ............................
Total ....................................
791,567 $
791,567 $
9.67
9.67
984,758
984,758
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information contained in the section titled “Related Party Transactions” in the Proxy Statement is
incorporated herein by reference in response to this Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the sections titled “Principal Accountant Fees” and “Policy Regarding
Pre-Approval of Services Provided by the Independent Registered Public Accounting Firm” in the Proxy Statement
is incorporated herein by reference in response to Item 14.
38
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The financial statements and schedules set forth below are filed on the indicated pages as part of this Annual
Report on Form 10-K.
Report of Independent Registered Public Accounting Firm ........................................................................
Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016 ..................................
Consolidated Statements of Income for the fiscal years ended December 30, 2017, December 31,
Page
40
41
2016 and January 2, 2016 .....................................................................................................................
42
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 30,
2017, December 31, 2016 and January 2, 2016 ....................................................................................
43
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 30, 2017,
December 31, 2016 and January 2, 2016 ..............................................................................................
Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2017, December 31,
2016 and January 2, 2016 ......................................................................................................................
Notes to Consolidated Financial Statements ..............................................................................................
Schedule II - Valuation and Qualifying Accounts ........................................................................................
44
45
46
63
39
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Build-A-Bear Workshop, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Build-A-Bear Workshop, Inc. and Subsidiaries
(collectively, the Company) as of December 30, 2017 and December 31, 2016, the related consolidated
statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three
years in the period ended December 30, 2017, and the related notes and the financial statement schedule listed
in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company
at December 30, 2017 and December 31 2016, and the results of its operations and its cash flows for each of the
three years in the period ended December 30, 2017, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2017, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2018 expressed
an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2011.
St. Louis, Missouri
March 15, 2018
40
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
Deccember 30, Deccember 31,
2017
2016
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $
Inventories .........................................................................................
Receivables .......................................................................................
Prepaid expenses and other current assets ......................................
Total current assets..................................................................
Property and equipment, net ....................................................................
Deferred tax assets ..................................................................................
Other intangible assets, net ......................................................................
Other assets, net ......................................................................................
Total Assets .............................................................................................. $
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................... $
Accrued expenses .............................................................................
Gift cards and customer deposits ......................................................
Deferred revenue and other ...............................................................
Total current liabilities ..............................................................
Deferred rent ............................................................................................
Deferred franchise revenue ......................................................................
Other liabilities ..........................................................................................
Commitments and contingencies .............................................................
Stockholders' equity:
Preferred stock, par value $0.01, Shares authorized: 15,000,000;
No shares issued or outstanding at December 30, 2017 and
December 31, 2016 ........................................................................
Common stock, par value $0.01, Shares authorized: 50,000,000;
Issued and outstanding: 15,515,960 and 15,856,927 shares,
respectively .....................................................................................
Additional paid-in capital ....................................................................
Accumulated other comprehensive loss ............................................
Retained earnings ..............................................................................
Total stockholders' equity .........................................................
Total Liabilities and Stockholders' Equity ................................................. $
30,445 $
53,136
13,302
13,346
110,229
77,751
6,381
995
2,633
197,989 $
18,942 $
15,189
33,926
1,806
69,863
17,906
1,208
1,697
32,483
51,885
12,939
12,737
110,044
74,924
8,256
1,721
4,650
199,595
27,861
15,897
37,070
2,029
82,857
15,438
565
1,623
-
-
155
68,962
(11,562 )
49,760
107,315
197,989 $
159
68,001
(12,727)
43,679
99,112
199,595
See accompanying notes to consolidated financial statements.
41
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
2017
Fiscal Year
2016
2015
Revenues:
Net retail sales ................................................................... $
Commercial revenue ..........................................................
Franchise fees ...................................................................
Total revenues ......................................................
349,408 $
6,007
2,451
357,866
357,593 $
4,312
2,299
364,204
372,715
2,783
2,196
377,694
Costs and expenses:
Cost of merchandise sold – retail ......................................
Cost of merchandise sold – commercial ............................
Selling, general and administrative ....................................
Store preopening ...............................................................
Interest expense (income), net ..........................................
Total costs and expenses .....................................
Income before income taxes .................................
Income tax (benefit) expense ...................................................
Net income ............................................................ $
185,481
3,412
152,653
2,496
11
344,053
13,813
5,897
7,916 $
195,914
2,253
157,174
3,549
5
358,895
5,309
3,932
1,377 $
197,101
1,375
159,612
1,851
(143)
359,796
17,898
(9,447)
27,345
Income per common share:
Basic .................................................................................. $
Diluted ................................................................................ $
0.50 $
0.50 $
0.09 $
0.09 $
1.61
1.59
Shares used in computing common per share amounts:
Basic .................................................................................. 15,572,045 15,442,086 16,642,269
Diluted ................................................................................ 15,757,060 15,622,273 16,867,356
See accompanying notes to consolidated financial statements.
42
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
2017
Fiscal Year
2016
2015
Net income ............................................................................... $
7,916 $
1,377 $
27,345
Foreign currency translation adjustment ...........................
1,165
(2,756)
(1,273)
Comprehensive income (loss) .................................................. $
9,081 $
(1,379) $
26,072
See accompanying notes to consolidated financial statements.
43
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Additional
Accumulated
other
Common paid-in
capital
stock
comprehensive Retained
income (loss) earnings Total
Balance, January 3, 2015 ..............................
174
69,362
(8,698)
36,787
97,625
Share repurchase and retirement .................
Stock-based compensation ...........................
Shares issued under employee stock plans ..
Other comprehensive loss .............................
Net income ....................................................
(17)
-
1
-
-
(4,978 )
2,111
(486 )
-
-
-
-
-
(1,273)
-
(20,914 )
-
-
-
27,345
(25,909)
2,111
(485)
(1,273)
27,345
Balance, January 2, 2016 .............................. $
158 $ 66,009 $
(9,971)
43,218 $
99,414
Share repurchase and retirement .................
Stock-based compensation ...........................
Shares issued under employee stock plans ..
Other comprehensive loss .............................
Net income ....................................................
(1)
-
2
-
-
(552 )
3,025
(481 )
-
-
-
-
-
(2,756)
-
(916 )
-
-
-
1,377
(1,469)
3,025
(479)
(2,756)
1,377
Balance, December 31, 2016 ........................ $
159 $ 68,001 $
(12,727)
43,679 $
99,112
Share repurchase and retirement .................
Stock-based compensation ...........................
Shares issued under employee stock plans ..
Adoption of new accounting standards .........
Other comprehensive income .......................
Net income ....................................................
(5)
-
1
-
-
-
(2,237 )
3,423
(472 )
247
-
-
-
-
-
-
1,165
-
(2,413 )
-
-
578
-
7,916
(4,655)
3,423
(471)
825
1,165
7,916
Balance, December 30, 2017 ........................ $
155 $ 68,962 $
(11,562) $ 49,760 $ 107,315
See accompanying notes to consolidated financial statements.
44
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income ......................................................................... $
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ....................................
Stock-based compensation .........................................
Asset impairment .........................................................
Deferred taxes .............................................................
Provision for doubtful accounts ...................................
Loss on disposal of property and equipment ..............
Trade credit utilization .................................................
Change in assets and liabilities:
Inventories ............................................................
Receivables ..........................................................
Prepaid expenses and other assets .....................
Accounts payable and accrued expenses ............
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 .....
Proceeds from property insurance .....................................
Proceeds from sale or maturity of short term investments
Purchases of short term investments ................................
Cash flow used in investing activities .............
Cash flows from financing activities:
Proceeds from the exercise of employee stock options,
net of withholding tax payments .....................................
Borrowings under line of credit ..........................................
Repayments under line of credit ........................................
Payments made under capital leases ................................
Purchases of Company's common stock ...........................
Cash flow used in financing activities .............
Effect of exchange rates on cash .............................................
Net decrease in cash and cash equivalents .............................
Cash and cash equivalents, beginning of period .....................
Cash and cash equivalents, end of period ............................... $
Supplemental disclosure of cash flow information:
2017
Fiscal Year
2016
2015
7,916 $
1,377 $
27,345
16,165
3,423
104
5,262
372
225
-
(210)
(584)
(341)
(10,484)
2,316
(3,376)
300
21,088
(17,763)
(310)
310
-
-
(17,763)
(467)
4,000
(4,000)
(76)
(4,232)
(4,775)
(588)
(2,038)
32,483
30,445 $
16,171
3,025
2,674
2,263
1,972
403
-
643
(2,207)
1,184
(16,301)
3,427
2,091
(708)
16,014
(27,251)
(867)
-
1,461
-
(26,657)
(479)
5,400
(5,400)
-
(1,469)
(1,948)
(122)
(12,713)
45,196
32,483 $
16,419
2,111
296
(8,123)
19
282
185
(2,466)
(2,118)
(2,998)
1,458
(1,182)
1,037
(218)
32,047
(22,466)
(1,922)
-
793
(1,551)
(25,146)
(481)
-
-
-
(25,909)
(26,390)
(704)
(20,193)
65,389
45,196
Net cash paid during the period for income taxes ............. $
1,072 $
1,002 $
2,175
See accompanying notes to consolidated financial statements.
45
Notes to Consolidated Financial Statements
(1) Description of Business and Basis of Preparation
Build-A-Bear Workshop, Inc. and subsidiaries (collectively, 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 361corporately-managed locations operated primarily in leased mall locations in the United States,
Canada, China, Denmark, Ireland, Puerto Rico and the United Kingdom along with its e-commerce sites.
Operations in foreign countries where the Company does not have corporately-managed locations are through
franchise agreements.
The Company’s consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”).
(2) Summary of Significant Accounting Policies
A summary of the Company’s significant accounting policies applied in the preparation of the accompanying
consolidated financial statements follows:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Build-A-Bear Workshop, Inc.
and its wholly-owned subsidiaries. All significant intercompany accounts are eliminated in consolidation.
Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending on the Saturday closest to December 31.
Subsequent to year-end, the Company’s Board of Directors approved a change in the Company’s fiscal year-end
to the Saturday closest to January 31, see Note 16 – Subsequent Event for additional information. The periods
presented in these financial statements are fiscal 2017 (52 weeks ended December 30, 2017), fiscal 2016 (52
weeks ended December 31, 2016) and fiscal 2015 (52 weeks ended January 2, 2016). References to years in
these financial statements relate to fiscal years or year ends rather than calendar years.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term highly liquid investments with an original maturity
of three months or less held in both domestic and foreign financial institutions.
The majority of the Company’s cash and cash equivalents exceed federal deposit insurance limits. The
Company has not experienced any losses in such accounts and management believes that the Company is not
exposed to any significant credit risk on cash and cash equivalents.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on an average-cost
basis. Inventory includes supplies of $2.7 million and $3.1 million as of December 30, 2017 and
December 31, 2016, respectively. A reserve for estimated shortage is accrued throughout the year based on
detailed historical averages. The inventory reserve was $1.0 million as of both December 30, 2017 and December
31, 2016.
Receivables
Receivables consist primarily of amounts due to the Company in relation to tenant allowances, wholesale
and corporate product sales, franchisee royalties and product sales, certain amounts due from taxing authorities
and licensing revenue. The Company assesses the collectability of all receivables on an ongoing basis by
considering its historical credit loss experience, current economic conditions, and other relevant factors. Based
on this analysis, the Company has established an allowance for doubtful accounts of $3.1 million and $3.6 million
as of December 30, 2017 and December 31, 2016, respectively.
46
Property and Equipment
Property and equipment consist of leasehold improvements, furniture and fixtures, computer equipment and
software, building and land and are stated at cost. Leasehold improvements are depreciated using the
straight-line method over the shorter of the useful life of the assets or the life of the lease which is generally ten
years. Furniture and fixtures and computer equipment are depreciated using the straight-line method over the
estimated service lives ranging from three to seven years. Computer software includes certain costs, including
internal payroll costs incurred in connection with the development or acquisition of software for internal use and
is amortized using the straight-line method over a period of three to five years. New store construction deposits
are recorded at the time the deposit is made as construction-in-progress and reclassified to the appropriate
property and equipment category at the time of completion of construction, when operations of the store
commence. Maintenance and repairs are expensed as incurred and improvements are capitalized. Gains or
losses on the disposition of fixed assets are recorded upon disposal.
Other Intangible Assets
Other intangible assets consist primarily of initial costs related to trademarks and other intellectual property.
Trademarks and other intellectual property represent third-party costs that are capitalized and amortized over their
estimated lives ranging from one to three years using the straight-line method.
Other Assets
Other assets consist primarily of the non-current portion of prepaid income taxes, deferred leasing fees and
deferred costs related to franchise agreements. Prepaid income taxes through December 31, 2016 were
amortized through income tax expense over the life of the related asset. After fiscal 2016, the remaining balance
of prepaid income taxes was adjusted to retained earnings. Deferred leasing fees are initial, direct costs related
to the Company’s operating leases and are amortized over the term of the related leases. Deferred franchise costs
are initial costs related to the Company’s franchise agreements that are deferred and amortized over the life of
the respective franchise agreement. Amortization expense related to other assets was $0.1 million for each of the
fiscal years 2017, 2016 and 2015.
Long-lived Assets
Whenever facts and circumstances indicate that the carrying value of a long-lived asset may not be
recoverable, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be
recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life,
the carrying value of the asset is reduced to its estimated fair value. The Company performs an annual assessment
of the store assets in the direct-to-consumer (“DTC”) segment, based on operating performance and forecasts of
future performance. Total impairment charges were $0.1 million, $2.7 million and $0.3 million in fiscal years 2017,
2016 and 2015, respectively. See Note 4 – Property and Equipment for further discussion regarding the
impairment of long-lived assets.
The calculation of fair value requires multiple assumptions regarding our future operations to determine
future cash flows, including but not limited to, sales volume, margin rates and discount rates. If different
assumptions were used in the analysis, it is possible that the amount of the impairment charge may have been
significantly different than what was recorded.
Deferred Rent
Certain of the Company’s operating leases contain predetermined fixed escalations of minimum rentals
during the original lease terms. For these leases, the Company recognizes the related rental expense on a
straight-line basis over the life of the lease and records the difference between the amounts charged to operations
and amounts paid as deferred rent. The Company also receives certain lease incentives in conjunction with
entering into operating leases. These lease incentives are recorded as deferred rent at the beginning of the lease
term and recognized as a reduction of rent expense over the lease term. In addition, certain of the Company’s
leases contain future contingent increases in rentals. Such increases in rental expense are recorded in the period
that it is probable that store sales will meet or exceed the specified target that triggers contingent rental expense.
47
Franchises
The Company defers initial, one-time nonrefundable franchise fees and amortizes them over the initial term
of the respective franchise agreements, which extend for periods up to 25 years. The Company’s obligations
under the contract are ongoing and include operations and product development support and training, generally
concentrated around new store openings. Continuing franchise fees are recognized as revenue as the fees are
earned.
Retail Revenue Recognition
Net retail sales are net of discounts, exclude sales tax, and are recognized at the time of sale. For
e-commerce sales, revenue is recognized at the time of shipment. Shipping and handling costs billed to customers
are included in net retail sales.
Revenues from the sale of gift cards are recognized at the time of redemption. Unredeemed gift cards are
included in gift cards and customer deposits on the consolidated balance sheets. For gift cards issued prior to
December 2015, the Company recorded income from unredeemed gift cards under the delayed recognition
method when the likelihood of redemption by a customer is considered remote. For fiscal 2015, these unredeemed
gift cards were recorded as an offset to selling, general and administrative expenses due to immateriality.
Beginning in December 2015, the Company established Build-A-Bear Card Services LLC and issued all future gift
cards under this entity. For these unredeemed gift cards, gift card breakage revenue is recorded as a component
of net retail sales based on historical redemption patterns and under the redemption recognition method. The total
unredeemed gift card amount recorded as net retail sales from breakage was $8.3 million, $4.5 million and
$0.5 million in fiscal years 2017, 2016 and 2015, respectively.
The Company has a customer loyalty program, Build-A-Bear Bonus Club, whereby guests enroll in the
program and receive points based on the value of the transaction and receive awards for various discounts on
future purchases after achieving defined point thresholds. Historical patterns for points converting into awards and
ultimate award redemption are applied to actual points and awards outstanding at the respective balance sheet
date to calculate the liability and corresponding adjustment to net retail sales.
Management reviews these patterns and assesses the adequacy of the deferred revenue liability at the end
of each fiscal quarter. Due to the estimates involved in these assessments, adjustments to the historical rates are
generally made no more often than annually in order to allow time for more definite trends to emerge. Based on
the year-end assessments, the adjustment was $0.1 million for fiscal years 2017 and 2015 and no adjustment for
fiscal 2016. The deferred revenue balance for the loyalty program was $1.4 million and $1.8 million as of
December 31, 2017 and December 30, 2016 respectively.
Cost of Merchandise Sold
Cost of merchandise sold - retail includes the cost of the merchandise, including royalties paid to licensors
of third-party branded merchandise; store occupancy cost, including store depreciation and store asset impairment
charges; cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and
handling costs incurred in shipment to customers. Cost of merchandise sold - commercial includes the cost of the
merchandise, including royalties paid to licensors of third-party branded merchandise; cost of warehousing and
distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment
to customers.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses include store payroll and related benefits, advertising, credit
card fees, store supplies and store closing costs, as well as central office management payroll and related benefits,
travel, information systems, accounting, insurance, legal, and public relations. It also includes depreciation and
amortization of central office leasehold improvements, furniture, fixtures, and equipment, as well as amortization
of trademarks and intellectual property.
48
Store Preopening Expenses
Store preopening expenses include costs incurred prior to store openings, remodels and relocations
including certain store set-up, labor and hiring costs, rental charges, payroll, marketing, travel and relocation costs.
They are expensed as incurred and are included in selling, general and administrative expenses.
Advertising
The costs of advertising and marketing programs are charged to operations in the first period the program
takes place. Advertising expense was $19.0 million, $20.7 million and $25.3 million for fiscal years 2017, 2016
and 2015, respectively.
Income Taxes
Income taxes are accounted for using a balance sheet approach known as the liability method. The liability
method accounts for deferred income taxes by applying the rate, based on enacted tax law, that will be in effect
in the period in which the temporary differences, between the book basis and the tax basis of assets and liabilities,
reverse or are settled. Deferred taxes are reported on a jurisdictional basis.
Tax positions are reviewed at least quarterly and adjusted as new information becomes available. The
recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income
from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available
tax planning strategies. These estimates of future taxable income inherently require significant judgment. To the
extent it is considered more likely than not that a deferred tax asset will be not recovered, a valuation allowance
is established.
The Company accounts for its total liability for uncertain tax positions according to the provisions of ASC
740-10-25. The Company recognizes estimated interest and penalties related to unrecognized tax benefits in
income tax expense. See Note 7—Income Taxes for further discussion including the impact of the
December 22, 2017 enactment of The Tax Cuts and Job Act (“Act”).
Income Per Share
Under the two-class method, basic income per share is determined by dividing net income allocated to
common stockholders by the weighted average number of common shares outstanding during the period. In
periods of net loss, no effect is given to the Company’s participating securities as they do not contractually
participate in the losses of the Company. Diluted income per share reflects the potential dilution that could occur
if options to issue common stock were exercised. In periods in which the inclusion of such instruments is
anti-dilutive, the effect of such securities is not given consideration.
Stock-Based Compensation
The Company has share-based compensation plans covering certain management groups and its Board of
Directors. The Company accounts for share-based payments utilizing the fair value recognition provisions of ASC
718. The Company recognizes compensation cost for equity awards over the requisite service period for the entire
award. See Note 11 – Stock Incentive Plans for additional information. For fiscal 2017, 2016, and 2015, selling,
general and administrative expense includes $3.4 million, $3.0 million and $2.1 million, respectively, of
stock-based compensation expense.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and foreign currency translation
adjustments.
Deferred Compensation Plan
The Company maintains a Deferred Compensation Plan for the benefit of certain management employees.
The investment funds offered to the participant generally 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
49
funds in active markets with sufficient volume and frequency (Level 1). As of December 30, 2017, the current
portions of the assets and related liabilities of less than $0.1 million are presented in prepaid expenses and other
current assets and accrued expenses in the accompanying consolidated balance sheets, and the non-current
portions of the assets and the related liabilities of $1.0 million are presented in other assets, net and other liabilities
in the accompanying consolidated balance sheets. As of December 31, 2016, the current portions of the assets
and related liabilities of $0.1 million are presented in prepaid expenses and other current assets and accrued
expenses in the accompanying consolidated balance sheets, and the non-current portions of the assets and the
related liabilities of $0.7 million are presented in other assets, net and other liabilities in the accompanying
consolidated balance sheets.
Fair Value of Financial Instruments
For purposes of financial reporting, management has determined that the fair value of financial instruments,
including cash and cash equivalents, receivables, short term investments, accounts payable and accrued
expenses, approximates book value at December 30, 2017 and December 31, 2016.
Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to make a
number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. The assumptions used by management in future estimates
could change significantly due to changes in circumstances, including, but not limited to, challenging economic
conditions. Accordingly, future estimates may change significantly. Significant items subject to such estimates and
assumptions include the calculation of revenue from gift card breakage, valuation of long-lived assets, including
deferred income tax assets, and the determination of deferred revenue under the Company’s customer loyalty
program.
Sales Tax Policy
The Company’s revenues in the consolidated statement of operations are net of sales taxes.
Foreign Currency
Assets and liabilities of the Company’s foreign operations with functional currencies other than the U.S.
dollar are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are
translated at average rates prevailing during the year. Translation adjustments are reported in accumulated other
comprehensive income, a separate component of stockholders’ equity. Gains and losses resulting from foreign
exchange transactions, including the impact of the re-measurement of the Company’s balance sheet, are recorded
as a component of selling, general and administrative expenses. The Company recorded income of $1.6 million
in fiscal 2017 and losses of $0.3 million and $2.3 million in fiscal 2016 and 2015, respectively.
Recent Accounting Pronouncements – Adopted in the current year
The Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock
Compensation: Improvements to Employee Share-Based Payment Accounting, effective January 1, 2017. The
Company made an accounting policy election to account for forfeitures as they occur. The impact of this election,
along with the adoption of the other provisions of the standard in the first quarter of 2017, was to increase deferred
tax assets by $1.6 million, increase additional paid-in-capital by $0.3 million, increase retained earnings by
$1.9 million and decrease taxes payable by $0.6 million.
Additionally, the Company early adopted ASU No. 2016-16, Income Taxes – Intra-Entity Transfers of Assets
Other Than Inventory, effective January 1, 2017. Using the modified retrospective method, the impact of the
adoption of the standard in the first quarter of 2017 was to increase deferred tax assets by $1.0 million, decrease
other assets, net by $2.3 million and decrease retained earnings by $1.3 million.
50
Recent Accounting Pronouncements – Pending adoption
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with
Customers (ASU 2014-09), which will replace most existing revenue recognition guidance. The core principle of
the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that
it expects to be entitled to receive for those goods or services. ASU 2014-09 requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments. ASU 2014-09 will be effective for the Company beginning in
fiscal 2018 and allows for both retrospective and modified retrospective methods of adoption. In 2016, the
Company established a cross-functional team to use a detailed approach to assess the impact of the new
standard. The team has reviewed current accounting policies and practices to identify potential differences that
would result from applying the provisions of the new standard to the Company’s existing revenue contracts. To
date, management has reviewed all types of the Company’s revenue sources and contracts. Internal controls
have been designed and an accounting policy has been developed. The Company expects the most significant
impact to result from changes to the accounting for deferred revenue, specifically related to gift card breakage.
Breakage revenue, which is currently recognized for certain gift cards, when the likelihood of redemption becomes
remote, will be recognized under the new guidance proportionately over the estimated customer redemption
period, subject to the constraint that it must be highly probable that a significant reversal of revenue will not occur.
In addition, the Company has identified minor changes to the timing of revenues for certain outbound licensing
arrangements and international franchise agreements. The Company will adopt ASU 2014-09 effective the first
day of fiscal 2018 using the modified retrospective method through a cumulative adjustment recorded to the
opening fiscal 2018 retained earnings balance. The Company expects the pre-tax cumulative effect adjustment
to retained earnings to be approximately $12.3 million and the tax effect to be approximately $3.0 million. As a
result of this change, the Company expects a negative impact to revenue and pre-tax income of $3.9 million in
fiscal 2018 with the remaining balance of the cumulative effect adjustment predominantly impacting fiscal years
2019 and 2020.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU 2016-02),
which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of the ASU is that
an entity should recognize the rights and obligations resulting from leases as assets and liabilities. ASU 2016-02
requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial
statements so that users can understand more about the nature of an entity’s leasing activities, including
significant judgments and changes in judgments. ASU 2016-02 will be effective for the Company beginning in
fiscal 2019 and requires the modified retrospective method of adoption. Early adoption is permitted. The Company
is in the process of determining the impact of ASU 2016-02 on its consolidated financial statements. Management
expects a material impact to the consolidated balance sheet in the addition of significant right-of-use assets and
related liabilities as the Company's retail locations are currently categorized as operating leases. In 2017, the
Company established a cross-functional team to use a detailed approach to assess the impact of the new
standard. The Company is in the process of implementing new lease accounting software to assist in the
quantification of the expected impact on the consolidated balance sheets and to facilitate the calculations of the
related accounting entries and disclosures. See Note 9 – Commitments and Contingencies for further detail of the
Company’s future minimum lease payments.
(3) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
Prepaid rent ........................................................................................... $
Other .....................................................................................................
Total ................................................................................................... $
2017
2016
7,314 $
6,032
13,346 $
7,191
5,546
12,737
51
(4) Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
2017
2016
Land .................................................................................................... $
Furniture and fixtures ..........................................................................
Computer hardware ............................................................................
Building ...............................................................................................
Leasehold improvements ....................................................................
Computer software ..............................................................................
Construction in progress .....................................................................
Less accumulated depreciation ..........................................................
Total, net .......................................................................................... $
2,261 $
44,191
27,122
14,970
111,717
42,911
7,774
250,946
173,195
77,751 $
2,261
41,578
26,960
14,970
113,573
41,763
6,152
247,257
172,333
74,924
For fiscal 2017, 2016 and 2015, depreciation expense was $15.1 million, $15.2 million and $15.8 million,
respectively.
During 2017, the Company reviewed the operating performance and forecasts of future performance for the
stores in its DTC segment. As a result of that review, it was determined that several stores would not be able to
recover the carrying value of certain store assets through expected undiscounted cash flows over the remaining
life of the related assets. Accordingly, the carrying value of the assets was reduced to fair value, calculated as the
net present value of estimated future cash flows for each asset group, and any remaining net book value is
depreciated over the remaining life of the asset. Asset impairment charges of less than $0.1 million were recorded
in the fourth quarter of fiscal 2017, which are included in cost of merchandise sold - retail as a component of
income before income taxes in the DTC segment. Similar impairment charges were $2.3 million in fiscal 2016 and
immaterial in fiscal 2015, respectively. The inputs used to determine the fair value of the assets are Level 3 fair
value inputs as defined by ASC 820-10. In the event that we decide to close any or all of these stores in the future,
we may be required to record additional impairment, lease termination charges, severance charges and other
charges.
In 2015, the Company began on ongoing project to update its store locations. The Company currently
expects to update stores primarily in conjunction with natural lease events including new store openings,
relocations and lease required remodels. The Company considers a more likely than not assessment that an
individual location will close or be remodeled prior to the end of its original lease term as a triggering event to
review the store asset group for recoverability. As a result of these reviews, it was determined that certain stores
would not be able to recover the carrying value of store assets through expected undiscounted cash flows over
the shortened remaining life of the related assets. Accordingly, the carrying value of the assets was reduced to
fair value, calculated as the net present value of estimated future cash flows for each asset group, and any
remaining net book value is depreciated over the shortened expected life. Asset impairment charges of
$0.1 million, $0.4 million and $0.3 million were recorded in fiscal 2017, 2016 and 2015, respectively, which are
included in selling, general and administrative expenses as a component of income before income taxes in the
DTC segment. The inputs used to determine the fair value of the assets are Level 3 fair value inputs as defined
by ASC 820-10.
(5) Other Intangible Assets
Other intangible assets consist of the following (in thousands):
Trademarks and other intellectual property ..................................... $
Less accumulated amortization .......................................................
Total, net .................................................................................... $
15,656 $
14,661
995 $
15,276
13,555
1,721
2017
2016
52
Trademarks and intellectual property are amortized over three years. Amortization expense related to
trademarks and intellectual property was $1.0 million, $0.9 million and $0.5 million in fiscal 2017, 2016 and 2015,
respectively. Estimated amortization expense related to other intangible assets in the subsequent five-year period
is: 2018 - $0.8 million; 2019 - $0.2 million; 2020 - $0; 2021 - $0; and 2022 - $0.
(6) Accrued Expenses
Accrued expenses consist of the following (in thousands):
2017
2016
Accrued wages, bonuses and related expenses ................................ $
Sales tax payable ................................................................................
Accrued rent and related expenses ....................................................
Current income taxes payable ............................................................
Total ................................................................................................. $
5,863 $
4,858
3,679
789
15,189 $
5,596
5,075
4,615
611
15,897
(7)
Income Taxes
The Company’s income before income taxes from domestic and foreign operations (which include the United
Kingdom, Canada, China, Denmark and Ireland), are as follows (in thousands):
Domestic .............................................................. $
Foreign ................................................................
Total income before income taxes ................... $
13,081 $
732
13,813 $
9,733 $
(4,424)
5,309 $
13,854
4,044
17,898
2017
2016
2015
The components of the provision for income taxes are as follows (in thousands):
Current:
U.S. Federal ....................................................... $
U.S. State ...........................................................
Foreign ...............................................................
Deferred:
U.S. Federal .......................................................
U.S. State ...........................................................
Foreign ...............................................................
Income tax expense (benefit) ...................... $
2017
2016
2015
683 $
609
(313)
3,815
(113)
1,216
5,897 $
1,605 $
237
(231 )
1,902
1,230
(811 )
3,932 $
-
24
1,189
(9,697)
(1,308)
345
(9,447)
A reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows
(in thousands):
2017
2016
2015
Income before income taxes ................................... $
U.S. federal statutory income tax rate .....................
Income tax expense at statutory federal rate ...
State and local income taxes, net of federal tax
benefit ....................................................................
Valuation allowance ................................................
Effect of lower foreign taxes ....................................
Adjustment for unrecognized tax positions .............
U.S. federal rate change to 21% .............................
Other items, net .......................................................
Income tax expense (benefit) ........................... $
Effective tax rate ......................................................
13,813 $
34%
4,696
327
323
(131)
(309)
1,448
(457)
5,897 $
42.7%
5,309 $
34%
1,805
968
576
864
(77)
-
(204)
3,932 $
74.1%
17,898
34%
6,085
371
(15,572)
(622)
67
-
224
(9,447)
(52.8)%
53
In fiscal 2017, the Company recorded an additional allowance of $0.3 million on its deferred tax assets in
certain foreign jurisdictions due to cumulative losses and uncertainty about future earnings forecast. In fiscal 2016,
the Company established a full valuation allowance of $0.6 million on its deferred tax assets in certain foreign
jurisdictions due to cumulative losses and uncertainty about future earnings forecast. In fiscal 2011, the Company
had established a full valuation allowance on its deferred tax assets in the United States due to significant losses
and uncertainty about future earnings forecast. In fiscal 2015, the Company recorded an income tax benefit of
$9.4 million primarily due to the reduction in the valuation allowances in the U.S. The valuation allowance in the
U.S. was fully reversed because the weight of evidence regarding the future realizability of the deferred tax assets
had become predominately positive and realization of the deferred tax assets was more likely than not. The
positive evidence considered in our assessment of the realizability of the deferred tax assets included the
generation of significant positive cumulative income in the U.S., the implementation of tax planning strategies,
and projections of future taxable income. Based on its earnings performance trend, expected continued profitability
and improvements in the Company’s financial condition; management determined it was more likely than not that
all of our U.S. deferred tax assets would be realized. The negative evidence considered included historical losses
in certain prior years; however, the positive evidence outweighed this negative evidence.
The movement in the valuation allowance balance during the year is primarily attributable to the additional
valuation allowance recorded in certain foreign jurisdictions, plus foreign currency fluctuations and the deferred
adjustment affecting only the balance sheet.
Temporary differences that gave rise to deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Deferred revenue ............................................................................. $
Accrued rents ...................................................................................
Net operating loss carryforwards .....................................................
Intangible assets ..............................................................................
Deferred compensation ...................................................................
Accrued compensation ....................................................................
Carryforward of tax credits ...............................................................
Receivable write-offs .......................................................................
Inventories .......................................................................................
Other ................................................................................................
Total gross deferred tax assets .................................................
Less: Valuation allowance ...............................................................
Total deferred tax assets, net of valuation allowance ...............
Deferred tax liabilities:
Depreciation .....................................................................................
Deferred expense ............................................................................
Other ................................................................................................
Total deferred tax liabilities........................................................
Net deferred tax assets ............................................................. $
2017
2016
3,120 $
1,625
764
1,466
1,414
533
25
40
1,179
1,188
11,354
1,301
10,053
(1,704)
(1,907)
(61)
(3,672)
6,381 $
5,004
1,907
1,194
1,040
1,739
620
880
604
1,994
1,209
16,191
576
15,615
(3,909 )
(3,318 )
(132 )
(7,359 )
8,256
The Company continues to assert its investments in foreign subsidiaries are permanent in duration and it is
not practical to estimate the income tax liability on the outside basis differences.
On December 22, 2017, the Tax Cuts and Job Act (“Act”) was enacted, which significantly changes U.S.
tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and
imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Act permanently reduces
the U.S. federal statutory rate to 21%, effective January 1, 2018. The Company recorded a provisional tax charge
of $1.4 million for the re-measurement of its U.S. net deferred tax assets. The Act also provided for a one-time
deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year
ended December 30, 2017. The Company does not anticipate a cost for this one-time deemed repatriation at this
time. The Global Intangible Low-Taxed Income ("GILTI") provisions of the Act require a company to include in its
U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s
tangible assets. The Base-Eroding Anti-abuse Tax (“BEAT”) provisions of the Act assess tax on certain payments
54
made by a U.S. company to a related foreign company. The Company does not expect the impact of GILTI or
BEAT will be material to the consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the
application of U.S. GAAP in situations when a registrant does not have the necessary information available,
prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income
tax effects of the Act. The Company has recognized the provisional tax impacts related to the tax charge for the
revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial
statements for the year ended December 30, 2017. The final impact may differ from these provisional amounts,
possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions
made, additional regulatory guidance that may be issued, and actions that the Company may take as a result of
the Act. In accordance with SAB 118 the financial reporting impact of the Act will be completed and any adjustment
will be recorded in income tax expense in fiscal 2018.
As of December 30, 2017, the Company had total unrecognized tax benefits of $0.7 million, of which
approximately $0.3 million would favorably impact the Company’s provision for income taxes if recognized. As of
December 31, 2016, the Company had total unrecognized tax benefits of $1.0 million, of which approximately
$0.4 million would favorably impact the Company’s provision for income taxes if recognized. The Company
reviews its uncertain tax positions periodically and accrues interest and penalties accordingly. Accrued interest
and penalties included in other liabilities in the Consolidated Balance Sheets were less than $0.1 million and
$0.1 million as of December 30, 2017, and December 31, 2016, respectively. The Company recognizes accrued
interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes within
the Consolidated Statements of Income. For the year ended December 30, 2017, the Company recognized a
benefit of less than $0.1 million for interest and penalties. For the year ended December 31, 2016, the Company
recognized a benefit of $0.3 million for interest and penalties.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
Balance as of January 2, 2016 ................................................................................................ $
Increases for prior year tax positions ...................................................................................
Decreases for prior year tax positions .................................................................................
Increases for current year tax positions ...............................................................................
Audit settlement release.......................................................................................................
Balance as of December 31, 2016 ........................................................................................
Increases for prior year tax positions ..............................................................................
Decreases for prior year tax positions ............................................................................
Balance as of December 30, 2017 ........................................................................................ $
719
248
(25)
26
(7)
961
57
(359)
659
Management estimates it is reasonably possible that the amount of unrecognized tax benefits could
decrease by as much as $0.6 million in the next twelve months as a result of the resolution of audits currently in
progress involving issues common to multinational corporations and the lapsing of the statute of limitations.
The following tax years remain open in the Company’s major taxing jurisdictions as of December 30, 2017:
United States (Federal) ......................................................................................................... 2016 through 2017
United Kingdom .................................................................................................................... 2009 through 2017
(8) Line of Credit
As of December 30, 2017, the Company had a bank line of credit that provides borrowing capacity of
$35 million. Borrowings under the credit agreement are secured by our assets and a pledge of 66% of the
Company’s ownership interest in certain of its foreign subsidiaries. The credit agreement expires on
December 31, 2018 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers,
acquisitions or sale of assets, loans, transactions with affiliates, and investments. It prohibits the Company from
declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any
terms of the credit agreement. The Company is also prohibited from repurchasing shares of its common stock
unless such purchase would not violate any terms of the credit agreement; the Company may not use proceeds
of the line of credit to repurchase shares. Borrowings bear interest at LIBOR plus 1.8%. Financial covenants
55
include maintaining a minimum tangible net worth, maintaining a minimum fixed charge coverage ratio (as defined
in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and
amortization ratio. As of December 30, 2017: (i) the Company was in compliance with all covenants; (ii) there were
no borrowings under the line of credit; and (iii) there was $35.0 million available for borrowing under the line of
credit.
(9) Commitments and Contingencies
(a) Operating Leases
The Company leases its retail stores and corporate offices under agreements which expire at various dates
through 2030. The majority of leases contain provisions for base rent plus contingent payments based on defined
sales as well as scheduled escalations. Total office and retail store base rent expense was $45.0 million,
$44.5 million and $45.3 million, and contingent rents were $1.2 million, $1.1 million and $1.2 million for 2017, 2016
and 2015, respectively.
Future minimum lease payments at December 30, 2017, were as follows (in thousands):
2018 ........................................................................................................................................ $
2019 ........................................................................................................................................
2020 ........................................................................................................................................
2021 ........................................................................................................................................
2022 ........................................................................................................................................
Subsequent to 2022 ................................................................................................................
Total ..................................................................................................................................... $
40,849
34,041
31,723
29,477
27,738
70,068
233,896
(b) Litigation
In the normal course of business, the Company is subject to certain claims or lawsuits. Except as noted
below, management is not aware of any claims or lawsuits that may have a material adverse effect on the
consolidated financial position or results of operations of the Company.
In the normal course of business, the Company is subject to regular examination by various taxing authorities
for years not closed by the statute of limitations. If one or more of these examinations has an unfavorable
resolution, it is possible that the results of operations, liquidity or financial position of the Company could be
materially affected in any particular period. The Company accrues a liability for loss contingencies when it believes
that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss.
Gain contingencies are recorded when the underlying uncertainty has been settled. Assessments made by the
United Kingdom customs authority in 2012 have been appealed by the Company, which has paid the disputed
duty, strictly under protest, pending the outcome of the continuing dispute, and this is included in receivables in
the DTC segment. The United Kingdom customs authority is contesting the Company's appeal. The Company
maintains a provision against the related receivable, based on a current evaluation of the collectability, using the
latest facts available in the dispute. As of December 30, 2017, the Company had a gross receivable balance of
$3.7 million and a reserve of $2.9 million, leaving a net receivable of $0.8 million. However, the Company
continues to vigorously dispute the customs audit findings and believes that the outcome of this dispute will not
have a material adverse impact on the results of operations, liquidity or financial position of the Company.
56
(10) Net Income Per Share
The Company uses the two-class method to compute basic and diluted earnings per common share. In
periods of net loss, no effect is given to the Company’s participating securities as they do not contractually
participate in the losses of the Company. The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share and per share data):
NUMERATOR:
Net income before allocation of earnings to
participating securities ..................................... $
Less: Earnings allocated to participating
securities ...................................................
Net income ....................................................... $
DENOMINATOR:
Weighted average number of common
2017
2016
2015
7,916 $
1,377 $
27,345
96
7,820 $
29
1,348 $
520
26,825
shares outstanding – basic ..............................
Dilutive effect of share-based awards:
15,572,045
185,015
15,442,086
180,187
16,642,269
225,087
Weighted average number of common
shares outstanding – dilutive ...........................
15,757,060
15,622,273
16,867,356
Basic income per common share attributable
to Build-A-Bear Workshop, Inc. stockholders ..... $
0.50 $
Diluted income per common share attributable
to Build-A-Bear Workshop, Inc. stockholders ..... $
0.50 $
0.09 $
0.09 $
1.61
1.59
In calculating diluted earnings per share for fiscal 2017, 2016 and 2015, options to purchase 325,427;
264,717; and 65,040; respectively, shares of common stock were outstanding at the end of the period, but were
not included in the computation of diluted income per share due to their anti-dilutive effect under provisions of
ASC 260-10.
(11) Stock Incentive Plans
In 2003, the Company adopted the Build-A-Bear Workshop, Inc. 2002 Stock Incentive Plan. In 2004, the
Company adopted the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan which the Company amended and
restated in 2009 and 2014 (collectively, the Incentive Plans).
On March 14, 2017, the Company’s Board of Directors (the “Board”) adopted, subject to stockholder approval,
the Build-A-Bear Workshop, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”). On May 11, 2017, at the
Company’s 2017 Annual Meeting of Stockholders, the Company’s stockholders approved the 2017 Plan. The
2017 Plan, which is administered by the Compensation and Development Committee of the Board, permits the
grant of stock options (including both incentive and non-qualified stock options), stock appreciation rights,
restricted stock, cash and other stock-based awards, some of which may be performance-based pursuant to the
terms of the 2017 Plan. The Board may amend, modify or terminate the 2017 Plan at any time, except as otherwise
provided in the 2017 Plan. The 2017 Plan will terminate on March 14, 2027, unless earlier terminated by the
Board. The number of shares of the Company’s common stock authorized for issuance under the 2017 Plan is
1,000,000, plus shares of stock subject to outstanding awards made under the Incentive Plans that on or after
March 21, 2017 may be forfeited, expire or be settled for cash.
57
(a) Stock Options
The following table is a summary of the balance and activity for the Plans related to stock options for the
periods presented:
Number of
Weighted
Average
Weighted
Average
Remaining
Aggregate
Intrinsic
Value
Shares
Exercise Price Contractual Term
(in thousands)
Outstanding, January 3, 2015 .......
Granted ..........................................
Exercised .......................................
Forfeited ........................................
Canceled or expired ......................
Outstanding, January 2, 2016 .......
Granted ..........................................
Exercised .......................................
Forfeited ........................................
Canceled or expired ......................
Outstanding, December 31, 2016 ..
Granted ..........................................
Exercised .......................................
Forfeited ........................................
Canceled or expired ......................
Outstanding, December 30, 2017 ..
Options Exercisable As Of:
December 30, 2017 .......................
714,451 $
71,517
(150,409)
(19,003)
(41,705)
574,851
213,156
(30,223)
-
-
757,784
72,051
(1,269)
(26,795)
(10,204)
791,567 $
8.14
20.58
6.07
12.15
32.95
8.30
13.68
5.91
-
-
9.91
8.85
6.36
13.45
12.51
9.67
5.8 $
1,228
569,361 $
8.46
4.8 $
1,203
The expense recorded related to options granted during fiscal 2017, 2016 and 2015 was determined using
the Black-Scholes option pricing model and the provisions of SAB 107 and 110, which allow the use of a simplified
method to estimate the expected term of “plain vanilla” options. The assumptions used in the option pricing model
during fiscal 2017, 2016 and 2015 were:
Dividend yield .......................................................................
Historical volatility .................................................................
Risk-free rate ........................................................................
Expected life (in years) .........................................................
Weighted average grant date fair value ...............................
2017
0%
47%
2%
6
$4.18
2016
0%
2015
0%
52% - 55% 51% - 58%
1.4% - 1.6% 1.5% - 1.8%
6
$7.13
6
$11.20
The total grant date fair value of options exercised in fiscal 2017, 2016 and 2015 was approximately less
than $0.1 million, $0.1 million, and $0.6 million, respectively. The total intrinsic value of options exercised in fiscal
2017, 2016 and 2015 was approximately less than $0.1 million, $0.2 million and $2.1 million, respectively. The
Company generally issues new shares to satisfy option exercises.
Shares available for future option, non-vested stock and restricted stock grants were 984,758 and 545,799
at the end of 2017 and 2016, respectively.
58
(b) Restricted Stock
The Company granted restricted stock awards that vest over a 1 to 3-year period. Recipients of time-based
restricted stock awards have the right to vote and receive dividends as to all unvested shares. Recipients of
performance-based restricted stock awards have the right to vote and receive dividends upon satisfaction of the
performance criteria and certain of these awards’ dividend rights are also subject to time-based vesting. The
following table is a summary of the balance and activity for the Plans related to unvested time-based and
performance-based restricted stock granted as compensation to employees and directors for the periods
presented:
Restricted Stock
Performance Shares
Weighted
Average
Weighted
Average
Outstanding, January 3, 2015 ........................
Granted ...........................................................
Vested ............................................................
Forfeited .........................................................
Canceled ........................................................
Outstanding, January 2, 2016 ........................
Granted ...........................................................
Vested ............................................................
Forfeited .........................................................
Canceled ........................................................
Outstanding, December 31, 2016 ..................
Granted ...........................................................
Vested ............................................................
Forfeited .........................................................
Canceled ........................................................
Outstanding, December 30, 2017 ..................
Shares
Shares
Fair Value
Number of Grant Date Number of Grant Date
Fair Value
-
- $
20.71
86,222
-
-
20.80
(2,160)
-
-
20.70
84,062
13.68
176,611
20.56
(7,039)
-
-
20.56
(12,493)
15.39
241,141
8.85
83,897
20.54
(6,472)
14.28
(15,247)
13.68
(13,704)
13.66
289,615 $
419,674 $
107,004
(205,137)
(44,988)
-
276,553
203,613
(152,548)
(11,502)
-
316,116
258,060
(179,132)
(33,505)
-
361,539 $
7.64
19.59
7.84
8.89
-
11.93
13.58
11.22
13.45
-
13.30
9.18
12.20
12.55
-
10.97
In 2017, the Company awarded three-year performance-based restricted stock subject to the achievement
of pre-established pre-tax income growth objectives for fiscal 2017, 2018 and 2019. These shares of
performance-based restricted stock had a payout opportunity ranging from 25% to 200% of the target number of
shares. The target number of shares awarded was 83,897 with a weighted average grant date fair value of $8.85
per share. Based on the Company’s pre-tax income results for fiscal 2017, the Company currently estimates the
minimum number of shares that will be earned is approximately 12,580, assuming no forfeitures. The Company
is currently unable to estimate the total number of these shares expected to be earned.
In 2016, the Company awarded performance-based restricted stock subject to the achievement of
pre-established pre-tax income objectives for fiscal 2016. These shares of performance-based restricted stock
had a payout opportunity ranging from 50% to 200% of the target number of shares. The target number of shares
awarded was 15,366 with a weighted average grant date fair value of $13.57 per share. Based on the Company’s
pre-tax income results for fiscal 2016, none of these shares were earned. Additionally, the Company awarded
three-year performance-based restricted stock subject to the achievement of pre-established cumulative total
revenue goals for fiscal 2016, 2017 and 2018. These shares of three-year performance-based restricted stock
also had a payout opportunity ranging from 50% to 200% of the target number of shares. The target number of
shares awarded was 161,245 with a weighted average grant date fair value of $13.69 per share. The Company
is currently unable to estimate the total number of these shares expected to be earned.
59
In 2015, the Company awarded performance-based restricted stock subject to the achievement of
pre-established pre-tax income objectives for fiscal 2015. These shares of performance-based restricted stock
had a payout opportunity ranging from 50% to 200% of the target number of shares. The target number of shares
awarded was 36,222 with a weighted average grant date fair value of $20.58 per share. Based on the Company’s
pre-tax income results for fiscal 2015, the number of shares earned was 22,458. Additionally, the Company
awarded three-year performance-based restricted stock subject to the achievement of pre-established cumulative
pre-tax income goals for fiscal 2015, 2016 and 2017. These shares of three-year performance-based restricted
stock also had a payout opportunity ranging from 50% to 200% of the target number of shares. The target number
of shares awarded was 50,000 with a weighted average grant date fair value of $20.80 per share. The Company
does not expect these shares to be earned.
The vesting date fair value of shares that vested in fiscal 2017, 2016 and 2015 was $2.3 million, $1.9 million
and $4.0 million, respectively. The aggregate unearned compensation expense related to options and restricted
stock was $3.5 million as of December 30, 2017 and is expected to be recognized over a weighted average period
of 1.3 years.
(12) Stockholders’ Equity
The following table summarizes the changes in outstanding shares of common stock for fiscal 2015, 2016
and 2017:
Common
Stock
Shares as of January 3, 2015 ................................................................................................
17,360,635
Shares issued under employee stock plans, net of shares withheld in lieu of tax
withholding ......................................................................................................................
Repurchase of shares .........................................................................................................
Shares as of January 2, 2016 ................................................................................................
Shares issued under employee stock plans, net of shares withheld in lieu of tax
withholding ......................................................................................................................
Repurchase of shares .........................................................................................................
Shares as of December 31, 2016 ..........................................................................................
Shares issued under employee stock plans, net of shares withheld in lieu of tax
withholding ......................................................................................................................
Repurchase of shares .........................................................................................................
Shares as of December 30, 2017 ..........................................................................................
141,827
(1,706,571)
15,795,891
193,538
(132,502)
15,856,927
172,758
(513,725)
15,515,960
In fiscal 2017, we had stock repurchases of $4.7 million including a $4.2 million use of cash plus an additional
$0.5 million commitment to be settled in fiscal 2018.
(13) Related-Party Transactions
The Company collected $0.2 million in fiscal 2017 and $0.5 million in both fiscal 2016 and 2015, from its
guests on behalf of charitable foundations controlled by a member of the Company’s Board of Directors and
certain executive officers of the Company. Substantially all of the contributions are collected from guests at the
point of sale via pin pad prompts or as a portion of the proceeds of specifically identified products. The foundations
support a variety of children’s causes, domestic animal shelters, disaster relief and other concerns. The
foundations distribute grants to qualifying charitable organizations based upon decisions of their respective
contribution committees most of whose members are employees of the Company. The total amount due to this
related party as of December 30, 2017 and December 31, 2016 was immaterial.
60
(14) Major Vendors
Four vendors, each of whose primary manufacturing facilities are located in Asia, accounted for
approximately 79%, 73% and 85% of inventory purchases in 2017, 2016 and 2015, respectively.
(15) Segment Information
The Company’s operations are conducted through three operating segments consisting of DTC, commercial
and international franchising. The DTC segment includes the operating activities of corporately-managed locations
and other retail delivery operations in the United States, Canada, China, Denmark, Ireland and the United
Kingdom, including the Company’s e-commerce sites and temporary stores. The commercial segment includes
the Company’s transactions with other businesses, mainly comprised of licensing the Company’s intellectual
properties for third party use and wholesale activities. The international franchising segment includes the licensing
activities of the Company’s franchise agreements with store locations in Europe (outside of the United Kingdom,
Ireland and Denmark), Asia, Australia, the Middle East, Africa and Mexico. The operating segments have discrete
sources of revenue, different capital structures and different cost structures. These operating segments represent
the basis on which the Company’s chief operating decision maker regularly evaluates the business in assessing
performance, determining the allocation of resources and the pursuit of future growth opportunities. Accordingly,
the Company has determined that each of its operating segments represent a reportable segment. The three
reportable segments follow the same accounting policies used for the Company’s consolidated financial
statements.
Following is a summary of the financial information for the Company’s reporting segments (in thousands):
Direct-to
Consumer Commercial Franchising Total
International
Fifty-two weeks ended December 30, 2017
Net sales to external customers .......................... $ 349,408 $
10,436
Net income before income taxes .........................
17,882
Capital expenditures ............................................
16,101
Depreciation and amortization .............................
Fifty-two weeks ended December 31, 2016
Net sales to external customers .......................... $ 357,593 $
2,760
Net income before income taxes .........................
28,083
Capital expenditures ............................................
16,086
Depreciation and amortization .............................
Fifty-two weeks ended January 2, 2016
Net sales to external customers .......................... $ 372,715 $
16,053
Net income before income taxes .........................
24,307
Capital expenditures ............................................
16,284
Depreciation and amortization .............................
6,007 $
934
-
2
4,312 $
1,813
-
2
2,783 $
977
7
1
2,451 $ 357,866
2,443 13,813
191 18,073
62 16,165
736
2,299 $ 364,204
5,309
35 28,118
83 16,171
2,196 $ 377,694
868 17,898
74 24,388
134 16,419
Total Assets as of:
December 30, 2017 ............................................. $ 188,685 $
December 31, 2016 ............................................. $ 190,236 $
5,949 $
6,143 $
3,355 $ 197,989
3,216 $ 199,595
61
The Company’s reportable segments are primarily determined by the types of products and services that
they offer. Each reportable segment may operate in many geographic areas. Revenues are recognized in the
geographic areas based on the location of the customer or franchisee. The following schedule is a summary of
the Company’s sales to external customers and long-lived assets by geographic area (in thousands):
North
America (1) Europe (2) Other (3)
Total
Fifty-two weeks ended December 30, 2017
Net sales to external customers ............................. $ 293,282 $
Property and equipment, net ..................................
68,141
Fifty-two weeks ended December 31, 2016 ..............
Net sales to external customers ............................. $ 296,152 $
Property and equipment, net ..................................
66,154
Fifty-two weeks ended January 2, 2016 ....................
61,901 $
9,578
2,683 $ 357,866
77,751
32
66,140 $
8,733
1,912 $ 364,204
74,924
37
Net sales to external customers ............................. $ 297,554 $
61,211
Property and equipment, net ..................................
78,788 $
6,459
1,352 $ 377,694
67,741
71
For purposes of this table only:
(1) North America includes the United States, Canada, Puerto Rico and franchise business in Mexico
(2) Europe includes the United Kingdom, Ireland, Denmark and franchise businesses in Europe
(3) Other includes franchise businesses outside of North America and Europe and, beginning in 2016, a
corporately-managed location in China
62
(16) Subsequent events
On January 9, 2018, the Company's Board of Directors approved a change in the Company’s fiscal
year-end, which previously ended on the Saturday closest to December 31, to the Saturday closest to January
31. This change is effective immediately following the end of the Company’s 2017 fiscal year. The first 12-month
fiscal year under the new calendar will encompass February 4, 2018 through February 2, 2019. A one fiscal month
transition period, December 31, 2017 through February 3, 2018, will be reported on the Company’s Quarterly
Report on Form 10-Q along with results for the first fiscal quarter ending May 5, 2018 as well as on the Company’s
Annual Report Form 10-K for the year ending February 2, 2019.
In the period after December 30, 2017, the Company repurchased approximately 616,100 shares for an
aggregate of $5.3 million under share repurchase programs it adopted in 2017. As of March 15, 2018, there was
approximately $10.0 million of availability under the programs.
(a)(2) Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts
Beginning
Balance
Charged to
cost
and
expenses Other (1) (2)
Ending
Balance
Deferred Tax Asset Valuation Allowance
2017 .............................. $
2016 ..............................
2015 ..............................
576 $
-
15,572
323 $
576
368
402 $
-
(15,940 )
1,301
576
-
Receivables Allowance for Doubtful Accounts
2017 .............................. $
2016 ..............................
2015 ..............................
3,585 $
3,044
3,248
372 $
1,972
19
(885 ) $
(1,431 )
(223 )
3,072
3,585
3,044
(1) Other deferred tax asset valuation allowance represent reserves utilized and the impact of currency translation
(2) Other receivables allowance for doubtful accounts represent uncollectible accounts written off, recoveries and
the impact of currency translation
63
(a)(3) 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 Statement on Form S-1,
filed on August 12, 2004, Registration No. 333-118142)
3.1
Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit
3.1 of our Current Report on Form 8-K, filed on November 8, 2004)
3.2
Amended and Restated Bylaws, as amended through February 23, 2016 (incorporated by reference
from Exhibit 3.1 to our Current Report on Form 8-K, filed on February 24, 2016)
3.3
Amended and Restated Bylaws, as amended through January 4, 2018 (incorporated by reference
from Exhibit 3.1 to our Current Report on Form 8-K, filed on January 8, 2018)
4.1
Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to our
Registration Statement on Form S-1, filed on October 1, 2004, Registration No. 333-118142)
10.1*
Build-A-Bear Workshop, Inc. Amended and Restated 2004 Stock Incentive Plan (incorporated by
reference from Exhibit 10.1 to our Current Report on Form 8-K, filed on August 1, 2006)
10.1.1* Second Amended and Restated Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan
(incorporated by reference from Exhibit 99.1 on our Registration Statement on Form S-8, filed on
May 18, 2009)
10.1.2* Third Amended and Restated Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (incorporated
by reference from Exhibit 10.1 on our Current Report on Form 8-K, filed on May 12, 2014)
10.1.3* Form of the Restricted Stock and Non-Qualified Stock Option Agreement under the Registrant’s
Second Amended and Restated 2004 Stock Incentive Plan (incorporated by reference from Exhibit
10.1 on our Quarterly Report on Form 10-Q, filed on May 14, 2009)
10.1.4* Form of the Restricted Stock and Non-Qualified Stock Option Agreement under the Registrant’s
Second Amended and Restated 2004 Stock Incentive Plan (incorporated by reference from Exhibit
10.2 on our Current Report on Form 8-K, filed on March 28, 2011)
10.1.5* Form of the Restricted Stock and Non-Qualified Stock Option Agreement under the Registrant’s
Third Amended and Restated 2004 Stock Incentive Plan (incorporated by reference from Exhibit
10.2 on our Current Report on Form 8-K, filed on May 12, 2014)
10.1.6* Form of the Restricted Stock and Non-Qualified Stock Option Agreement under the Registrant’s
Third Amended and Restated 2004 Stock Incentive Plan (incorporated by reference from Exhibit
10.1 on our Current Report on Form 8-K, filed on March 20, 2015)
10.1.7* Form of the Restricted Stock Agreement under the Registrant’s Third Amended and Restated 2004
Stock Incentive Plan (incorporated by reference from Exhibit 10.2 on our Current Report on
Form 8-K, filed on March 20, 2015)
10.1.8* 2016 Performance Objectives for Chiefs (incorporated by reference from Exhibit 10.6 on our Current
Report on Form 8-K, filed on March 11, 2016)
10.1.9* Form of Restricted Stock and Non-Qualified Stock Option Agreement under the Registrant’s Third
Amended and Restated 2004 Stock Incentive Plan (incorporated by reference from Exhibit 10.7 on
our Current Report on Form 8-K, filed on March 11, 2016)
64
10.1.10* Form of Restricted Stock Agreement under the Registrant’s Third Amended and Restated 2004
Stock Incentive Plan (incorporated by reference from Exhibit 10.8 on our Current Report on
Form 8-K, filed on March 11, 2016)
10.1.11* Form of Restricted Stock Agreement under the Registrant’s Third Amended and Restated 2004
Stock Incentive Plan (incorporated by reference from Exhibit 10.1.11 on our Annual Report on
Form 10-K, for the year ended December 31, 2016)
10.1.12* Description of Build-A-Bear Workshop, Inc. Cash Bonus Program for Chiefs (incorporated by
reference from Exhibit 10.1 on our Current Report on Form 8-K, filed on March 17, 2017)
10.1.13* Form of Restricted Stock and Non-Qualified Stock Option Agreement under the Registrant’s Third
Amended and Restated 2004 Stock Incentive Plan (incorporated by reference from Exhibit 10.2 on
our Current Report on Form 8-K, filed on March 17, 2017)
10.1.14* Build-A-Bear Workshop, Inc. 2017 Omnibus Incentive Plan (incorporated by reference from Exhibit
10.1 to our Current Report on Form 8-K, filed on May 12, 2017)
10.2 *
Nonqualified Deferred Compensation Plan (incorporated by reference from Exhibit 10.42 to our
Annual Report on Form 10-K, for the year ended December 30, 2006)
10.3 *
Employment, Confidentiality and Noncompete Agreement dated January 20, 2014 between Gina
Collins and the Registrant (incorporated by reference from Exhibit 10.10 to our Annual Report on
Form 10-K for the year ended December 28, 2013)
10.3.1*
Amended and Restated Employment, Confidentiality and Noncompete Agreement, dated
March 7, 2016, by and between Gina Collins and Build-A-Bear Workshop, Inc. (incorporated by
reference from Exhibit 10.7.1 to our Annual Report on Form 10-K for the year ended
January 2, 2016)
10.3.2*
Separation Agreement and General Release by and between Gina Collins and the Registrant dated
February 3, 2017 (incorporated by reference from Exhibit 10.3.2 on our Annual Report on
Form 10-K, for the year ended December 31, 2016)
10.4*
Amended and Restated Employment, Confidentiality and Noncompete Agreement dated
April 14, 2015 between Eric Fencl and the Registrant (incorporated by reference from Exhibit 10.3
to our Quarterly Report on Form 10-Q, filed on May 14, 2015)
10.4.1*
Amended and Restated Employment, Confidentiality and Noncompete Agreement, dated
March 7, 2016, by and between Eric Fencl and Build-A-Bear Workshop, Inc. (incorporated by
reference from Exhibit 10.1 on our Current Report on Form 8-K, filed on March 11, 2016)
10.5*
Employment, Confidentiality and Noncompete Agreement dated April 15, 2015 between J.
Christopher Hurt and the Registrant (incorporated by reference from Exhibit 10.4 to our Quarterly
Report on Form 10-Q, filed on May 14, 2015)
10.5.1*
Amended and Restated Employment, Confidentiality and Noncompete Agreement, dated
March 7, 2016, by and between J. Christopher Hurt and Build-A-Bear Workshop, Inc. (incorporated
by reference from Exhibit 10.2 on our Current Report on Form 8-K, filed on March 11, 2016)
10.6*
Employment, Confidentiality and Noncompete Agreement dated December 3, 2012 between Sharon
Price John and the Registrant (incorporated by reference from Exhibit 10.1 to our Quarterly Report
on Form 10-Q, filed on August 8, 2013)
10.6.1*
Amended and Restated Employment, Confidentiality and Noncompete Agreement, dated
March 7, 2016, by and between Sharon Price John and Build-A-Bear Workshop, Inc. (incorporated
by reference from Exhibit 10.3 on our Current Report on Form 8-K, filed on March 11, 2016)
65
10.7*
10.7.1*
Employment, Confidentiality and Noncompete Agreement dated August 12, 2014 between Jennifer
Kretchmar and the Registrant (incorporated by reference from Exhibit 10.1 to our Quarterly Report
on Form 10-Q, filed on November 6, 2014)
Amended and Restated Employment, Confidentiality and Noncompete Agreement, dated
March 7, 2016, by and between Jennifer Kretchmar and Build-A-Bear Workshop, Inc. (incorporated
by reference from Exhibit 10.4 on our Current Report on Form 8-K, filed on March 11, 2016)
10.8*
Employment, Confidentiality and Noncompete Agreement dated September 15, 2014 between Vojin
Todorovic and the Registrant (incorporated by reference from Exhibit 10.1 to our Current Report on
Form 8-K, filed on September 15, 2014)
10.8.1*
Amended and Restated Employment, Confidentiality and Noncompete Agreement, dated
March 7, 2016, by and between Vojin Todorovic and Build-A-Bear Workshop, Inc. (incorporated by
reference from Exhibit 10.5 on our Current Report on Form 8-K, filed on March 11, 2016)
10.9*
10.10
Form of Indemnification Agreement between the Registrant and its directors and executive officers
(incorporated by reference from Exhibit 10.11 to our Registration Statement on Form S-1, filed on
August 12, 2004, Registration No. 333-118142)
Third Amendment to Loan Documents among the Registrant, Shirts Illustrated, LLC, Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, LLC (incorporated by reference from Exhibit 10.12 to our Registration Statement on
Form S-1, filed on August 12, 2004, Registration No. 333-118142)
10.10.1 Fifth Amendment to Loan Documents among the Registrant, Shirts Illustrated, LLC, Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, LLC (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K,
filed on July 10, 2006)
10.10.2 Sixth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc. Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., and Build-A-Bear Workshop UK Holdings Ltd., as borrowers, Build-A-Bear
Workshop Canada, Ltd. and US Bank National Association, as lender entered into on and effective
as of on June 19, 2007 (incorporated by reference from Exhibit 10.1 to our Current Report on Form
8-K filed on June 20, 2007)
10.10.3 Seventh Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc. Build-A-Bear Entertainment, LLC, and Build-A-Bear Retail
Management, Inc., as borrowers, and US Bank National Association, as lender entered into as of
on October 28, 2009 (incorporated by reference from Exhibit 10.1 to our Current Report on Form
8-K filed on October 29, 2009)
10.10.4 Eighth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of December 31, 2010 (incorporated by reference to Exhibit 10.1 to our Current Report
on Form 8-K filed on January 4, 2011)
10.10.5 Ninth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of December 30, 2011 (incorporated by reference from Exhibit 10.1 to our Current
Report on Form 8-K, filed on January 4, 2012)
10.10.6
Tenth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of June 30, 2012 (incorporated by reference from Exhibit 10.1 to our Current Report on
Form 8-K, filed on July 26, 2012)
66
10.10.7
10.10.8
10.10.9
Eleventh Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of December 21, 2012 (incorporated by reference from Exhibit 10.1 to our Current
Report on Form 8-K, filed on December 21, 2012)
Twelfth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of February 13, 2013 (incorporated by reference from Exhibit 10.1 to our Current Report
on Form 8-K, filed on February 14, 2013)
Thirteenth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of April 30, 2013 (incorporated by reference from Exhibit 10.1 to our Current Report on
Form 8-K, filed on May 2, 2013)
10.10.10
Fourteenth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of January 22, 2014 (incorporated by reference from Exhibit 10.1 to our Current Report
on Form 8-K, filed on January 23, 2014)
10.10.11
Fifteenth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of January 2, 2015 (incorporated by reference from Exhibit 10.1 to our Current Report
on Form 8-K, filed on January 7, 2015)
10.10.12
Joinder and Sixteenth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-
A-Bear Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., as Borrowers, and U.S. Bank National Association, as Lender, entered into
effective as of April 25, 2016 (incorporated by reference from Exhibit 10.1 to our Current Report on
Form 8-K, filed on April 28, 2016)
10.10.13
Seventeenth Amendment to Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., and Build-A-Bear Card Services, LLC, as Borrowers, and U.S. Bank National
Association, as Lender, entered into effective as of May 4, 2017 (incorporated by reference from
Exhibit 10.1 to our Current Report on Form 8-K, filed on May 8, 2017)
10.10.14
Letter Agreement amending Loan Documents between Build-A-Bear Workshop, Inc., Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail
Management, Inc., and Build-A-Bear Card Services, LLC, as Borrowers, and U.S. Bank National
Association, as Lender, entered into effective as of March 1, 2018
10.10.15 Fourth Amended and Restated Loan Agreement between the Registrant, Build-A-Bear Workshop
Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail Management, Inc.,
as borrowers, and U.S. Bank National Association, as lender, dated as of August 11, 2008
(incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K, filed on
August 13, 2008)
10.10.16 Fourth Amended And Restated Revolving Credit Note dated as of October 28, 2009 by the
Registrant, Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC (“BABE”), and Build-A-Bear
Retail Management, Inc., as borrowers, in favor of U.S. Bank National Association (incorporated by
reference from Exhibit 10.2 to our Current Report on Form 8-K, filed on August 13, 2008)
67
10.11
Standard Form Industrial Building Lease dated August 28, 2004 between First Industrial, L.P. and
the Registrant (incorporated by reference from Exhibit 10.35 to Pre-Effective Amendment No. 4 to
our Registration Statement on Form S-1, filed on October 5, 2004, Registration No. 333-118142)
10.11.1
Third Amendment to Lease between First Industrial, L.P. and Registrant, dated as of
November 21, 2007 (incorporated by reference from Exhibit 10.19.1 to our Annual Report on Form
10-K, filed on March 15, 2012)
10.11.2
Fourth Amendment to Lease between First Industrial, L.P. and Registrant, dated as of November
21, 2007 (incorporated by reference from Exhibit 10.19.2 to our Annual Report on Form 10-K, filed
on March 15, 2012)
10.11.3
Fifth Amendment to Lease between First Industrial, L.P. and Registrant, dated as of October 3, 2013
(incorporated by reference from Exhibit 10.13.3 to our Annual Report on Form 10-K for the year
ended January 2, 2016)
10.11.4
Sixth Amendment to Lease between First Industrial, L.P. and Registrant, dated as of
January 3, 2018
10.12
10.13
Facility Construction Agreement dated December 22, 2005 between the Registrant and Duke
Construction Limited Partnership (incorporated by reference from Exhibit 10.35 to our Annual Report
on Form 10-K, for the year ended December 31, 2005)
Real Estate Purchase Agreement dated December 19, 2005 between Duke Realty Ohio and the
Registrant (incorporated by reference from Exhibit 10.36 to our Annual Report on Form 10-K, for
the year ended December 31, 2005)
11.1
Statement regarding computation of earnings per share (incorporated by reference from Note 10 of
the Registrant’s audited consolidated financial statements included herein)
21.1
List of Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to our Annual
Report on Form 10-K, for the year ended December 31, 2016)
23.1
Consent of Ernst & Young LLP
31.1
Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
executed by the President and Chief Executive Officer)
31.2
Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Financial Officer)
32.1
Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the President and Chief Executive Officer)
32.2
Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the Chief Financial Officer)
101.INS XBRL Instance
101.SCH XBRL Extension Schema
101.CAL XBRL Extension Calculation
101.DEF XBRL Extension Definition
101.LAB XBRL Extension Label
101.PRE XBRL Extension Presentation
* Management contract or compensatory plan or arrangement
68
BUILD-A-BEAR WORKSHOP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 15, 2018
BUILD-A-BEAR WORKSHOP, INC.
(Registrant)
By: /s/ Sharon John
Sharon John
President and Chief Executive Officer
By: /s/ Voin Todorovic
Voin Todorovic
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Sharon John and Voin Todorovic, and each of them, his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and
stead, in any and all capacities to sign the Annual Report on Form 10-K of Build-A-Bear Workshop, Inc. (the
“Company”) for the fiscal year ended December 30, 2017 and any other documents and instruments incidental
thereto, together with any and all amendments and supplements thereto, to enable the Company to comply
with the Securities Act of 1934, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act
and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or
any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signatures
/s/ Craig Leavitt
Craig Leavitt
/s/ Maxine Clark
Maxine Clark
/s/ Robert L. Dixon, Jr.
Robert L. Dixon, Jr.
/s/ Anne Parducci
Anne Parducci
/s/ Sarah Personette
Sarah Personette
/s/ Coleman Peterson
Coleman Peterson
/s/ Michael Shaffer
Michael Shaffer
/s/ Sharon John
Sharon John
/s/ Voin Todorovic
Voin Todorovic
Title
Date
Non-Executive Chairman
March 15, 2018
Director
Director
Director
Director
Director
Director
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
Director and President and Chief Executive Officer March 15, 2018
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 15, 2018
69
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Build-A-Bear Workshop, Inc.
1954 Innerbelt Business Center Dr.
St. Louis, MO 63114
buildabear.com