# Build-A-Bear Workshop Inc: Form 10-Q for the period ended Oct 29, 2022

- Company: [Build-A-Bear Workshop Inc](/companies/bbw.md) (CIK 1113809)
- Form: 10-Q
- Filed: 2022-12-08
- Accepted by EDGAR: Dec 8, 2022, 09:15 ET
- Period: 2022-10-29
- Accession: 0001437749-22-028696
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1113809/000143774922028696/bbw20220913_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1113809/000143774922028696/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-10-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-08-01 to 2022-10-29 | $104.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-30 to 2022-10-29 | $322.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-08-01 to 2022-10-29 | $50.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-30 to 2022-10-29 | $156.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-08-01 to 2022-10-29 | $54.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-30 to 2022-10-29 | $166.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-08-01 to 2022-10-29 | $44.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-30 to 2022-10-29 | $130.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2022-08-01 to 2022-10-29 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-30 to 2022-10-29 | $8.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-08-01 to 2022-10-29 | $7.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-02-01 to 2022-10-29 | $27.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-08-01 to 2022-10-29 | $0.51 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-30 to 2022-10-29 | $1.78 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-08-01 to 2022-10-29 | $0.51 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-30 to 2022-10-29 | $1.82 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-08-01 to 2022-10-29 | 14,760,586 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-30 to 2022-10-29 | 15,412,130 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-02-01 to 2022-10-29 | $11.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-08-01 to 2022-10-29 | $2.7m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2022-02-01 to 2022-10-29 | $6.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-02-01 to 2022-10-29 | $292.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2022-02-01 to 2022-10-29 | $24.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-10-29 | $12.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-10-29 | $126.6m | us-gaap:AssetsCurrent |
| Total assets | at 2022-10-29 | $259.8m | us-gaap:Assets |
| Current liabilities | at 2022-10-29 | $96.9m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2022-10-29 | $97.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,960 characters.

### Cautionary Notice Regarding Forward-Looking Statements

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, and we undertake no obligation to update these statements except as required by the federal securities laws. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, as filed with the SEC, and include the following:

- the COVID pandemic has had and is expected to continue to have an adverse effect on our business and results of operations through periodic factory closures, and other supply chain disruptions;
- we depend upon the shopping malls and tourist locations in which our corporately-managed stores and third-party retail locations are located to attract guests. If continued volatility leads to a decline in retail consumer traffic, it could adversely affect our financial performance and profitability;
- any continuing or sustained decline in general global economic conditions, caused by the pandemic, inflation, or otherwise, could lead to disproportionately reduced discretionary consumer spending and a corresponding reduction in demand for our products and have an adverse effect on our liquidity and profitability;
- 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 and drive consumer demand for key products and services;
- our profitability could be adversely affected by fluctuations in petroleum products prices;
- our business may be adversely impacted at any time by a variety of significant competitive threats;
- continuing inflationary pressures may increase supply chain costs, especially freight and fuel costs, and may reduce disposable income for consumers and demand for our products, therefore negatively impacting our sales 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;
- failure to successfully execute our omnichannel strategy and the cost of our investments in e-commerce and digital technology may materially adversely affect our financial condition and profitability;
- we are subject to risks associated with technology and digital operations;
- 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 revenue and profitability could be harmed;
- our company-owned distribution center that services the majority of our stores in North America and our third-party distribution center providers used in the western U.S. and Europe may be required to close and operations may experience disruptions or may operate inefficiently;
- we may not be able to evolve our store locations over time to align with market trends, successfully diversify our store models and formats in accordance with our strategic goals or otherwise effectively manage our overall portfolio of stores which could adversely affect our ability to grow and could significantly harm our profitability;
- we may not be able to operate our international corporately-managed locations profitability;
- we rely on a few global supply chain vendors to supply substantially all of our merchandise, and significant price increases or disruption in their ability to deliver merchandise could harm our ability to source products and supply inventory in our stores;
- our merchandise is manufactured by foreign manufacturers and we transact business in various foreign countries, and 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, tariffs and foreign currency fluctuations;

19

- if we are unable to effectively manage our international franchises, attract new franchises 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;
- we are subject to a number of risks related to disruptions, failures or security breaches of our information technology infrastructure. For example, a putative class action lawsuit was filed against us asserting claims under the Telephone Consumer Protection Act (the "TCPA") alleging that we continued to send marketing text messages to mobile phone numbers after those numbers had allegedly opted-out of receiving them. If we improperly obtain or are unable to protect our data or violate privacy or security laws such as the GDPR or the General Data Protection Regulation, the CCPA or the California Privacy Rights Act (as adopted), the TCPA, or expectations, we could be subject to additional lawsuits and liability as well as damage to our reputation;
- 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;
- 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;
- 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 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;
- fluctuations in our operating results could reduce our cash flow, or trigger restrictions under our credit agreement, and we may be unable to repurchase shares at all or at the times or in the amounts we desire, or the results of our share repurchase program may not be as beneficial as we would like;
- fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline;
- the market price of our common stock is subject to volatility, which could attract the interest of activist shareholders;
- 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;
- 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;
- we may be unsuccessful in acquiring businesses or engaging in other strategic transactions, which may negatively affect our financial condition and profitability.

### Overview

Build-A-Bear Workshop, Inc., a Delaware corporation, was formed in 1997 as a mall-based, experiential specialty retailer where children and their families could create their own stuffed animals. Over the last nearly 25 years, Build-A-Bear has become a brand with high consumer awareness and positive affinity with over 200 million furry friends made by guests. We are leveraging this brand strength to strategically evolve our brick-and-mortar retail footprint beyond traditional malls with a versatile range of formats and locations including tourist destinations, expand into international markets primarily via a franchise model, and broaden the consumer base beyond children by adding teens and adults with entertainment/sports licensing, collectible and gifting offerings. Build-A-Bear's pop-culture and multi-generational appeal have also played a key role in our digital transformation which includes a meaningful e-commerce/omni-channel business that has delivered sustained growth, engaging consumer loyalty program and robust digital marketing and content capabilities with industry-leading partners. As of October 29, 2022, we had 347 corporately-managed stores globally and 3 seasonal locations, 65 locations operating through our "third-party retail" model in which we sell our products on a wholesale basis to other companies that then, in turn, execute our retail experience, and 66 international franchised stores under the Build-A-Bear Workshop brand. In addition to these stores, we sell products on our company-owned e-commerce sites and third-party marketplace sites, our franchisees sell products through sites that they manage as well as other third-party marketplace sites and other parties sell products on their sites 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 U.S., Canada, the U.K., and Ireland and two e-commerce sites;
- Commercial – Transactions with other businesses, mainly comprised of wholesale product sales to third-party retailers and licensing our intellectual property, including entertainment properties, for third-party use; and
- International franchising – Royalties as well as development fees and the sales from products and fixtures from other international operations under franchise agreements.

Selected financial data attributable to each segment for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

### Business Update

Build-A-Bear Workshop offers interactive entertainment experiences via both physical and e-commerce engagement, targeting a range of consumer segments and purchasing occasions through digitally-driven, diversified omnichannel capabilities. We operate a vertical retail channel with stores that feature a unique combination of experience and product in which guests can "make their own stuffed animals" by participating in the stuffing, fluffing, dressing, accessorizing, and naming of their teddy bears and other stuffed animals. We also operate e-commerce sites that focus on gift-giving, collectible merchandise and licensed products that appeal to consumers that have an affinity for characters from a range of licensed properties. Over the last 25 years, Build-A-Bear has become a brand with high consumer awareness and positive affinity. We believe there are opportunities to leverage this brand strength, pop-culture status and multi-generational appeal and generate incremental revenue and profits through licensing our intellectual properties through content and entertainment development for kids and adults while also offering products at wholesale and in non-plush consumer categories through outbound licensing agreements with leading manufacturers.

In the second and third quarters of fiscal 2022, we experienced unfavorable foreign currency effects due to the British Pound weakening against the U.S. Dollar. This unfavorable effect negatively impacted European revenue compared to the fiscal 2021 second and third quarters. We anticipate this unfavorable effect to continue at least into the fourth quarter of fiscal 2022.

We believe we have built the infrastructure to respond with greater agility to deal with ongoing and future potential uncertainty and we expect to deliver continued growth in total revenues and profit in fiscal 2022 compared to fiscal 2021. While we believe that we have seen benefits from pandemic-driven factors such as pent-up demand and stimulus packages, we believe that the initiatives and investments that were put in place prior to the pandemic, and in many cases accelerated during the pandemic, are driving improved results, which we expect to continue. We remain focused on our strategic priorities which are centered primarily on three key areas:

- Further acceleration of a broad-reaching and comprehensive digital transformation including content and entertainment initiatives.We expect to more effectively use our expanded digital capabilities and platforms to inform and drive marketing and content campaigns and deliver personalized experiences and sales messaging. We also plan to expand our addressable market by reaching beyond the core kid base and continue to acquire new tween, teen, and adult consumers by offering unique affinity offerings and expanding purchase occasions. We prepared for and launched the planned updated mobile-first version of our e-commerce site with extended A/B testing and algorithm refinements being made throughout the period on multiple points from the landing page to checkout. While some sales disruption is expected during this type of upgrade, we saw a greater than planned decline in digital demand in the quarter, which could also be related to what seems to be a macro consumer trend back to in-person shopping, simply shifting some of our demand to our retail locations given the strength of our total sales growth in the quarter. However, our most recent e-commerce trends have shown improvement and have returned to a positive trend in the current fourth quarter. In addition, we plan to continue to utilize digital media, content and entertainment as marketing and brand-building tools to engage consumers and create value. Although our third quarter e-commerce sales were down from the third quarter of 2021, the results are up 105% compared to the third quarter of fiscal 2019, which was prior to the implementation of key digital initiatives. The year-over-year decrease in e-commerce sales were impacted by a heavier mix of e-commerce sales relative to brick-and-mortar store sales due to the ongoing impact of the pandemic in 2021 as well as the strong launch of a key licensed product collection in 2021.
- Continuing to leverage our expanded omnichannel capabilities while further evolving retail experiences and purchase occasions. As of October 29, 2022, 23 new Build-A-Bear Workshop retail locations have been opened demonstrating the progress we have made exceeding our goal of opening approximately 20 new locations through a combination of corporately-managed and third-party retail this fiscal year. We expect to finish fiscal 2022 with a net increase in the number of stores in North America inclusive of third-party retail sites and to have fewer locations in Europe. Combined across geographies and business models, we plan to have more total locations at the end of this fiscal year compared to the end of 2021. We have made a concerted effort to shift to non-traditional locations including family-centric tourist sites and now have approximately 35% of total retail locations in non-traditional settings. As consumers have embraced a return to physical and in-person experiences and travel, in general, key metrics in our non-traditional locations have continued to outpace traditional retail locations. We also continue to develop innovative experiences to expand our brand reach. This includes Build-A-Bear vending machines, also known as ATMs or automatic teddy machines. We expect to have approximately 10 ATMs by the end of this year with more than half of them in airports through our relationship with Hudson Group, a leader in travel retail throughout North America. In addition, 2022 marks the 25th anniversary since Build-A-Bear Workshop was founded and we plan to capitalize on the occasion to create interest, leverage nostalgia and drive incremental purchases.
- Optimizing our solid financial position including a strong balance sheet to support our business and make investments aligned with the strategy outlined above. We plan to maintain disciplined expense management particularly in light of recent inflationary pressures, wage increases and supply chain challenges. We are also focused on ongoing lease negotiations as we continue to evolve our real estate portfolio with new locations, formats and business models. In addition, we expect to continue to strategically manage our capital to support key initiatives and innovative developments designed to deliver long-term profitable growth while returning value to shareholders through actions such as the recent completion of the share repurchase program that was adopted in November 2021, and with plans to buyback additional shares through a newly-authorized share repurchase program announced in August 2022, which demonstrates the confidence our Board of Directors continues to have in our strategy and future.

### Retail Stores:

The table below sets forth the number of Build-A-Bear Workshop corporately-managed stores in North America, Europe and Asia for the periods presented:

|  | Thirty-nine weeks ended October 29, 2022 North America | Europe | Asia | Total | October 30, 2021 North America | Europe | Asia | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning of period | 305 | 41 | - | 346 | 305 | 48 | 1 | 354 |
| Opened | 8 | - | - | 8 | 3 | - | - | 3 |
| Closed | (1) | (6) | - | (7) | (3) | (4) | (1) | (8) |
| End of period | 312 | 35 | - | 347 | 305 | 44 | - | 349 |

As of October 29, 2022, 45% of our corporately-managed stores were in an updated Discovery format. 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. The future of our retail store fleet may include expansion into more non-traditional locations, including concourse format shops and by expansion in other locations outside of traditional malls.

### International Franchise Stores:

Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our corporately-managed stores. As of October 29, 2022, we had six master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 10 countries.

The number of franchised stores opened and closed for the periods presented below are summarized as follows:

|  | Thirty-nine weeks ended October 29, 2022 | October 30, 2021 |
| --- | ---: | ---: |
| Beginning of period | 72 | 71 |
| Opened | 9 | 6 |
| Closed | (15) | (4) |
| End of period | 66 | 73 |

In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements. We source fixtures and other supplies for our franchisees from China which significantly reduces the capital and lowers 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.

### Results of Operations

The following table sets forth, for the periods indicated, selected income statement 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, commercial revenue, international franchising, respectively, as well as immaterial rounding:

### BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

### CONDENSED CONSOLIDATED STATEMENTS OF INCOME

### (Unaudited)

| Revenues: | Thirteen weeks ended October 29, 2022 | October 30, 2021 | Thirty-nine weeks ended October 29, 2022 | October 30, 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net retail sales | 95.0% | 96.2% | 95.4% | 96.6% |
| Commercial revenue | 3.9 | 2.9 | 3.9 | 2.8 |
| International franchising | 1.1 | 0.9 | 0.7 | 0.6 |
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 |
| Costs and expenses: |  |  |  |  |
| Cost of merchandise sold - retail (1) | 47.7 | 48.0 | 48.5 | 47.3 |
| Cost of merchandise sold - commercial (1) | 46.8 | 38.6 | 46.7 | 41.6 |
| Cost of merchandise sold - international franchising (1) | 77.0 | 65.2 | 67.4 | 69.2 |
| Total cost of merchandise sold | 48.0 | 47.9 | 48.6 | 47.3 |
| Consolidated gross profit | 52.0 | 52.1 | 51.4 | 52.7 |
| Selling, general and administrative | 42.5 | 43.8 | 40.4 | 41.9 |
| Interest expense, net | 0.0 | (0.0) | 0.0 | 0.0 |
| Income before income taxes | 9.5 | 8.3 | 11.1 | 10.9 |
| Income tax expense | 2.3 | 2.1 | 2.6 | 2.6 |
| Net income | 7.1 | 6.2 | 8.5 | 8.2 |
| Retail Gross Margin (2) | 52.3% | 52.0% | 51.5% | 52.7% |

(1) Cost of merchandise sold – retail is expressed as a percentage of net retail sales. Cost of merchandise sold – commercial is expressed as a percentage of commercial revenue. Cost of merchandise sold – international franchising is expressed as a percentage of international franchising revenue.

(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.

23

### Thirteen weeks ended October 29, 2022 compared to thirteen weeks ended October 30, 2021

*Total revenues.* Consolidated revenues increased 9.8%, primarily driven by an 13.7% increase in North America and partially offset by a 12.9% decrease in Europe. The overall revenue growth was primarily driven by increased retail transactions in North American brick and mortar stores resulting from an increase in consumer traffic, as well as increases in the commercial and international franchising segments' revenue.

Net retail sales for the thirteen weeks ended October 29, 2022 were $99.2 million, compared to $91.6 million for the thirteen weeks ended October 30, 2021, an increase of $7.6 million, or 8.3%, compared to the prior year period. The components of this increase are as follows (dollars in millions):

| Impact from: | Thirteen weeks ended October 29, 2022 |
| --- | ---: |
| Existing stores | $17,203 |
| Digital sales | (6,985) |
| New stores | 1,136 |
| Store closures | (1,701) |
| Gift card breakage | 229 |
| Foreign currency translation | (2,504) |
| Other | 299 |
| Total Change | $7,678 |

The retail revenue increase was primarily the result of an increase in demand for our product and in-person interactive experience (partially offset by a decrease in digital sales), select strategic price increases, and lower promotional activity. The negative foreign currency translation effect is due to the British Pound weakening against the US Dollar during the fiscal 2022 third quarter. This negative foreign currency effect has, in turn, decreased European revenue compared to the fiscal 2021 third quarter.

Commercial revenue was $4.2 million for the thirteen weeks ended October 29, 2022 compared to $2.8 million for the thirteen weeks ended October 30, 2021. The $1.4 million increase is primarily the result of increased sales volume from our commercial accounts through our third-party retail model.

International franchising revenue was $1.1 million for the thirteen weeks ended October 29, 2022 compared to $0.8 million for the thirteen weeks ended October 30, 2021. The $0.3 million increase is primarily due to an overall increase in sales from franchisees.

*Retail gross margin.* Retail gross margin dollars increased $4.3 million to $51.9 million from $47.6 million for the thirteen weeks ended October 30, 2021. The retail gross margin rate increased 30 basis points compared to the prior year primarily driven by increased leverage of fixed occupancy, distribution, and labor costs driven by higher sales.

*Selling, general and administrative.* Selling, general and administrative ("SG&A") expenses were $44.4 million, or 42.5% of consolidated revenue, for the thirteen weeks ended October 29, 2022, compared to $41.7 million, or 43.8% of consolidated revenue, for the thirteen weeks ended October 30, 2021. The increase in overall expense was driven by higher store labor costs to service the increased sales demand within the quarter. Additionally, the change reflects an increase in variable costs driven by sales growth initiatives inclusive of higher marketing spend.

*Interest expense.* Interest expense was $6,000 for the thirteen weeks ended October 29, 2022 compared to interest income of $2,000 for the thirteen weeks ended October 30, 2021, an immaterial difference.

*Provision for income taxes*. Income tax expense was $2.4 million with a tax rate of 24.6% for the thirteen weeks ended October 29, 2022 as compared to $2.0 million with a tax rate of 25.1% for the thirteen weeks ended October 30, 2021. In the third quarter of fiscal 2022, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In addition, the Company remains in a full valuation allowance in certain foreign jurisdictions. In the third quarter of fiscal 2021, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In addition, while the Company was still in a full valuation allowance globally, it recorded tax expense on the pretax income earned based on its project current tax expense.

### Thirty-nine weeks ended October 29, 2022 compared to thirty-nine weeks ended October 30, 2021

*Total revenues.* Consolidated revenues increased 14.6%, primarily driven by a 14.2% increase in North America and partially offset by a 2.2% decrease in Europe. The overall revenue growth was primarily driven by increased retail transactions in brick and mortar stores which benefitted from higher consumer traffic, as well as an increase in the commercial and international franchising segments' revenue.

Net retail sales for the thirty-nine weeks ended October 29, 2022 were $308.0 million, compared to $272.1 million for the thirty-nine weeks ended October 30, 2021, an increase of $35.9 million, or 13.2%, compared to the prior year period. The components of this increase are as follows (dollars in millions):

| Impact from: | Thirty-nine weeks ended October 29, 2022 |
| --- | ---: |
| Existing stores | $49,722 |
| Digital sales | (10,198) |
| New stores | 2,915 |
| Store closures | (4,151) |
| Gift card breakage | 873 |
| Foreign currency translation | (4,287) |
| Other | 1,074 |
| Total Change | $35,949 |

The retail revenue increase was primarily the result of an increase in demand for our product and in-person interactive experience (partially offset by a decrease in digital sales), select strategic price increases, and lower promotional activity. The negative foreign currency translation effect is due to the British Pound weakening against the US Dollar for the thirty-nine weeks ended October 29, 2022.

Commercial revenue was $12.5 million for the thirty-nine weeks ended October 29, 2022 compared to $7.8 million for the thirty-nine weeks ended October 30, 2021. The $4.7 million increase is primarily the result of increased sales volume from our commercial accounts through our third-party retail model.

International franchising revenue was $2.4 million for the thirty-nine weeks ended October 29, 2022 compared to $1.7 million for the thirty-nine weeks ended October 30, 2021. The $0.7 million increase is primarily due to an overall increase in sales from franchisees.

*Retail gross margin.* Retail gross margin dollars increased $15.3 million to $158.7 million from $143.4 million for the thirty-nine weeks ended October 30, 2021. The retail gross margin rate decreased 120 basis points compared to the prior year primarily driven by an increase in inflationary pressures mostly shown in significant freight increases, while being partially offset by increased leverage of fixed occupancy, distribution, and labor costs driven by higher sales.

*Selling, general and administrative.* Selling, general and administrative ("SG&A") expenses were $130.3 million, or 40.4% of consolidated revenue, for the thirty-nine weeks ended October 29, 2022, compared to $117.9 million, or 41.9% of consolidated revenue, for the thirty-nine weeks ended October 30, 2021. The increase in overall expense was driven by higher store labor costs to service the increased retail sales demand for the year to date. Additionally, the change reflects an increase in variable costs driven by sales growth initiatives inclusive of higher marketing spend.

*Interest expense.* Interest expense was $27,000 for the thirty-nine weeks ended October 29, 2022 compared to interest expense of $11,000 for the thirty-nine weeks ended October 30, 2021, an immaterial difference.

*Provision for income taxes*. Income tax expense was $8.2 million with a tax rate of 23.1% for the thirty-nine weeks ended October 29, 2022 as compared to $7.4 million with a tax rate of 24.3% for the thirty-nine weeks ended October 30, 2021. In the first thirty-nine weeks of fiscal 2022, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In addition, the Company remains in a full valuation allowance in certain foreign jurisdictions. In the first thirty-nine weeks of fiscal 2021, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In addition, while the Company was still in a full valuation allowance globally, it recorded tax expense on the pretax income earned based on its project current tax expense.

### Earnings before Interest, Taxes, Depreciation, and Amortization

We believe that earnings before interest, taxes, depreciation, and amortization ("EBITDA") provides meaningful information about our operational efficiency by excluding the impact of differences in tax jurisdictions and structures, debt levels, and capital investment. Additionally, this measure is the metric used for portions of the Company's incentive compensation structure. This measure is not in accordance with, or an a lternative to, GAAP. The most comparable GAAP measure is income before income taxes, or pre-tax income. EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other companies. The following table sets forth, for the periods indicated, the components of EBITDA (dollars in millions):

|  | Thirteen weeks ended October 29, 2022 | October 30, 2021 | Thirty-nine weeks ended October 29, 2022 | October 30, 2021 |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes (pre-tax) | 9,888 | 7,907 | 35,722 | 30,561 |
| Interest (income) expense, net | 6 | (2) | 27 | 11 |
| Depreciation and amortization expense | 3,017 | 3,033 | 9,295 | 9,152 |
| Earnings before interest, taxes, depreciation, and amortization | $ 12,911 | $ 10,938 | $ 45,044 | $ 39,724 |

EBITDA for the thirteen weeks ended October 29, 2022 increased $2.0 million to $12.9 million from $10.9 million in the fiscal 2021 third quarter. The increase in EBITDA is primarily driven by an increase in consolidated revenues, allowing for a leverage of fixed occupancy and payroll costs compared to the prior period.

EBITDA for the thirty-nine weeks ended October 29, 20222 was $45.0 million, compared to $39.7 million for the thirty-nine weeks ended October 30, 2021, an increase of $5.3 million compared to the prior year period. The overall increase in EBITDA was due to increased consolidated revenues, allowing for a leverage of fixed occupancy and payroll costs compared to the prior period.

### Seasonality and Quarterly Results

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) changes in general economic conditions (including as a result of the pandemic) and consumer spending patterns; (2) changes in store operations in response to the pandemic apart from its effect on the general economy, including temporary store closures required by local governments; (3) increases or decreases in our existing store and e-commerce sales; (4) fluctuations in the profitability of our stores; (5) the timing and frequency of the sales of licensed products tied to major theatrical releases (including the cancellation or delay of such releases due to the pandemic or other external factors) and our marketing initiatives, including national media and other public relations events; (6) changes in foreign currency exchange rates; (7) the timing of new store openings, closings, relocations and remodeling and related expenses; (8) changes in consumer preferences; (9) the effectiveness of our inventory management; (10) the actions of our competitors or mall anchors and co-tenants; (11) seasonal shopping patterns and holiday and vacation schedules; (12) disruptions in store operations due to civil unrest; and (13) weather conditions.

The timing of store closures, relocations, remodels, openings and re-openings may result in fluctuations in quarterly results based on the revenues and expenses associated with each store location. Expenses related to store closings are typically incurred in stages: when the decision is made to close the store typically associated with a lease event such as an expiration or lease triggered clause; when the closure is communicated to store associates; and at the time of closure. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening.

Because our retail operations include toy products which have sales that historically peak in relation to the holiday season as part of our revenue model, our sales have historically been highest in our fourth quarter. The timing of holidays and school vacations can impact our quarterly results. We cannot provide assurance 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. For example, the 2014 fiscal fourth quarter had 14 weeks.

### Liquidity and Capital Resources

As of October 29, 2022, we had a consolidated cash balance of $12.0 million, 33% of which was domiciled within the U.S. Historically, our cash requirements have been primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, investments in information technology infrastructure and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations.

A summary of our operating, investing and financing activities is shown in the following table (dollars in thousands):

|  | Thirty-nine weeks ended October 29, 2022 | October 30, 2021 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $11,247 | $17,235 |
| Net cash used in investing activities | (6,752) | (4,644) |
| Net cash (used in) provided by financing activities | (26,135) | 924 |
| Effect of exchange rates on cash | 818 | 146 |
| (Decrease) increase in cash, cash equivalents, and restricted cash | $(20,822) | $13,661 |

*Operating Activities.* Cash provided by operating activities decreased $6.0 million for the thirty-nine weeks ended October 29, 2022, as compared to the thirty-nine weeks ended October 30, 2021. This decrease in cash from operating activities was primarily driven by an increase in cash spent on inventory purchases, as we proactively and strategically accelerated the timing of our order placement to mitigate the continuing inflationary pressures that were experienced during the thirty-nine weeks ended October 29, 2022, which was offset by increased sales volume, resulting in higher net income.

*Investing Activities.* Cash used in investing activities increased $2.1 million for the thirty-nine weeks ended October 29, 2022 as compared to the thirty-nine weeks ended October 30, 2021. This increase in cash used in investing activities was primarily driven by an increase in spending on capital expenditures related to information technology projects and new store openings.

*Financing Activities.* Cash used in financing activities increased $27.1 million for the thirty-nine weeks ended October 29, 2022, as compared to the thirty-nine weeks ended October 30, 2021. This increase in cash used in financing activities was driven primarily by repurchases of our common stock for $24.2 million for the thirty-nine weeks ended October 29, 2022.

*Capital Resources:* We have a revolving credit and security agreement with PNC Bank, as agent, that provides for a secured revolving loan in aggregate principal of up to $25.0 million, subject to a borrowing base formula. As of October 29, 2022, borrowings under the agreement bore interest at (a) a base rate determined under the agreement, or (b) the borrower's option, at a rate based on LIBOR, plus in either case a margin based on average undrawn availability as determined in accordance with the agreement. As of October 29, 2022, our borrowing base was $25.0 million. As a result of a $500,000 letter of credit against the line of credit at the end of the fiscal 2022 third quarter, approximately $24.5 million was available for borrowing. We had no outstanding borrowings as of October 29, 2022. On November 21, 2022, we entered into a Second Amendment to the Revolving Credit and Security Agreement with PNC Bank. In light of the upcoming cessation of LIBOR, the Second Amendment (i) changed the interest calculation from a LIBOR based reference rate to a SOFR based reference rate, (ii) updated the mechanics to use a future reference rate in the event that SOFR is no longer available, (iii) updated various provisions regarding compliance with sanctions and anti-money laundering laws, and (iv) implemented certain other technical amendments. As a result, any borrowings under the Credit Agreement will bear interest by reference to, at the Borrower’s option, either (a) a base rate determined under the Credit Agreement, or (b) at a rate based on SOFR, plus in either case a margin based on average undrawn availability as determined in accordance with the Credit Agreement, as such rates and floor were reduced by the First Amendment.

Most of our corporately-managed retail stores are located within shopping malls and all are operated under leases classified as operating leases. Extensions or modifications of existing leases in North America have shifted to shorter term leases, many of which include variable rent structures, to provide flexibility in aligning stores with market trends. 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 new 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 before the end of its initial term. 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 U.K. and Ireland typically have terms of ten years and generally contain a provision whereby every fifth year the rental rate can be adjusted upward to reflect the current market rates if they have increased. The leases typically provide the lessee with the first right for renewal at the end of the lease term. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are invoiced monthly or quarterly and paid in advance.

Capital spending through the thirty-nine weeks ended October 29, 2022 totaled $6.8 million for information technology projects and new store openings, and we expect to spend approximately $12 to $14 million on capital expenditures in fiscal 2022.

We note that total inventory at quarter end was $88.3 million, an increase of $26.4 million from the end of the fiscal 2021 third quarter. We are comfortable with the composition and level of its inventory which supports increased consumer demand and critical seasonal products. We continue to expect to end the year with total inventory below the 2021 fiscal year-end level.

We have various contractual or other obligations, including operating lease commitments and obligations under deferred compensation plans. As of October 29, 2022, we had purchase obligations totaling approximately $92.9 million, of which $27.9 million are due in the next 12 months. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.

We have utilized $4.8 million in cash to repurchase 336,935 shares in the thirteen weeks ended October 29, 2022 and utilized $24.2 million in cash to repurchase 1,540,220 shares in the thirty-nine weeks ended October 29, 2022. On August 9, 2022, we completed the $25.0 million share repurchase program that was approved by the Board of Directors on November 30, 2021.

On August 31, 2022, we announced that our Board of Directors authorized a share repurchase program of up to $50.0 million. The primary source of funding for the share repurchase program is expected to be cash on hand. The timing and amount of share repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors. The program authorizes us to repurchase shares through August 31, 2025, 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. We believe that the multi-year, multi-million dollar share repurchase program is reflective of the strong confidence that the Board of Directors has in the strategy and future of the Company. As of October 29, 2022, the Company has utilized $3.5 million in cash to repurchase 256,377 shares under this new share repurchase program. Completion of the stock repurchase program that was adopted in November 2021 along with the commencement of the stock repurchase program that was adopted in August 2022 resulted in the Company repurchasing nearly 11% of the shares outstanding at the end of the fiscal 2021 third quarter.

### Off-Balance Sheet Arrangements

None.

### Inflation

The impact of inflation on the Company's business operations was seen throughout fiscal 2021 and began to have an adverse impact on our business in the second quarter of fiscal 2022, mainly in freight and other supply chain related costs. However, we continue to take mitigating actions, such as select strategic price increases on highly sought-after products, accelerated purchases of inventory, and leveraging occupancy and distribution costs. We expect the inflationary pressures experienced in the third quarter of fiscal 2022 to continue for the rest of fiscal 2022. We continue to monitor the impact of inflation on our business operations on an ongoing basis and may need to adjust our prices further to mitigate the impacts of changes to the rate of inflation during 2022 or in future years. Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results. Inflationary pressures may be exacerbated by higher transportation costs due to war and other geopolitical conflicts, such as the current China-Taiwan conflict. We cannot provide an estimate or range of impact that such inflations may have our future results of operations. However, if we are unable to recover the impact of these costs through price increases to our guests, or if consumer spending decreases as a result of inflation, our business, results of operations, financial condition and cash flows may be adversely affected. In addition, ongoing inflation in product costs may result in lower gross margin rates due to the need to maintain higher inventory reserves.

### Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP 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.

We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates, including those related to long-lived assets, leases, revenue recognition and income taxes, are reevaluated on an ongoing basis, 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 critical accounting policies and estimates are discussed in and should be read in conjunction with our Annual Report on Form 10-K for the year ended January 29, 2022 as filed with the SEC on April 14, 2022, which includes audited consolidated financial statements for our 2021 and 2020 fiscal years. There have been no material changes to the critical accounting estimates disclosed in the 2021 Form 10-K.

### Recent Accounting Pronouncements

See Note 1 to the Condensed Consolidated Financial Statements — Basis of Presentation — Recent Accounting Pronouncements – Adopted in the Current Year as disclosed in our Annual Report on Form 10-K for the year ended January 29, 2022 as filed with the SEC on April 14, 2022.

## Market risk

As filed, 225 characters.

There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk as disclosed in our Annual Report on Form 10-K for the year ended January 29, 2022 as filed with the SEC on April 14, 2022.

## Controls and procedures

As filed, 3,348 characters.

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 of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us 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 October 29, 2022, the end of the period covered by this Quarterly Report.

It should be noted that our management, including the President and Chief Executive Officer and 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.

*Changes in Internal Control Over Financial Reporting.* The Company’s management, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s 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, the Company’s internal control over financial reporting. There have been no changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 179 characters.

There have been no material changes to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended January 29, 2022 as filed with the SEC on April 14, 2022.

Filed Dec 8, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-028696. Last ingested by Listed: Nov 12, 2026, 17:30 ET. No prices; not investment advice.