Build-A-Bear Workshop, Inc. Reports Sixth Consecutive Quarter of Operating Improvement with Second Quarter Fiscal 2014 Results

Build-A-Bear Workshop, Inc. (NYSE:BBW) today reported results for the 2014 second quarter and twenty-six weeks ended June 28, 2014.

Second Quarter 2014 Highlights (13 weeks ended June 28, 2014):

• Consolidated net retail sales were $75.4 million while operating 10 fewer stores at quarter’s end compared to $80.4 million in the fiscal 2013 second quarter, a decrease of 7.7%, excluding the impact of foreign exchange;
• Consolidated comparable store sales decreased 4.9% and included a 4.0% decrease in North America and an 8.1% decrease in Europe;
• Retail gross margin expanded 220 basis points to 39.0% from 36.8% in the 2013 second quarter;
• Pre-tax loss was $4.0 million, an improvement from a pre-tax loss of $6.1 million in the 2013 second quarter;
• Net loss was $4.3 million, or $0.25 per share, an improvement from a net loss of $6.2 million, or $0.38 per share in the fiscal 2013 second quarter; and
• Adjusted net loss was $4.3 million, or $0.25 per share, an improvement from an adjusted net loss of $5.4 million, or $0.33 per share, in the 2013 second quarter. (See Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss).)

Sharon John, Build-A-Bear Workshop’s Chief Executive Officer commented, “I am pleased that our disciplined approach to the execution of our strategies produced our sixth consecutive quarter of improved operating performance. The second quarter is historically our smallest in terms of revenue, and therefore, it was critical to stay focused on our goal to improve profitability. For the first six months, we have delivered pre-tax income of $1.3 million marking the first time since 2008 that our Company has been profitable at the halfway point of the year.”

Ms. John continued, “While early, we have a positive sales trend in the third quarter and we are well-positioned for the back half of the year with a powerful lineup of hot licenses, proprietary concepts and holiday offerings. I am confident that the disciplined execution of our stated strategies will continue to drive sustainable profitability.”

Additional Second Quarter Highlights (13 weeks ended June 28, 2014):

• Total revenues were $76.2 million while operating 10 fewer stores at quarter’s end compared to $81.9 million in the 2013 second quarter, a decrease of 8.1%, excluding the impact of foreign exchange;
• Selling, general and administrative expense (“SG&A”) was $34.0 million, or 44.6% of total revenues. This compares to $36.9 million, or 45.1% of total revenues, including $0.9 million in management transition and store closing expenses in the fiscal 2013 second quarter. Excluding these costs, SG&A was 44.0% of total revenues in the 2013 second quarter.

First Six Months 2014 Highlights (26 weeks ended June 28, 2014):

• Total revenues were $174.2 million compared to $186.2 million in the first six months of 2013, a decrease of 8.6%, excluding the impact of foreign exchange;
• Consolidated net retail sales were $172.2 million, compared to $183.3 million in the first six months of fiscal 2013, a decrease of 7.4%, excluding the impact of foreign exchange;
• Consolidated comparable store sales decreased 3.4% and included a 2.8% decrease in North America and a 5.5% decrease in Europe;
• Retail gross margin expanded 220 basis points to 41.6% from 39.4% in the first six months of 2013;
• SG&A was $71.8 million, or 41.2% of total revenues, including $0.4 million in management transition and store closing expenses. This compares to $80.6 million, or 43.3% of total revenues, including $3.2 million in management transition and store closing expenses in the first half of fiscal 2013. Excluding these costs in both periods, SG&A was 41.0% of total revenues in the first six months of 2014, an improvement of 60 basis points from the prior year;
• Pre-tax income was $1.3 million, an improvement from a pre-tax loss of $6.0 million in the first six months of 2013;
• Net income was $0.7 million or $0.04 per diluted share, an improvement from a net loss of $6.2 million, or $0.38 per share in the first six months of fiscal 2013; and
• Adjusted net income was $1.1 million or $0.06 per diluted share, an improvement from an adjusted net loss of $3.1 million, or $0.19 per share in the first six months of fiscal 2013. (See Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss).)

Store Activity

During the quarter, the Company closed four stores and opened one to end the period with 313 company-owned stores, including 254 in North America and 59 in Europe. (See Company-Owned Store Activity Schedule.) The Company’s international franchisees ended the 2014 second quarter with 75 stores in 15 countries.

Balance Sheet

The Company ended the 2014 second quarter with cash and cash equivalents totaling $41.8 million and no borrowings under its revolving credit facility. Total inventory at quarter end was $43.5 million. Inventory per square foot decreased 6.7% as compared to the end of the second quarter of the prior year.

In 2014, the Company continues to expect capital expenditures to be between $12 million and $15 million and depreciation and amortization is expected to be approximately $18 million.

2014 Key Strategic Objectives:

The Company reported progress on its stated strategies:

• Optimize real estate to improve store productivity. Year-to-date in fiscal 2014, the Company has closed 11 stores transferring 16% of sales to remaining stores, consistent with past closures. The Company continues to expect to close approximately 15 stores in the fiscal year, primarily in North America. The Company will selectively upgrade stores in conjunction with lease renewals while reducing the cost of capital that is needed for the improvements. In addition, the Company expects to open six to eight pop-up stores ahead of the holiday season.
• Refine the consumer value equation by continuing to reposition its marketing programs. In the quarter, the Company expanded its integrated brand building marketing initiatives as it broadened its annual Huggable Heroes program which recognizes charitably-minded kids by partnering with the USO and their “Every Moment Counts” campaign. The elevated marketing resulted in strong consumer demand for its superhero merchandise collection and delivered over 80 million media impressions.
• Rationalize expense structure to leverage its SG&A expenses and enhance product margins with end-to-end improvements in its supply chain and ongoing value engineering of product designs. For the first half, retail gross margin increased to 41.6%, a 220 basis point improvement from the prior year and adjusted SG&A as a percent of total revenues was 41.0%, a 60 basis point improvement from the prior year.
• Build on core competencies and leverage brand equity into new revenue streams. The Company expects to make continual improvements to its high touch retail service model and customizable product offerings. It expects to lay the ground work to further leverage the strength of the Build-A-Bear brand as it begins to develop new product categories to generate incremental profit and revenue streams.

Today’s Conference Call Webcast

Build-A-Bear Workshop will host a live Internet webcast of its quarterly investor conference call at 9 a.m. ET today. The audio broadcast may be accessed at the Company’s investor relations Web site, http://IR.buildabear.com. The call is expected to conclude by 10 a.m ET.

A replay of the conference call webcast will be available in the investor relations Web site for one year. A telephone replay will be available beginning at approximately 12 p.m. ET on July 24, 2014, until 12 a.m. ET on August 7, 2014. The telephone replay is available by calling (858) 384-5517. The access code is 13586042.

About Build-A-Bear Workshop, Inc.:

Founded in St. Louis in 1997, Build-A-Bear Workshop, Inc. is the only global company that offers an interactive make-your-own stuffed animal retail-entertainment experience. There are approximately 400 Build-A-Bear Workshop stores worldwide, including company-owned stores in the U.S., Puerto Rico, Canada, the United Kingdom and Ireland, and franchise stores in Europe, Asia, Australia, Africa, the Middle East, and Mexico. The Company was named to the FORTUNE 100 Best Companies to Work For^® list for the sixth year in a row in 2014. Build-A-Bear Workshop (NYSE: BBW) posted total revenue of $379.1 million in fiscal 2013. For more information, call 888.560.BEAR (2327) or visit the Investor Relations section of its award-winning Web site at buildabear.com^®.

Forward-Looking Statements:

This press release contains forward looking statements that involve risks and uncertainties and the Company’s 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 the Company’s annual report on Form 10-K for the year ended December 28, 2013, as filed with the SEC, and the following:

All other brand names, product names, or trademarks belong to their respective holders.

* Non-GAAP Financial Measures

In this press release, the Company’s financial results are provided both in accordance with generally accepted accounting principles (GAAP) and using certain non-GAAP financial measures. In particular, the Company provides historic earnings (loss) and earnings (loss) per diluted share adjusted to exclude certain costs and accounting adjustments, which are non-GAAP financial measures. These results are included as a complement to results provided in accordance with GAAP because management believes these non-GAAP financial measures help identify underlying trends in the Company’s business and provide useful information to both management and investors by excluding certain items that may not be indicative of the Company’s core operating results. These measures should not be considered a substitute for or superior to GAAP results.