BUILD-A-BEAR WORKSHOP, INC. 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. Business OverviewBuild-A-Bear Workshop started 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 around the world. We seek to provide outstanding guest service and experiences across all channels and touch points including our stores, our e-commerce sites, our mobile sites and apps as well as traditional, digital and social media. We believe the hands-on and interactive nature of our stores, our personal service model and engaging digital shopping experiences result in guests forming an emotional connection with our brand which has multi-generational appeal that captures today's zeitgeist including desire for experience, personalization and "DIY" while being recognized as trusted, giving, and a part of pop culture. 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 own 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 entertainment, sports, art, and gaming properties. Our engaging digital purchasing experiences include our online "Bear-Builder", the animated "Bear Builder 3D Workshop", an age-gated adult-focused "Bear Cave" and the recently introduced "HeartBox" gift site. Our retail stores also act as "mini distribution centers" that provide efficient omnichannel support for our growing digital demand. The primary consumer target for our retail stores is families with children while our e-commerce sites focus on collectors and gift givers that are primarily tweens, teens and adults. We have also extended our business model to develop a circle of continuous engagement by leveraging our brand strength and owned intellectual properties through the creation of engaging content for kids and adults while also offering products at wholesale and in non-plush consumer categories via outbound licensing agreements with leading manufacturers. Our strategy includes leveraging our brand strength to continue 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 the Company's digital transformation with a focus on accelerating our initiatives to expand our digitally-driven, diversified omnichannel capabilities that offer interactive entertainment experiences via both physical and e-commerce engagement, targeting a range of consumer segments and purchasing occasions. As ofJanuary 29, 2022 , we had 346 corporate-managed stores globally, 61 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 72 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.
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
as
• 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 as well as product and fixture
sales from other international operations under franchise agreements.
23--------------------------------------------------------------------------------
Selected financial data attributable to each segment for fiscal 2021 and 2020 are presented in Note 15 - Segment Information to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
At the beginning of fiscal 2021, ourU.S. store portfolio was open and operating while our stores in theU.K. ,Ireland andCanada remained temporarily closed due to the pandemic. InApril 2021 , stores in theU.K. reopened as the government lifted lockdown restrictions resulting in almost all of our stores operating at the end of the 2021 first fiscal quarter with the remaining stores in theU.K. andIreland opening in the second fiscal quarter thereby ending that period with all stores open in those geographies. The majority of our Canadian stores remained temporarily closed at the beginning of the second quarter with the majority reopening inJune 2021 and with all stores ending the second fiscal quarter open. Our year-over-year results discussed below are impacted by prior year store closures and operating hour reductions as a result of the pandemic. Our consolidated net income was$47.3 million in fiscal 2021 compared to net loss of$23.0 million in fiscal 2020. We believe that we have a concept that has broad demographic appeal which, for North American stores open for the entire year averaged net retail sales per store of$1.0 million and$0.6 million in fiscal 2021 and 2020, respectively. We use store contribution as the key performance metric for our retail stores. Consolidated store contribution, which consists of store location net retail sales less cost of product, marketing and store related expenses, as a percentage of net retail sales was 27.3% for fiscal 2021 and 8.5% for fiscal 2020, the latter reflecting the negative impact of COVID. Non-store general and administrative expenses are excluded as are our revenues and expenses associated with e-commerce sites and adjustments to deferred revenue related to gift card breakage and our loyalty program. The diversification of our real estate portfolio and shift to smaller more flexible store formats may result in lower average store revenue but is expected to improve store contribution on a long-term basis. See "Non-GAAP Financial Measures" for a reconciliation of store contribution to net income. The increase in consolidated store contribution as a percent of net retail sales in fiscal 2021 compared to fiscal 2020 was due to increased retail gross margin by 1,240 basis points primarily driven by increased leverage of fixed occupancy costs as a percent of revenue by 1,048 basis points. We ended fiscal 2021 with no borrowings under our credit agreement and with$32.8 million in cash, cash equivalents and restricted cash after investing$8.1 million in capital projects throughout the year. InNovember 2021 , our Board of Directors authorized a share repurchase program of up to$25 million and as ofJanuary 29, 2022 , we had utilized$4.4 million in cash to repurchase 245,554 shares under the program. Additionally, we paid a special dividend of$19.9 million to shareholders of record as ofDecember 10, 2021 .
Following is a description and discussion of the major components of our statement of operations:
Revenues
Net retail sales, commercial revenue and international franchising: See Note 3 - Revenue to the consolidated financial statements for additional accounting information.
We use net retail sales per square foot as a performance measure for our business. The following table details net retail sales per square foot for stores open throughout the fiscal year other than periods of temporary government-mandated closures, for the periods presented:
Fiscal year ended
January 29, January 30,
Net retail sales per square foot 2022 2021
North America (1) $ 404 $ 234
United Kingdom (2) £ 418 £ 199
(1) Net retail sales per square foot in
from stores open throughout the entire period in
e-commerce sales, divided by the total leased square footage of such stores.
(2) Net retail sales per square foot in the
stores open throughout the entire period in the
sales, divided by the total selling square footage of such stores.
24--------------------------------------------------------------------------------
Costs and Expenses
Cost of merchandise sold: Cost of merchandise sold is driven primarily by our
retail segment. 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 (if not disclosed separately due to materiality) (See Note
6 - Property and Equipment, net to the consolidated financial statements for
additional accounting information regarding store asset impairment), 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. For the commercial segment, cost of merchandise includes the cost of
merchandise sold to third-party retailers on a wholesale basis for sale within
their stores. For the franchise segment, cost of merchandise includes the sale
of furniture, fixtures, and supplies to our franchise partners.
Selling, general and administrative expense ("SGA"): These expenses include
store payroll and benefits, advertising, credit card fees, store supplies and
normal store pre-opening and 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 and the amortization of other assets. Certain store expenses such
as credit card fees historically have increased or decreased proportionately
with net retail sales. In addition, bad debt expenses and accounts receivable
related charges are recorded in SGA. Additionally, as a result of COVID,
governments enacted relief legislation and stimulus packages to help combat the
economic effects of the pandemic through such things as payroll expense
reimbursement and business grants, whose effects are recorded within SGA.
Stores
Corporately-managed locations:
The number ofBuild-A-Bear Workshop stores in theU.S. ,Canada andPuerto Rico (collectively,North America ), theU.K. andIreland (collectively,Europe ) andChina for the last two fiscal years is summarized as follows: Fiscal year ended January 29, 2022 January 30, 2021 North North America Europe China Total America Europe China Total Beginning of period 305 48 1 354 316 55 1 372 Opened 5 - - 5 3 - - 3 Closed (5 ) (7 ) (1 ) (13 ) (14 ) (7 ) - (21 ) End of period 305 41 - 346 305 48 1 354 During fiscal 2021, our retail business model continued to evolve to address changing shopping patterns by diversifying our locations, formats and geographies. We are updating our store portfolio with our Discovery format, which represented 42% of our store base as ofJanuary 29, 2022 . During fiscal 2021, we executed 5 planned new store openings inNorth America , all Discovery format and 4 of which were in tourist sites. Through our third-party retail model, there were 61 stores in operation at the end of the fiscal year with relationships that includedCarnival Cruise Line ,Great Wolf Lodge Resorts , Landry's andBeaches Family Resorts . As in prior years, we operated in a number of other non-traditional locations as well as shop-in-shop arrangements within other retailers' stores. Temporary locations generally have lease terms of two to eighteen months. These specific sites are designed to capitalize on short-term opportunities. In the future, we 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. 25 --------------------------------------------------------------------------------
International Franchise Locations:
Our first franchisee location was opened inNovember 2003 . All franchised stores have similar signage, store layout and merchandise assortments as our corporately-managed stores. As ofJanuary 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 international, franchised stores opened and closed for the periods presented below is summarized as follows:
Fiscal year ended
January 29, 2022 January 30, 2021
Beginning of period 71 92
Opened 9 8
Closed (8 ) (29 )
End of period 72 71
As of January 29, 2022 , the distribution of franchised locations among these
countries was as follows:
South Africa 20
Australia 19
India (1) 11
China (2) 10
Gulf States (3) 6
Chile 6
Total 72
(1)
currently open.
(2)
currently open.
(3) Gulf States master franchise agreement includes
Arab Emirates which all have stores as well as Bahrain and Oman where no
stores are currently open.
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
2021 Overview
Our performance continues to reflect the success of our strategy which has
allowed us to put the building blocks in place to develop a powerful platform to
support our initiatives to deliver consistent profitable growth. We believe our
elevated omnichannel business model, which includes a highly profitable
e-commerce and experiential retail store base, complimented by diversified
revenue streams and disciplined expense and balance sheet management, puts us in
a solid position for continued future success. We delivered a full year pre-tax
profit of $50.7 million , which was the highest in our company's history. In
response to a variety of external pressures including changes in consumer
shopping habits resulting in the rapid rise of the digital economy and shifting
mall traffic patterns, we remained focused on accelerating and expanding our key
initiatives by investing in and executing plans to improve operations and
profitability. While we believe the majority of our positive performance was
driven by the disciplined execution of our strategic initiatives, impact from
pent-up demand and government stimulus may have also helped to contribute to
a 61.2% increase in total revenue to $411.5 million in fiscal 2021. We ended the
year with cash and cash equivalents of $32.8 million with no outstanding
borrowings on our credit facility. We returned $24.3 million in value to
shareholders through $4.4 million in share repurchases and payment of a
$19.9 million special dividend in fiscal 2021.
26
--------------------------------------------------------------------------------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 do total due to immaterial rounding:
Fiscal year ended
January 29, January 30,
2022 2021
Revenues:
Net retail sales 96.6 % 97.6 %
Commercial revenue 2.8 1.7
International franchising 0.6 0.7
Total revenues 100.0 100.0
Costs and expenses:
Cost of merchandise sold - retail (1) 46.9 59.3
Store asset impairment 0.0
2.9
Cost of merchandise sold - commercial (1) 49.1
41.5
Cost of merchandise sold - international franchising (1) 66.1
55.9
Total cost of merchandise sold 47.0
61.8
Consolidated gross profit 53.0
38.2
Selling, general and administrative 40.6
46.1
Interest (income) expense, net (0.0 )
0.0
Income (loss) before income taxes 12.3 (7.9 ) Income tax expense 0.8 1.1 Net income (loss) 11.5 (9.0 ) Retail gross margin (2) 53.1 % 40.7 %
(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.
Fiscal Year Ended
Total revenues. Net retail sales were$397.7 million for fiscal 2021, compared to$249.2 million for fiscal 2020, an increase of$148.5 million or 59.6%, driven by an increase inNorth America of$138.0 million or 62.7% and inEurope of$17.5 million or 51.8%. The components of this increase are as follows: Fiscal year ended January 29, 2022 (dollars in millions) Impact from: Existing stores $ 138.0 E-commerce 5.7 New stores 2.4 Store closures (3.1 ) Gift card breakage 2.7 Deferred revenue estimates 1.5 Foreign currency translation 1.3 $ 148.5 27
-------------------------------------------------------------------------------- The retail revenue increase was primarily the result of the increase in store operating days of corporately-managed stores due to a reduced impact from COVID in fiscal 2021 and consolidated e-commerce sales. Commercial revenue was$11.5 million for fiscal 2021 compared to$4.4 million for fiscal 2020, an increase of$7.1 million or 159.9% primarily due to increased sales volume from our commercial accounts versus the prior year which was impacted by pandemic driven closures of third-party retail locations serviced by these customers. Revenue from international franchising was$2.3 million for fiscal 2021 compared to$1.7 million for fiscal 2020. This$0.7 million or 39.0% increase was primarily due to having more stores in operation in 2021 compared to the same period in 2020 when significantly more locations were temporarily closed due to pandemic-related mandated government restrictions. Retail gross margin. Retail gross margin was$211.3 million in fiscal 2021 compared to$101.4 million in fiscal 2020, an increase of$109.9 million or 108.3% As a percentage of net retail sales, retail gross margin increased to 53.1% for fiscal 2021 from 40.7% for fiscal 2020, or 1,240 basis points as a percentage of net retail sales. The increase in gross margin was the result of growth in total revenues driving increased leverage of fixed occupancy costs of 1,048 basis points compared to the prior year, overall lower promotional activity resulting is less discounts, and strategic price increases on highly sought-after products. These strong results were partially offset by increased air and ocean freight costs. Impairment of long-lived assets, including right-of-use assets. We incurred no impairment charges in fiscal 2021. This compared to impairment charges of$7.3 million recorded in fiscal 2020. Selling, general and administrative. Selling, general and administrative expenses were$167.3 million or 40.6% of consolidated revenue for fiscal 2021 as compared to$117.6 million or 46.1% of consolidated revenue for fiscal 2020. The primary increase in overall expense was primarily due to higher labor costs given the re-opening of our store base, the recording of full corporate salaries in fiscal 2021 as opposed to the prior year, and an increase incentive compensation expense due to our financial performance. Additionally, we saw an increase in advertising expense of$8.3 million or 102.5% driven by depressed advertising spend in fiscal 2020 while we were in a cash management position due to COVID. Interest expense (income), net. For fiscal 2021, we had an immaterial amount of interest income compared to an immaterial amount of interest expense in fiscal 2020, resulting in an immaterial difference in activity. Provision for income taxes. The provision for income taxes was$3.4 million in fiscal 2021 compared to$2.8 million in fiscal 2020. The 2021 effective rate of 6.8% differed from the statutory rate of 21% primarily due to the tax benefit resulting from the reversal of the valuation allowance inNorth America of$7.8 million . The 2020 effective rate of (13.9%) differed from the statutory rate of 21% primarily due to no tax benefit being recorded on the pretax loss as a full valuation allowance had been recorded globally. Fiscal 2020 was also impacted by the$3.3 million valuation allowance recorded on the beginning balance of the net deferred tax assets in certain jurisdictions. Non-GAAP Financial Measures We use the term "store contribution" throughout this Annual Report on Form 10-K. Store contribution consists of income (loss) before income tax expense, interest, general and administrative expense, excluding income from franchise and commercial activities and contribution from our e-commerce sites, locations, other than periods of temporary government-mandated closures, 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 withU.S. generally accepted accounting principles ("GAAP"). We use store contribution as a measure of our stores' operating performance. 28
-------------------------------------------------------------------------------- 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 withU.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. The following table sets forth a reconciliation of store contribution to net income (loss) for our corporately-managed stores located in theU.S. ,Canada andPuerto Rico (collectively "North America"); stores located in theU.K. andIreland (collectively "Europe"); andChina , for our consolidated store base (dollars in thousands). For fiscal 2021, corporately-managed stores included are those that were not newly opened or permanently closed in fiscal 2021. For year-over-year comparison purposes, temporarily closed stores in fiscal 2020 were included in the below table. Fiscal 2021 Fiscal 2020 North Europe North Europe America and China Total America and China Total Net income (loss) 43,182 4,083$ 47,265 $ (24,256 ) $ 1,273 $ (22,983 ) Items excluded: Income tax expense 3,445 - 3,445 2,796 1 2,797 Interest (income) expense (14 ) 9 (5 ) 15 (5 ) 10 Store asset impairment - - - 5,429 1,917 7,346 Non-store related general and administrative expense (1) 57,888 4,660 62,548 41,972 2,657 44,629 Contribution from other retail activities (2) (17,493 ) (533 ) (18,026 ) (10,632 ) (4,126 ) (14,758 ) Other contribution (3) (3,245 ) (235 ) (3,480 ) (1,247 ) (47 ) (1,294 )
Store contribution
Total revenues from external customers$ 361,605 $ 49,917 $ 411,522 $ 216,809 $ 38,501 $ 255,310 Items excluded: Revenues from other retail activities (2) (61,784 ) 396 (61,388 ) (43,951 ) (19,154 ) (63,105 ) Other revenues from external customers (4) (12,602 ) (1,230 ) (13,832 ) (5,644 ) (456 ) (6,100 ) Store location net retail sales$ 287,219 $ 49,083 $ 336,302 $ 167,214 $ 18,891 $ 186,105 Store contribution as a percentage of store location net retail sales 29.2 % 16.3 % 27.3 % 8.4 % 8.8 % 8.5 % Total net income (loss) as a percentage of total revenues 11.9 % 8.2 % 11.5 % (11.2 %) 3.3 % (9.0 %)
--------------------------------------------------------------------------------
(1) Non-store related general and administrative expense consists primarily of
non-store related expenses such as overhead management compensation, travel,
information systems, accounting, purchasing and legal costs. Additionally,
non-store related depreciation and amortization, store closing and
pre-opening expenses are included within non-store related general and
administrative expense. Further, non-store related general and administrative
expenses include marketing costs, 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 for
breakage related to our loyalty program and gift cards.
(3) Other contribution includes commercial revenue, international franchising and
intercompany revenues as well as all expenses attributable to the commercial
and international franchising segments, excluding interest expense (income)
and income tax expense (benefit).
(4) Other revenues from external customers are comprised of commercial revenue
and international franchising.
29--------------------------------------------------------------------------------
Liquidity and Capital Resources
Our cash requirements are primarily for the opening, remodeling or reformatting
of 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.
Fiscal year ended
January 29 , January 30,
2022 2021Net cash provided by operating activities $ 28,077 $
13,386
Net cash used in investing activities (8,130 ) (5,046 ) Net cash used in financing activities (22,456 ) (114 ) Effect of exchange rates on cash 514 (112 ) Net change in cash, cash equivalents and restricted cash $ (1,995 ) $ 8,114 Operating Activities. Cash flows provided by operating activities were$28.1 million and$13.4 million in fiscal years 2021 and 2020, respectively. Cash flows from operating activities increased in fiscal 2021 as compared to fiscal 2020 primarily driven by increased retail store operating days at corporately-managed stores and sales volume to commercial customers, both due to the reduced impact of COVID in fiscal 2021, resulting in higher net income. This was offset by an increase in cash spent on inventory purchases throughout the year to match increased revenue growth as well as accelerated purchases made in the fourth quarter of fiscal 2021 of core and evergreen merchandise collections to support our business momentum and as part of our efforts to mitigate inflationary and supply chain COVID-related pressures and anticipated continued increases in product and freight costs. Investing Activities. Cash flows used in investing activities were$8.1 million and$5.0 million in fiscal years 2021 and 2020, respectively. Cash used in investing activities in fiscal 2021 increased as compared to fiscal 2020 primarily driven by reductions in planned capital expenditures in fiscal 2020 as a result of COVID cash management initiatives. Financing Activities. Financing activities used cash of$22.5 million in fiscal 2021 compared to$0.1 million in fiscal 2020. Cash used in financing activities in fiscal 2021 increased as compared to fiscal 2020, driven primarily by the payment of a special cash dividend of$19.9 million and repurchases of our common stock for$4.4 million , offset by proceeds from stock option exercises.
Capital Resources. As of
OnDecember 17, 2021 , we entered into a First Amendment to Revolving Credit and Security Agreement withPNC Bank, National Association , as agent. The First Amendment amended the Revolving Credit and Security Agreement dated as ofAugust 25, 2020 . The Credit Agreement continues to provide for a senior secured revolving loan in aggregate principal amount of up to$25,000,000 , which may be increased by an amount not to exceed$25,000,000 . The borrowing base under the Credit Agreement continues to be based on specified percentages of Eligible Credit Card Receivables, Eligible Inventory and, under certain circumstances, Eligible Foreign In-Transit Inventory and, at the discretion of the Agent, Eligible Receivables. The First Amendment eliminated certain eligibility requirements for Eligible Foreign In-Transit Inventory and Eligible Inventory. The Credit Agreement continues to provide for swingline loans of up to$5,000,000 and the issuance of standby or commercial letters of credit of up to$5,000,000 . The First Amendment (i) extended the maturity date of the Credit Agreement toDecember 17, 2026 , (ii) eliminated the minimum interest payment requirement, (iii) reduced the facility fee related to undrawn availability, (iv) reduced the availability requirement under the financial covenant, (v) provided the Company with additional flexibility to make permitted investments, declare dividends, repay intercompany loans or repurchase its stock, (vi) increased the threshold amounts for certain events of default, and (vii) reduced the required frequency of various information and reporting requirements under certain circumstances. Borrowings under the Credit Agreement continue to bear interest (a) at a base rate determined under the Credit Agreement, or (b) at 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 Credit Agreement, but the First Amendment reduced such rates and reduced the LIBOR floor. A$500,000 minimum interest payment requirement has been eliminated and the Facility Fee Percentage, which previously was either 0.50% or 0.375% depending on the Average Undrawn Availability, was reduced to 0.25%. 30 -------------------------------------------------------------------------------- The First Amendment revised a covenant to require us to maintain availability (as determined in accordance with the Credit Agreement) at all times equal to or greater than the greater of (a) 10.0% of the Loan Cap and (b)$1,875,000 (subject to increase upon exercise of the Increase Option). The "Loan Cap" is the lesser of (1)$25,000,000 less the outstanding amount of loans and letters of credit under the Credit Agreement and (2) the borrowing base from time to time under the Credit Agreement. At the closing date of the First Amendment, we had a$750,000 letter of credit issued and no outstanding indebtedness under the Credit Agreement; and, we were in compliance with the Credit Agreement covenants. As ofJanuary 29, 2022 , the Company had a borrowing base of$22.3 million . As a result of a$750,000 letter of credit against the line of credit at the end of fiscal 2021, approximately$22.5 million was available for borrowing. As ofJanuary 29, 2022 , the Company had no outstanding borrowings.
We ended fiscal 2021 with
As ofJanuary 29, 2022 , we have utilized$4.4 million in cash to repurchase 245,554 shares under our$25.0 million program that was authorized by our Board of Directors onNovember 30, 2021 . As ofApril 11, 2022 , we have utilized a total of$12.1 million under the program to purchase 716,760 shares and currently have$12.9 million available under the authorization.
During the fourth quarter of fiscal 2021, we made a
As ofJanuary 29, 2022 , we had restricted cash of$1.0 million compared to$1.7 million as ofJanuary 30, 2021 . The decrease in long-term deposits is the result of a reduction to our required deposit with theU.K. Customs Authority . During fiscal 2020, we renegotiated a large portion of our store lease portfolio resulting in a combination of rent reductions, deferments, and abatements inNorth America , theU.K. andIreland . These prior year negotiations and new leases, extensions, and modification in fiscal 2021 have increased the percentage of leases with variable rent structures resulting in the increase in variable rent expense in fiscal 2021 compared to fiscal 2020. Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases inNorth America have shifted to shorter term leases 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 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 prior to its contracted 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 theU.K. andIreland 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 monthly or quarterly and paid in advance.
Capital spending in fiscal 2021 totaled
We have various contractual or other obligations, including operating lease commitments and obligations under deferred compensation plans. Additional information is provided in the notes to our consolidated financial statements. As ofJanuary 29, 2022 , we had purchase obligations totaling approximately$99.9 million , of which$25.7 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 no off-balance sheet arrangements as of
31
--------------------------------------------------------------------------------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 fourth quarter of the year, mainly in freight and other supply chain related costs. However, due to mitigating actions taken by the Company, such as strategic price increases on highly sought-after products and accelerated purchases of inventory, the impact of general price inflation on our 2021 financial position and results of operations has not been significant. We expect the inflationary pressures experienced at the end of fiscal 2021 to continue into 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 ware and other geopolitical conflicts, such as the currentRussia -Ukraine crisis. 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 customers, 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 margins due to a requirement to maintain higher inventory reserves.
Critical Accounting Policies and 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.
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 Asset Impairments
In accordance with ASC 360-10-35, we assess the potential impairment of
long-lived assets, which include property, plant and equipment and operating
lease right-of-use assets (subsequent to the adoption of ASC 842, Leases) when
events or changes in circumstances indicate that the carrying value may not be
recoverable. Management's judgments regarding the existence of impairment
indicators are based on market conditions and financial
performance. 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. For operating lease
right-of-use assets, we determine the fair value of the lease right-of-use
assets by comparing the contractual rent payments to estimated market rental
rates. Fair value is calculated as the present value of estimated future cash
flows for each asset group.
For purposes of evaluating store assets for impairment, we have determined that
each store location is an asset group, inclusive of the right-of-use asset
attributable to each store. 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
quarterly, using rolling twelve-month results (i.e. full fiscal year). 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 typically
included in Store asset impairment as a component of income (loss) before income
taxes in the DTC segment. See Note 4 - Leases and Note 6 - Property and
Equipment, Net to our consolidated financial statements for further discussion.
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During fiscal 2021, we did not record any impairment charges. In fiscal 2020, we recorded impairment charges on long-live assets totaling$ 7.3 million ,$ 3.5 million for property and equipment and$ 3.8 million for right-of-use lease assets. As a measure of sensitivity for fiscal 2021, a hypothetical 10% decrease in the undiscounted future cash flows for the stores would not have resulted in impairments for the year. 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. 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, general economic trends, public health issues (such as the COVID pandemic) 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. Revenue Recognition For our gift cards, revenue is deferred for single transactions until redemption including any related gift card discounts. Three-quarters of our gift cards are redeemed within three years of issuance and over the last three years, approximately 60% of gift cards issued have been redeemed within the first twelve months. In addition, unredeemed gift cards or breakage revenue is recorded in proportion to the customer's redemption pattern using an estimated breakage rate based on historical experience. The Company utilizes historical redemption data to develop a model to analyze the amount of breakage expected for gift cards sold to customers and business partners. The Company reviews historical gift card redemption information and considers any changes in redemption patterns as a result of the current economic environment, to assess the reasonableness of projected gift card breakage rates and patterns of redemption. The Company continues to evaluate expected breakage annually and adjusts the breakage rates in the fourth quarter of each year, or other times, if significant changes in customer behavior are detected. Future gift card usage may be different than our historical experience and as a result our estimate of cards not expected to be redeemed is subject to inherent uncertainty. If actual redemption activity differs significantly from our historical experience, our gift card liability and results of operations could be materially impacted, given the significant dollar value of gift cards outstanding. As a matter of sensitivity, a hypothetical 1% change in our gift card breakage rate in fiscal 2021 would have resulted in a change in breakage revenue of$1.3 million . For certain qualifying transactions, a portion of revenue transactions are deferred for the obligation related to our loyalty program or when a material right in the form of a future discount is granted. In these transactions, the transaction price is allocated to the separate performance obligations based on the relative standalone selling price. The standalone selling price for the points earned for our loyalty program is estimated using the net retail value of the merchandise purchased, adjusted for estimated breakage based on historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. In regard to the consolidated balance sheet, contract liabilities for gift cards are classified as gift cards and customer deposits, and contract liabilities related to the loyalty program are classified as deferred revenue and other.
See Note 3 - Revenue for additional information.
Leases We determine if an arrangement is a lease at inception. The right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments using a discounted cash flow analysis, considering lease terms and our internal borrowing rate, over the lease term for those arrangements where there is an identified asset and the contract conveys the right to control its use. Our lease term includes options to extend or terminate a lease only when it is reasonably certain that we will exercise that option. The majority of our leases do not provide an implicit rate and therefore, we estimate the incremental borrowing discount rate based on information available at lease commencement. The discount rates used are indicative of a synthetic credit rating based on quantitative and qualitative analysis and adjusted one notch higher to estimate a secured credit rating. For non-U.S. locations, a risk-free rate yield based on the currency of the lease is used to estimate the incremental borrowing rate. The weighted average risk-free rates were based on the Treasury BVAL rates curve in Bloomberg. Rates were developed for length of lease term for each year 1 through 10 and for 12, 15, 20, 25, and 30-year terms. 33
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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 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. In the fourth quarter of fiscal 2021, we performed an analysis of all available positive and negative evidence. As we were no longer in a cumulative loss inNorth America for the three-year period endingJanuary 29, 2022 driven by the record pretax performance of fiscal 2021 and with the expectation that this strong financial performance will continue given our recent strategic initiatives coupled with the fact that almost all available tax attribute carryforwards were utilized in North American in fiscal 2021, the Company recorded a benefit of$7.8 million for the reversal of the beginning-of-the-year valuation allowance inNorth America . As we had incurred a cumulative book loss in theU.K. over the three-year period endedFebruary 2, 2019 , we evaluated the realizability of ourUK deferred tax assets and, accordingly, in the fourth quarter of fiscal 2018, the Company recorded a$3.7 million valuation allowance on itsU.K. deferred tax assets, and remains in a full valuation allowance, as theU.K. continues to be in a three year cumulative loss. 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 ofJanuary 29, 2022 andJanuary 30, 2021 .
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies for additional information.
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