Item 1. Item 2. Item 3. Item 4. Item 2. Current assets: Cash and cash equivalents Inventories Receivables Prepaid expenses and other current assets Deferred tax assets Total current assets Property and equipment, net of accumulated depreciation of $155,494 and $144,413, respectively Goodwill Other intangible assets, net Other assets, net Total Assets Current liabilities: Accounts payable Accrued expenses Gift cards and customer deposits Deferred revenue Total current liabilities Deferred franchise revenue Deferred rent Other liabilities Stockholders’ equity: Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at July 3, 2010 and January 2, 2010 Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 20,272,578 and 20,447,343 shares, respectively Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total stockholders’ equity Total Liabilities and Stockholders’ Equity Revenues: Net retail sales Franchise fees Licensing revenue Total revenues Costs and expenses: Cost of merchandise sold Selling, general and administrative Store preopening Store closing Equity losses from investment in affiliate Interest expense (income), net Total costs and expenses Loss before income taxes Income tax benefit Net loss Loss per common share: Basic Diluted Shares used in computing common per share amounts: Basic Diluted Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Stock-based compensation Deferred taxes Impairment of store assets Equity losses from investment in affiliate Loss on disposal of property and equipment Change in assets and liabilities: Inventories Receivables Prepaid expenses and other assets Accounts payable Accrued expenses and other liabilities Net cash used in operating activities Cash flows from investing activities: Purchases of property and equipment Purchases of other assets and other intangible assets Investment in affiliate Cash used in investing activities Cash flows from financing activities: Exercise of employee stock options and employee stock purchases Purchases of Company’s common stock Cash used in financing activities Effect of exchange rates on cash Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosure of cash flow information: Cash received during the period for income taxes, net of income taxes paid Noncash Transactions: Return of common stock in lieu of tax witholdings Prepaid rent Prepaid income taxes Other Balance as of January 2, 2010 Effect of foreign currency translation Balance as of July 3, 2010 expense. Outstanding, January 2, 2010 Granted Exercised Forfeited Outstanding, July 3, 2010 Options Exercisable As Of: July 3, 2010 Outstanding, January 2, 2010 Granted Vested Canceled or expired Outstanding, July 3, 2010 Net loss Weighted average number of common shares outstanding Effect of dilutive securities: Stock options Restricted stock Weighted average number of common shares—dilutive Loss per share: Basic Diluted limitations expired. Thirteen weeks ended July 3, 2010 Net sales to external customers Income (loss) before income taxes Capital expenditures, net Depreciation and amortization Thirteen weeks ended July 4, 2009 Net sales to external customers Income (loss) before income taxes Capital expenditures, net Depreciation and amortization Twenty-six weeks ended July 3, 2010 Net sales to external customers Income (loss) before income taxes Capital expenditures, net Depreciation and amortization Twenty-six weeks ended July 4, 2009 Net sales to external customers Income (loss) before income taxes Capital expenditures, net Depreciation and amortization Total Assets as of: July 3, 2010 July 4, 2009 Thirteen weeks ended July 3, 2010 Net sales to external customers Property and equipment, net Thirteen weeks ended July 4, 2009 Net sales to external customers Property and equipment, net Twenty-six weeks ended July 3, 2010 Net sales to external customers Property and equipment, net Twenty-six weeks ended July 4, 2009 Net sales to external customers Property and equipment, net North America Europe Consolidated Beginning of period Opened Closed End of period Beginning of period Opened Closed End of period indicated. Percentages may not total due to immaterial rounding: Revenues: Net retail sales Franchise fees Licensing revenue Total revenues Costs and expenses: Cost of merchandise sold Selling, general and administrative Store preopening Store closing Equity losses from investment in affiliate Interest expense (income), net Total costs and expenses Income (loss) before income taxes Income tax (benefit) expense Net income (loss) Retail Gross Margin % (1) As a percentage of net retail sales, retail gross margin margin. This decrease was primarily due to the decline in the number of franchised locations and in franchisee store sales reflecting the global economic s lowdown. Net loss Income tax expense (benefit) Interest expense (income) Store depreciation, amortization and Store preopening expense Store closing expense (2) Equity losses from investment in affiliate (3) General and administrative expense (4) Franchising and licensing contribution (5) Non-store activity contribution (6) Store contribution Total revenues from external customers Franchising and licensing revenues Revenues from non-store activities (6) Store location net retail sales Store contribution as a percentage of store location net retail sales Total net loss as a percentage of total revenues store construction costs. Period Apr. 4, 2010 – May 1, 2010 May 2, 2010 – May 29, 2010 May 30, 2010 – Jul. 3, 2010 Total Exhibit No. Description 2.1 3.1 3.2 4.1 4.2 4.3 4.4 31.1 31.2 32.1 32.2x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 July 3,October 2, 2010¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Delaware 43-1883836 Delaware43-1883836 (IRS EmployerIdentification No.)63114 (Address of Principal Executive Offices) (Zip Code) Accelerated filerx(Do not check if a smaller reporting company) August 6,November 8, 2010, there were 20,142,17619,554,043 issued and outstanding shares of the registrant’s common stock.Page Part I Financial Information PagePart I Financial InformationFinancial Statements (Unaudited) 3 4 5 6 6Management’s Discussion and Analysis of Financial Condition and Results of Operations 12 11Quantitative and Qualitative Disclosures About Market Risk 21 20Controls and Procedures 21 20Part II Other Information Item 1A.Risk Factors21 Item 1A. Risk Factors 22 Unregistered Sales of Equity Securities and Use of Proceeds 21Item 6.Exhibits22 Item 6. Exhibits 23 2324 July 3,
2010 January 2,
2010 ASSETS $ 31,168 $ 60,399 57,115 44,384 3,513 5,337 17,370 19,329 7,231 6,306 116,397 135,755 92,634 101,044 31,742 33,780 2,813 3,601 10,740 10,093 $ 254,326 $ 284,273 LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,341 $ 32,822 6,597 11,185 22,891 29,301 9,131 8,582 68,960 81,890 1,792 2,027 31,686 34,760 806 816 — — 203 204 78,130 80,122 (11,244 ) (6,336 ) 83,993 90,790 151,082 164,780 $ 254,326 $ 284,273 October 2, January 2, 2010 2010 ASSETS Current assets: Cash and cash equivalents $ 24,660 $ 60,399 Inventories 54,726 44,384 Receivables 5,790 5,337 Prepaid expenses and other current assets 19,247 19,329 Deferred tax assets 6,874 6,306 Total current assets 111,297 135,755 Property and equipment, net of accumulated depreciation of $160,162 and $144,413, respectively 90,397 101,044 Goodwill 33,044 33,780 Other intangible assets, net 2,657 3,601 Other assets, net 15,476 10,093 Total Assets $ 252,871 $ 284,273 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 32,369 $ 32,822 Accrued expenses 6,202 11,185 Gift cards and customer deposits 21,736 29,301 Deferred revenue 9,952 8,582 Total current liabilities 70,259 81,890 Deferred franchise revenue 1,604 2,027 Deferred rent 30,296 34,760 Other liabilities 794 816 Stockholders' equity: Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at October 2, 2010 and January 2, 2010 - - Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 19,560,591 and 20,447,343 shares, respectively 196 204 Additional paid-in capital 75,349 80,122 Accumulated other comprehensive loss (8,242 ) (6,336 ) Retained earnings 82,615 90,790 Total stockholders' equity 149,918 164,780 Total Liabilities and Stockholders' Equity $ 252,871 $ 284,273 Thirteen weeks ended Twenty-six weeks ended July 3,
2010 July 4,
2009 July 3,
2010 July 4,
2009 $ 72,488 $ 81,307 $ 172,274 $ 177,623 661 612 1,344 1,209 985 915 1,951 1,666 74,134 82,834 175,569 180,498 50,334 55,017 109,440 116,391 36,403 37,508 75,935 74,427 77 17 88 17 — 230 — 731 — 533 — 533 (77 ) (23 ) (108 ) (47 ) 86,737 93,282 185,355 192,052 (12,603 ) (10,448 ) (9,786 ) (11,554 ) (4,126 ) (4,479 ) (2,987 ) (4,760 ) $ (8,477 ) $ (5,969 ) $ (6,799 ) $ (6,794 ) $ (0.45 ) $ (0.32 ) $ (0.36 ) $ (0.36 ) $ (0.45 ) $ (0.32 ) $ (0.36 ) $ (0.36 ) 18,866,448 18,871,415 18,920,494 18,827,665 18,866,448 18,871,415 18,920,494 18,827,665 Thirteen weeks ended Thirty-nine weeks ended October 2, October 3, October 2, October 3, 2010 2009 2010 2009 Revenues: Net retail sales $ 91,689 $ 89,731 $ 263,963 $ 267,354 Commercial revenue 7,637 1,670 9,588 3,336 Franchise fees 767 945 2,112 2,153 Total revenues 100,093 92,346 275,663 272,843 Costs and expenses: Cost of merchandise sold 62,710 57,630 172,150 174,021 Selling, general and administrative 39,113 39,255 115,048 113,683 Store preopening 255 73 343 90 Store closing - 250 - 981 Equity losses from investment in affiliate - 4,592 - 5,125 Interest expense (income), net (83 ) (44 ) (191 ) (92 ) Total costs and expenses 101,995 101,756 287,350 293,808 Loss before income taxes (1,902 ) (9,410 ) (11,687 ) (20,965 ) Income tax benefit (524 ) (4,647 ) (3,511 ) (9,408 ) Net loss $ (1,378 ) $ (4,763 ) $ (8,176 ) $ (11,557 ) Loss per common share: Basic $ (0.07 ) $ (0.25 ) $ (0.44 ) $ (0.61 ) Diluted $ (0.07 ) $ (0.25 ) $ (0.44 ) $ (0.61 ) Shares used in computing common per share amounts: Basic 18,426,860 18,876,697 18,755,941 18,844,009 Diluted 18,426,860 18,876,697 18,755,941 18,844,009 Twenty-six weeks ended July 3,
2010 July 4,
2009 $ (6,799 ) $ (6,794 ) 13,629 14,089 2,458 2,061 (1,661 ) (948 ) 306 289 — 533 71 44 (13,026 ) 3,318 1,425 3,606 1,179 (2,949 ) (1,308 ) (9,855 ) (14,111 ) (14,199 ) (17,837 ) (10,805 ) (5,997 ) (2,543 ) (413 ) (1,170 ) — (365 ) (6,410 ) (4,078 ) 46 — (3,286 ) — (3,240 ) — (1,744 ) (1,405 ) (29,231 ) (16,288 ) 60,399 47,000 $ 31,168 $ 30,712 $ 2,918 $ 233 $ 704 $ 311 Thirty-nine weeks ended October 2, 2010 October 3, 2009 Cash flows from operating activities: Net loss $ (8,176 ) $ (11,557 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 20,338 21,114 Impairment of store assets 306 312 Deferred taxes (1,877 ) (1,695 ) Equity losses from investment in affiliate - 5,125 Loss on disposal of property and equipment 404 138 Stock-based compensation 3,661 3,145 Change in assets and liabilities: Inventories (14,562 ) 2,435 Receivables (819 ) 3,224 Prepaid expenses and other assets (461 ) (5,114 ) Accounts payable 510 (8,616 ) Accrued expenses and other liabilities (16,615 ) (19,422 ) Net cash used in operating activities (17,291 ) (10,911 ) Cash flows from investing activities: Purchases of property and equipment (9,697 ) (4,384 ) Purchases of other assets and other intangible assets (511 ) (2,267 ) Investment in affiliate - (562 ) Cash flow used in investing activities (10,208 ) (7,213 ) Cash flows from financing activities: Exercise of employee stock options and employee stock purchases 46 - Purchases of Company's common stock (7,274 ) - Cash flow used in financing activities (7,228 ) - Effect of exchange rates on cash (1,012 ) (1,833 ) Net decrease in cash and cash equivalents (35,739 ) (19,957 ) Cash and cash equivalents, beginning of period 60,399 47,000 Cash and cash equivalents, end of period $ 24,660 $ 27,043 Supplemental disclosure of cash flow information: Cash received during the period for income taxes, net of taxes paid: $ 3,271 $ 1,277 Noncash Transactions: Return of common stock in lieu of tax witholdings and option exercises $ 706 $ 311 Exchange of inventory for media credits $ 4,277 $ - management,mana gement, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended January 2, 2010 included in the Company’s annual report on Form 10-K filed with the SEC on March 18, 2010.Licensing and EntertainmentCommercial segment were previously reported net of the related cost of sales and are now reported on a gross revenue basis. Prior year amounts have been conformed to match the current year’s presentation. The impact for the thirteen and twenty-sixthirty-nine weeks ended July 4,October 3, 2009 was an increase to both licensingcommercial revenue and cost of sales of $0.4$0.6 million and $0.8$1.4 million, respectively. July 3,
2010 January 2,
2010 $ 7,963 $ 8,334 4,579 6,600 4,828 4,395 $ 17,370 $ 19,329 October 2, January 2, 2010 2010 Prepaid rent $ 8,017 $ 8,334 Prepaid income taxes 4,373 6,600 Other 6,857 4,395 $ 19,247 $ 19,329 Financial Accounting Standards Board Accounting Standards Codification (ASC)ASC Section 350-20 and is reported as a component of the Company’s retail segment. The following table summarizes the changes in goodwill for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 (in thousands): $ 33,780 (2,038 ) $ 31,742 Balance as of January 2, 2010 $ 33,780 Effect of foreign currency translation (736 ) Balance as of October 2, 2010 $ 33,044 event that we decide to close any or all2010 third quarter, certain other non-current assets were obtained through a single wholesale transactions whereby the Company exchanged $5.8 million of these storesinventory, at cost, with a third-party vendor for $4.3 million of credits for future media purchases and $1.5 million in cash. The transaction was accounted for based upon the fair values of the assets involved in the future, we may be required to record additional impairment, lease termination charges, severance charges and other charges.5.transaction. In accordance with Accounting Standards Codification (ASC) Section 845-10, in an exchange transaction for advertising credits, the fair value of the asset being surrendered cannot exceed its carrying value, meaning that the sale of the inventory was recorded at its cost in the Commercial segment. The media credits expire in 2015.twenty-sixthirty-nine weeks ended July 3,October 2, 2010, selling, general and administrative expenses includes $1.2 million ($0.7 million after tax) and $2.5$3.7 million ($1.52.2 million after tax), respectively, of stock-based compensation expense. For the thirteen and twenty-sixthirty-nine weeks ended July 4,October 3, 2009, selling, general and administrative expense includes $1.2$1.1 million ($0.7 million after tax) and $2.1$3.1 million ($1.31.9 million after tax), respectively, of stock-based compensation expenseJuly 3,October 2, 2010, there was $9.3$8.1 million of total unrecognized compensation expense related to nonvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 1.71.6 years.6.shareshar e of stock awarded pursuant to an option or subject to the exercised portion of a SAR reduces the number of shares available by one share. Each share of stock awarded pursuant to any other stock-based awards, including restricted stock grants, reduces the number of shares available by 1.27 shares.twenty-sixthirty-nine weeks ended July 3,October 2, 2010: Number of
Shares Weighted
Average
Exercise Price Weighted
Average
Remaining
Contractual Term Aggregate
Intrinsic
Value
(in thousands) 805,347 $ 9.51 386,864 6.63 28,484 0.87 20,700 9.11 1,143,027 $ 8.76 7.6 $ 647 421,703 $ 13.68 4.7 $ 178 Weighted Aggregate Weighted Average Intrinsic Number of Average Remaining Value Shares Exercise Price Contractual Term (in thousands) Outstanding, January 2, 2010 805,347 $ 9.51 Granted 390,088 6.62 Exercised 28,484 0.87 Forfeited 40,332 8.98 Outstanding, October 2, 2010 1,126,619 $ 8.75 7.3 $ 382 Options Exercisable As Of: October 2, 2010 419,132 $ 13.59 4.5 $ 96 twenty-sixthirteen and thirty-nine weeks ended July 3,October 2, 2010 was determined using the Black-Scholes option pricing model and the provisions of Staff Accounting Bulletin (SAB) 107 and 110, which allow the use of a simplified method to estimate the expected term of “plain vanilla” options. The assumptions used in the option pricing model for the twenty-six weeks ended July 3, 2010 were: (a) dividend yield of 0%; (b) volatility of 65%; (c) risk-free interest rates ranging from 3.0%2.1% to 3.4%; and (d) an expected life of 6.25 years.twenty-sixthirteen and thirty-nine weeks ended July 4,October 3, 2009 was determined using the Black-Scholes option pricing model and the provisions of SABStaff Accounting Bulletin (SAB) 107 and 110, which allow the use of a simplified method to estimate the expected term of “plain vanilla” options. The assumptions used in the option pricing model for the twenty-six weeks ended July 4, 2009 were: (a) dividend yield of 0%; (b) volatility of 65%; (c) risk-free interest rates ranging from 2.3% to 2.4%3.1%; and (d) an expected life of 6.25 years.twenty-sixthirty-nine weeks ended July 3,October 2, 2010: Number of
Shares Weighted
Average Grant
Date Fair Value
per Award 1,450,313 $ 7.23 400,196 6.61 282,494 11.69 45,928 6.94 1,522,087 $ 6.25 Weighted Average Grant Number of Date Fair Value Shares per Award Outstanding, January 2, 2010 1,450,313 $ 7.23 Granted 401,976 6.61 Vested 283,302 11.68 Canceled or expired 79,674 6.69 Outstanding, October 2, 2010 1,489,313 $ 6.25 twenty-sixthirty-nine weeks ended July 3,October 2, 2010 and July 4,October 3, 2009 was $1.8$1.9 million and $0.9 million, respectively.7. Thirteen weeks ended Twenty-six weeks ended July 3,
2010 July 4,
2009 July 3,
2010 July 4,
2009 $ (8,477 ) $ (5,969 ) $ (6,799 ) $ (6,794 ) 18,866,448 18,871,415 18,920,494 18,827,665 — — — — — — — — 18,866,448 18,871,415 18,920,494 18,827,665 $ (0.45 ) $ (0.32 ) $ (0.36 ) $ (0.36 ) $ (0.45 ) $ (0.32 ) $ (0.36 ) $ (0.36 ) Thirteen weeks ended Thirty-nine weeks ended October 2, October 3, October 2, October 3, 2010 2009 2010 2009 Net loss $ (1,378 ) $ (4,763 ) $ (8,176 ) $ (11,557 ) Weighted average number of common shares outstanding 18,426,860 18,876,697 18,755,941 18,844,009 Effect of dilutive securities: Stock options - - - - Restricted stock - - - - Weighted average number of common shares - dilutive 18,426,860 18,876,697 18,755,941 18,844,009 Loss per share: Basic $ (0.07 ) $ (0.25 ) $ (0.44 ) $ (0.61 ) Diluted $ (0.07 ) $ (0.25 ) $ (0.44 ) $ (0.61 ) twenty-sixthirty-nine weeks ended July 3,October 2, 2010, options to purchase 1,143,0271,126,619 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted loss per share due to their anti-dilutive effect. An additional 1,522,0871,489,313 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted loss per share for the thirteen and twenty-sixthirty-nine weeks ended July 3,October 2, 2010 due to their anti-dilutive effect.twenty-sixthirty-nine weeks ended July 4,October 3, 2009, options to purchase 817,053814,253 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted loss per share due to their anti-dilutive effect. An additional 1,470,8221,493,243 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted loss per share for the thirteen and twenty-sixthirty-nine weeks ended July 4,October 3, 2009 due to their anti-dilutive effect.8.July 3,October 2, 2010 and January 2, 2010, there werethe Company had approximately $0.5 million and $0.6 million, respectively, of unrecognized tax benefits. During the next twelve months, it is reasonably possible to reduce unrecognized tax benefits by $0.2 million either because the tax positions are sustained on audit, settlements are reached or expiration of the statute of limitations.July 3,October 2, 2010 and January 2, 2010, there was approximately $0.1 million of accrued interest related to uncertain tax positions.9.lossincome (loss) for the thirteen and twenty-sixthirty-nine weeks ended July 3,October 2, 2010 was $9.0$1.6 million and $11.7$(10.1) million, respectively. Comprehensive income(loss) for the thirteen weeks and twenty-sixthirty-nine weeks ended July 4,October 3, 2009 was $0.5$(6.4) million and $0.2$(6.2) million, respectively. The difference between comprehensive income or loss and net loss resulted from foreign currency translation adjustments.10.licensing and entertainment.commercial. The retail segment includes the operating activities of Company-ownedcompany-owned stores in the United States, including Puerto Rico, Canada, the United Kingdom, Ireland, France and other retail delivery operations, including the Company’s Web store and non-traditional store locations such as baseball ballparks. The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe, outside of France, Asia, Australia and Africa. The commercial segment, formerly referred to as the licensing and entertainment segment, has been established to marketincludes the naming and branding rightsCompany’s transactions with other business partners, mainly comprised of the licensing of the Company’s intellectual property, including entertainment properties, for third party use.use and wholesale product sales. No changes to prior year licensing and entertainment segment amounts were required to conform to the current year commercial segment presentation. This segment has historically included an immaterial amount of wholesale transactions. In the 2010 third quarter, the wholesale revenue became significant. Accordingly, the name and description of the segment has been revised to more fully describe the activities of the segment. The operating segments have discrete sources of revenue, different capital structures and different cost structures. These operating segments represent the basis on which the Company’s chief operating decision maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. Accordingly, the Company has determined that each of its operating segments represent one reportable segment. The reportable segments follow the same accounting policies used for the Company’s consolidated financial statements. Retail International
Franchising Licensing &
Entertainment Total $ 72,488 $ 661 $ 985 $ 74,134 (13,481 ) 255 623 (12,603 ) 3,128 26 — 3,154 6,643 119 — 6,762 $ 81,307 $ 612 $ 915 $ 82,834 (11,140 ) 283 409 (10,448 ) 1,529 35 — 1,564 6,942 108 — 7,050 $ 172,274 $ 1,344 $ 1,951 $ 175,569 (11,574 ) 595 1,193 (9,786 ) 6,347 63 — 6,410 13,408 221 — 13,629 $ 177,623 $ 1,209 $ 1,666 $ 180,498 (12,832 ) 527 751 (11,554 ) 3,617 96 — 3,713 13,868 221 — 14,089 $ 247,527 $ 3,073 $ 3,726 $ 254,326 $ 268,757 $ 2,824 $ 3,057 $ 274,638 International Retail Franchising Commercial Total Thirteen weeks ended October 2, 2010 Net sales to external customers $ 91,689 $ 767 $ 7,637 $ 100,093 Income (loss) before income taxes (3,342 ) 411 1,029 (1,902 ) Capital expenditures, net 3,724 74 - 3,798 Depreciation and amortization 6,530 179 - 6,709 Thirteen weeks ended October 3, 2009 Net sales to external customers $ 89,731 $ 945 $ 1,670 $ 92,346 Income (loss) before income taxes (10,764 ) 515 839 (9,410 ) Capital expenditures, net 2,805 133 - 2,938 Depreciation and amortization 6,906 119 - 7,025 Thirty-nine weeks ended October 2, 2010 Net sales to external customers $ 263,963 $ 2,112 $ 9,588 $ 275,663 Income (loss) before income taxes (14,915 ) 1,005 2,222 (11,687 ) Capital expenditures, net 10,072 136 - 10,208 Depreciation and amortization 19,938 400 - 20,338 Thirty-nine weeks ended October 3, 2009 Net sales to external customers $ 267,354 $ 2,153 $ 3,336 $ 272,843 Income (loss) before income taxes (23,597 ) 1,042 1,590 (20,965 ) Capital expenditures, net 6,422 229 - 6,651 Depreciation and amortization 20,773 341 - 21,114 Total Assets as of: October 2, 2010 $ 239,672 $ 2,817 $ 10,382 $ 252,871 October 3, 2009 $ 258,403 $ 3,222 $ 3,430 $ 265,055 North
America (1) Europe (2) Other (3) Total $ 61,326 $ 12,147 $ 661 $ 74,134 80,742 11,892 — 92,634 $ 68,049 $ 14,173 $ 612 $ 82,834 98,579 14,255 — 112,834 $ 146,294 $ 27,931 $ 1,344 $ 175,569 80,742 11,892 — 92,634 $ 151,008 $ 28,281 $ 1,209 $ 180,498 98,579 14,255 — 112,834 North America (1) Europe (2) Other (3) Total Thirteen weeks ended October 2, 2010 Net sales to external customers $ 83,333 $ 15,993 $ 767 $ 100,093 Property and equipment, net 78,082 12,315 - 90,397 Thirteen weeks ended October 3, 2009 Net sales to external customers $ 73,830 $ 17,571 $ 945 $ 92,346 Property and equipment, net 94,239 13,377 - 107,616 Thirty-nine weeks ended October 2, 2010 Net sales to external customers $ 229,627 $ 43,924 $ 2,112 $ 275,663 Property and equipment, net 78,082 12,315 - 90,397 Thirty-nine weeks ended October 3, 2009 Net sales to external customers $ 224,838 $ 45,852 $ 2,153 $ 272,843 Property and equipment, net 94,239 13,377 - 107,616 (1) North America includes the United States, Canada and Puerto Rico (2) Europe includes Company-ownedcompany-owned stores in the United Kingdom, Ireland and France(3) Other includes franchise businesses outside of the United States, Canada, Puerto Rico, the United Kingdom, Ireland and France 11.25%26% in Ridemakerz, LLC, which is accounted for under the equity method. Ridemakerz is an early-stage company that has developed an interactive retail concept that allows children and families to build and customize their own personalized cars. The Company also purchased a call option from a group of other Ridemakerz investors for $150,000 for 1.25 million Ridemakerz common units at an exercise price of $1.25 per unit. The call option was immediately exercisable and expires April 30, 2012. Simultaneously, the Company granted a put option to the same group of investors for 1.25 million common units at an exercise price of $0.50 per unit. The put option became exercisable on April 30, 2008 and expires on April 30, 2012. Under the current agreements,agree ments, the Company could own up to approximately 30%27% of fully diluted equity in Ridemakerz. In the fiscalthirteen and thirty-nine weeks ended October 3, 2009, second quarter, the Company recorded a non-cash pre-tax losscharges of $0.5$4.6 million or $0.02$0.15 per diluted share and $5.1 million or $0.17 per diluted share, included in “Equity losses from investment in affiliate” in the Consolidated Statements of Operations.July 3,October 2, 2010 and January 2, 2010, the book value of the Company’s investment in Ridemakerz was $-0-.12.twenty-sixthirty-nine weeks ended July 4,October 3, 2009, the Company recorded pre-tax charges of $0.2 and $0.7$1.0 million, respectively, related to the closures, which consisted of lease termination charges and construction costs, and are included in “Store closing” expenses in the Consolidated Statements of Operations. As of October 3, 2009, all nine locations were closed and the fixtures had been removed from all Build-A-Bear Workshop stores.claimscla ims that could adversely impact our financial performance and harm our reputation among consumers; we may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of our management team; we may be unable operate our Company-owned distribution center efficiently or our third-party distribution center providers may perform poorly; our market share could be adversely affected by a significant, or increased, number of competitors; we may fail to renew, register or otherwise protect our trademarks or other intellectual property; we may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights; poor global economic conditions could have a material adverse effect on our liquidity and capital resources; and we may be unable to recover amounts due to us from our affiliate, Ridemakerz, LLC. These risks, uncertainties and other factors may adversely affect our business, growth, financial condition or profitability, or subject us to potential liability, and cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.July 3,October 2, 2010, we operated 292291 stores in the United States, Canada, and Puerto Rico, 5456 stores in the United Kingdom, Ireland and France, and had 6058 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we market our products and build our brand through our multiple websites, which simulates our interactive shopping experience, as well as non-traditional store locations in four Major League Baseball® ballparks, one location in a zoo and one location in a science center. Seasonal locations, such as ballparks, pop-up locations and zoos, are excluded from our store count.5456 stores, including threetwo in France. We have adopted internal best practices in the areas of merchandising, marketing, purchasing and store operations, across the acquired store base that resulted in improved sales and earnings from the acquisition.licensing and entertainment)commercial) that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:websitesWeb sites or “webstores”“Web stores”;License arrangementsparties which manufactureparty use and sell to other retailers merchandise carrying the Build-A-Bear Workshop brand.wholesale product sales.twenty-sixthirty-nine weeks ended July 3,October 2, 2010 and July 4,October 3, 2009 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.10.6%11.7% for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 and 9.7%10.1% for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009 and consolidated net loss as a percentage of total revenues was 3.9%3.0% for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 and 3.8%4.3% for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009. See “— Non-GAAP“Non-GAAP Financial Measures” for a definition of store contribution and a reconciliation of store contribution to net loss. The increase in our store contribution over the prior year was primarily due to the improvements in gross margin that were driven by increasedincreases in merchandise margin, improved sales leverage on fixed store occupancy costs and decreases in marketing spend and store payroll as compared to the prior period. Thirteen Weeks Ended Twenty-Six Weeks Ended July 3,
2010 July 4,
2009 July 3,
2010 July 4,
2009 (9.7 )% (17.5 )% (3.3 )% (19.2 )% (11.2 )% 8.2 % (3.6 )% 7.3 % (10.0 )% (13.9 )% (3.3 )% (16.0 )% Thirteen weeks ended Thirty-nine weeks ended October 2, October 3, October 2, October 3, 2010 2009 2010 2009 North America 5.3 % (16.0 )% (0.5 )% (18.2 )% Europe (6.6 )% 2.5 % (4.7 )% 5.3 % Consolidated 3.1 % (12.9 )% (1.2 )% (15.0 )% the decrease inour comparable store sales for the period presented is primarily attributable towere impacted by the following factors:believe that our launch of only a single animal in May combined with later starts of school vacations in some regions of both the United States and the United Kingdom lead to a decrease in our comparable store sales.We believe the calendar shift of the Easter holiday and associated school breaks from the fiscal 2009 second quarter to the fiscal 2010 first quarter negatively impacted our comparable store sales for the thirteen weeks ended July 3, 2010.The Company isare addressing the decline in comparable store sales with the following key initiatives: Twenty-six weeks ended July 3,
2010 July 4,
2009 345 346 1 — — (1 ) 346 345 Thirty-nine weeks ended October 2, October 3, 2010 2009 Beginning of period 345 346 Opened 4 1 Closed (2 ) (2 ) End of period 347 345 anticipate opening three new stores in Europe. We have plans to close a small number of stores and open no permanent locations in the United Kingdom.2010 fourth quarter. We believe there is a market potential for at least 350 Build-A-Bear Workshop stores in the United States and CanadaNorth America, and approximately 70 to 75 stores in the United Kingdom and Ireland.inrelated products. All remaining closures were completed during the fiscal 2009 third quarter,quarter. Other than the closure was completed. Oneone stand-alone store, these Friends 2B Made location wasstores were not included in our store count, but rather were considered a store; the other eight locations were expansions of existing Build-A-Bear Workshop stores. Accordingly, the closures of the eight expansions are not included in the number of store closings noted above.July 3,October 2, 2010, we had a total of four ballpark locations, one store within a zoo and one store within a science center. Seasonal locations, such as ballparks, pop-up locations and zoos, are excluded from our store count. Twenty-six weeks ended July 3,
2010 July 4,
2009 65 62 3 4 (8 ) (5 ) 60 61 Thirty-nine weeks ended October 2, October 3, 2010 2009 Beginning of period 65 62 Opened 5 6 Closed (12 ) (7 ) End of period 58 61 July 3,October 2, 2010, we had master franchise agreements, which typically grant franchise rights for a particular country or countries, covering 1615 countries. We anticipate signing additional master franchise agreements in the future. We expect our franchisees to endopen approximately three to five stores in the fourth quarter of fiscal 2010 with 65 franchised locations.2010. We believe there is a market potential for approximately 300 franchised stores outside of the United States, Canada, Puerto Rico, the United Kingdom, Ireland and France.indicated: Thirteen weeks ended Twenty-six weeks ended July 3,
2010 July 4,
2009 July 3,
2010 July 4,
2009 97.8 98.2 98.1 98.4 0.9 0.7 0.8 0.7 1.3 1.1 1.1 0.9 100.0 100.0 100.0 100.0 67.9 66.4 62.3 64.5 49.1 45.3 43.3 41.2 0.1 0.0 0.1 0.0 — 0.3 — 0.4 — 0.6 — 0.3 (0.1 ) (0.0 ) (0.1 ) (0.0 ) 117.0 112.6 105.6 106.4 (17.0 ) (12.6 ) (5.6 ) (6.4 ) (5.6 ) (5.4 ) (1.7 ) (2.6 ) (11.4 ) (7.2 ) (3.9 ) (3.8 ) 30.9 % 32.9 % 36.8 % 34.9 % Thirteen weeks ended Thirty-nine weeks ended October 2, October 3, October 2, October 3, 2010 2009 2010 2009 Revenues: Net retail sales 91.6 % 97.2 % 95.8 % 98.0 % Licensing revenue 7.6 1.8 3.5 1.2 Franchise fees 0.8 1.0 0.8 0.8 Total revenues 100.0 100.0 100.0 100.0 Costs and expenses: Cost of merchandise sold 62.7 62.4 62.4 63.8 Selling, general and administrative 39.1 42.5 41.7 41.7 Store preopening 0.3 0.1 0.1 0.0 Store closing - 0.3 - 0.4 Equity losses from investment in affiliate - 5.0 - 1.9 Interest expense (income), net (0.1 ) (0.0 ) (0.1 ) (0.0 ) Total costs and expenses 101.9 110.2 104.2 107.7 Loss before income taxes (1.9 ) (10.2 ) (4.2 ) (7.7 ) Income tax benefit (0.5 ) (5.0 ) (1.3 ) (3.4 ) Net loss (1.4 ) (5.2 ) (3.0 ) (4.2 ) 38.6 % 36.5 % 37.4 % 35.4 % (1) Retail gross margin represents net retail sales less retail cost of retail merchandise sold, which excludes cost of wholesale merchandise sold. Retail gross margin was $ 35.4 million and $98.8 million for the thirteen and thirty-nine weeks ended October 2, 2010, respectively, and $32.7 million and $94.7 million for the thirteen and thirty-nine weeks ended October 3, 2009, respectively. Retail gross margin percentage represents retail gross margin divided by net retail sales.July 3,October 2, 2010 compared to thirteen weeks ended July 4,October 3, 2009decreasedincreased to $72.5$91.7 million for the thirteen weeks ended July 3,October 2, 2010 from $81.3$89.7 million for the thirteen weeks ended July 4,October 3, 2009, a decreasean increase of $8.8$2.0 million, or 10.8%2.2%. This declineincrease was primarily attributable to a $7.6$2.6 million declineincrease in comparable store sales, a $0.8 million increase in other non-store locations and a $1.2 million decline in sales from non-comparable stores. These declines were partially offset by a $0.2$0.4 million increase in sales from new stores. Other changes in net retail sales, which included theThese increases were partially offset by a $0.7 million negative impact of theforeign currency translation, $0.6 million in changes in deferred revenue adjustment, totaled $0.2 million.and $0.5 million decreased sales from non-comparable locations.the decrease inour comparable store sales for the period presented is primarily attributable towere impacted by the following factors:We believe the calendar shift of the Easter holiday and associated school breaks from the fiscal 2009 second quarterthe fiscal 2010 first quarter negatively impacted our comparable store sales for the thirteen weeks ended July 3, 2010.We believe that our launch of only a single animal in May combined with later starts of school vacations in some regions of both the United States and the United Kingdom lead to a decrease in our comparable store sales.Revenue fromas licensing revenue, increased to $1.0$7.6 million for the thirteen weeks ended JulyOctober 2, 2010 from $1.7 million for the thirteen weeks ended October 3, 2009, an increase of $6.0 million. This increase was primarily related to a single $5.8 million wholesale transaction with no associated gross margin. We also increased revenues through our collaboration with Michael’s Stores and Borders. Revenue from franchise fees decreased to $0.8 million for the thirteen weeks ended October 2, 2010 from $0.9 million for the thirteen weeks ended July 4,October 3, 2009, an increasea decrease of $0.1 million. This increasedecrease was primarily relateddue to the release of new Wii and Nintendo DS gamesdecline in the 2010 first quarter. Revenue from franchise feesnumber of franchised locations and in franchisee store sales reflecting the global economic slowdown.$0.7$37.4 million for the thirteen weeks ended July 3,October 2, 2010 from $0.6$34.7 million for the thirteen weeks ended July 4,October 3, 2009, an increase of $0.1 million.Gross margin.Total$2.7 million, or 7.7%. Retail gross margin decreasedincreased to $23.8$35.4 million for the thirteen weeks ended July 3,October 2, 2010 from $27.8$32.7 million for the thirteen weeks ended July 4,October 3, 2009, a decreasean increase of $4.0$2.7 million, or 14.4%8.3%. Retail gross margin decreased to $22.4 million for the thirteen weeks ended July 3, 2010 from $26.7 million for the thirteen weeks ended July 4, 2009, a decrease of $4.3 million, or 16.1%.decreasedincreased to 30.9%38.6% for the thirteen weeks ended July 3,October 2, 2010 from 32.9%36.5% for the thirteen weeks ended July 4, 2009. This 200October 3, 2009, an increase of 210 basis points as a percentage of net retail sales (bps) decrease was. This increase resulted primarily attributable tofrom improved sales le verage on store occupancy costs and a 20 bps increaseslight improvement in merchandise margin more than offset by a 220 bps decrease in leverage on fixed occupancy costs.were $36.4decreased to $39.1 million for the thirteen weeks ended July 3,October 2, 2010 as compared to $37.5from $39.3 million for the thirteen weeks ended July 4, 2009, a decrease of $1.1 million, or 2.9%.October 3, 2009. As a percentage of total revenues, excluding the single wholesale transaction, selling, general and administrative expenses increaseddecreased to 49.1%41.5% for the thirteen weeks ended July 3,October 2, 2010 as compared to 45.3%42.5% for the thirteen weeks ended July 4,October 3, 2009, an increasea decrease of 380100 bps. The dollar decrease was primarily due to continued benefits from our cost reduction efforts, specifically in store payroll and marketing that were partially offset by increases in central office payroll. The increase in selling, general and administrative expenses as a percent of revenue was primarily due to deleveraging ofleverage on store salaries and other fixed components of overhead costs specifically, central office and store payroll and depreciation.as well as a shift in the timing of certain marketing programs. 0; These improvements were partially offset by charges related to the decision to close a small number of stores within the fiscal year.$77,000$0.3 for the thirteen weeks ended July 3,October 2, 2010 as compared to $17,000$0.1 million for the thirteen weeks ended July 4,October 3, 2009. The increase in store preopening for the period was the result of timing ofthree store preopening activities. We expect to open three new stores and relocate one store duringopenings in the fiscal 2010 third quarter as compared to one store opened duringopening in the same period last year. Additionally, we plan to open 11 pop-up stores in fiscal 2009.the 2010 fourth quarter. Preopening expenses include expenses for stores that opened in the current period as well as expenses incurred for stores that will open in future periods.$0.2$0.3 million for the thirteen weeks ended July 4,October 3, 2009 and consisted primarily of inventory write-offs and construction costs requiredincurred to reformat locations for return to the landlord related to the closure of the Friends 2B Made concept.$0.5$4.6 million for the thirteen weeks ended July 4,October 3, 2009 and is the result of the allocation of losses related to our investment in Ridemakerz.$77,000$83,000 for the thirteen weeks ended July 3,October 2, 2010 as compared to $23,000$44,000 for the thirteen weeks ended July 4,October 3, 2009.$4.1$0.5 million for the thirteen weeks ended July 3,October 2, 2010 as compared to $4.5$4.6 million for the thirteen weeks ended July 4,October 3, 2009. The effective tax rate was 32.7%27.5% for the thirteen weeks ended July 3,October 2, 2010 compared to 42.9%49.4% for the thirteen weeks ended July 4,October 3, 2009. The decrease in the effective tax rate was primarily attributable to the impact of valuation allowances recorded for losses incurred in certain tax jurisdictions and lower tax rates in certain foreign jurisdictions.Twenty-sixJuly 3,October 2, 2010 compared to twenty-sixthirty-nine weeks ended July 4,October 3, 2009$172.3$264.0 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 from $177.6$267.4 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009, a decrease of $5.3$3.4 million, or 3.0%1.3%. This decline was primarily attributable to a $5.6$3.1 million decline in comparable store sales, a $1.5 million change in deferred revenue and a $1.0$1.3 million declinedecrease in sales from non-comparable stores.locations. These declines were partially offset by a $1.7$1.0 million positive impact of foreign currency translation, and a $0.5$0.9 million increase in sales from new stores. Other changesstores and $0.6 million increase in net retail sales, which included the negative impact of the deferred revenue adjustment, totaled $0.9 million.other non-store locations.the decrease inour comparable store sales was attributed primarily towere impacted as the following factors:We believe the economic recession and associated decline in consumer confidence continue to impact consumer spending, and our comparable store sales particularly in Europe.We believe that our launch of only a single animal in May combined with later starts of school vacations in some regions of both the United States and the United Kingdom leada decrease in our comparable store sales.Revenue fromas licensing revenue, increased to $2.0$9.6 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 from $1.7$3.3 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009, an increase of $0.3$6.3 million. This increase was primarily related to the release of new Wiia single $5.8 million wholesale transaction with no associated gross margin. We also increased revenues through our collaboration with Michael’s Stores and Nintendo DS games in the 2010 first quarter.Borders. Revenue from franchise fees increaseddecreased to $1.3$2.1 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 from $1.2$2.2 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009, an increasea decrease of $0.1 million.$66.1$103.5 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 from $64.1$98.8 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009, an increase of $2.0$4.7 million, or 3.2%4.7%. Retail gross margin increased to $63.4$98.8 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 from $62.0$94.7 million for the thirteenthirty-nine weeks ended July 4,October 3, 2009, an increase of $1.4$4.1 million, or 2.2%4.3%. As a percentage of net retail sales, retail gross margin increased to 36.8%37.4% for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 from 34.9%35.4% for the twenty-sixthirty-nine weeks ended July 4, 2009.October 3, 2009, an increase of 200 bps. This 190 bps increase resulted primarily from a 12090 bps increaseimprovement in merchandise margin, 70 bps impr oved sales leverage on store occupancy costs and a 6040 bps increaseimprovement in leverage on buying and distribution costs.$75.9$115.0 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 as compared to $74.4$113.7 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009, an increase of $1.5$1.4 million, or 2.0%1.2%. As a percentage of total revenues, excluding the single wholesale transaction, selling, general and administrative expenses increased to 43.3%43.6% for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 as compared to 41.2%41.7% for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009, an increase of 210190 bps. TheBoth the dollar increase wasand the increase as a percent of revenue were primarily due to increases in central office payroll and depreciation, charges related to the decision to close a small number of stores within the fiscal year as well as having three more stores in operation as compared to the same period last year. These increases were partially offset by reductions in marketing expenses. The increase in selling, general and administrative expenses as a percent of revenue was primarily due to deleveraging of fixed components of overhead costs, specifically, central office and store payroll and depreciation.$88,000$0.3 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 as compared to $17,000$0.1 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009. We expect to open three new stores and relocate oneThe increase in store duringpreopening for the period was the result of four store openings in fiscal 2010 third quarter as compared to one store opened duringopening in the same periodlast fiscal year. Additionally, we plan to open 11 pop-up stores in fiscal 2009.the 2010 fourth quarter. Preopening expenses include expenses for stores that opened in the current period as well as expenses incurred for stores that will open in future periods.$0.7$1.0 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009 and consisted primarily of lease termination charges, inventory write-offs and construction costs requiredincurred to reformat locations for return to the landlord related to the closure of the Friends 2B Made concept.$0.5$5.1 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009 and is the result of the allocation of losses related to our investment in Ridemakerz.twenty-sixthirty-nine weeks ended JulyOctober 3, 2010 as compared to $47,000 for the twenty-six weeks ended July 4, 2009.$3.0$3.5 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 as compared to $4.8$9.4 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009. The effective tax rate was 30.5%30.0% for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 compared to 41.2%44.9% for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009. The decrease in the effective tax rate was primarily attributable to the impact of valuation allowances recorded for losses incurred in certain tax jurisdictions and lower tax rates in certain foreign jurisdictions.licensingcommercial activities and contribution from our webstore and seasonal and event-based locations. This term, as we define it, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance with U.S. GAAP. supplemental and not a substitute for net income, net income per store, cash flows provided by operating activities, cash flows provided by operating activities per store, or other income or cash flow data prepared in accordance with GAAP. 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.Company-ownedcompany-owned stores located in the United States, Canada and Puerto Rico (North America), stores located the United Kingdom, Ireland and France (Europe) and for our consolidated store base (Dollars in thousands): Twenty-six weeks ended
July 3, 2010 Twenty-six weeks ended
July 4, 2009 North
America Europe Total North
America Europe Total $ (5,330 ) $ (1,469 ) $ (6,799 ) $ (4,915 ) $ (1,879 ) $ (6,794 ) (2,798 ) (189 ) (2,987 ) (4,773 ) 13 (4,760 ) (38 ) (70 ) (108 ) (23 ) (24 ) (47 )
impairment (1) 8,031 1,481 9,512 8,980 1,276 10,256 83 5 88 17 — 17 — — — 731 — 731 — — — 533 — 533 19,642 1,772 21,414 17,925 1,736 19,661 (2,009 ) — (2,009 ) (1,499 ) — (1,499 ) (1,204 ) (273 ) (1,477 ) (1,291 ) (215 ) (1,506 ) $ 16,377 $ 1,257 $ 17,634 $ 15,685 $ 907 $ 16,592 $ 147,637 $ 27,932 $ 175,569 $ 152,217 $ 28,281 $ 180,498 (3,295 ) — (3,295 ) (2,875 ) — (2,875 ) (5,056 ) (829 ) (5,885 ) (5,507 ) (811 ) (6,318 ) $ 139,286 $ 27,103 $ 166,389 $ 143,835 $ 27,470 $ 171,305 11.8 % 4.6 % 10.6 % 10.9 % 3.3 % 9.7 % (3.6 )% (5.3 )% (3.9 )% (3.2 )% (6.6 )% (3.8 )% Thirty-nine weeks ended Thirty-nine weeks ended October 2, 2010 October 3, 2009 North North America Europe Total America Europe Total Net loss $ (6,417 ) $ (1,759 ) $ (8,176 ) $ (10,854 ) $ (703 ) $ (11,557 ) Income tax expense (benefit) (3,531 ) 20 (3,511 ) (9,530 ) 122 (9,408 ) Interest expense (income) (65 ) (126 ) (191 ) (54 ) (38 ) (92 ) Store depreciation, amortization and impairment (1) 11,848 2,082 13,930 13,243 1,975 15,218 Store preopening expense 162 181 343 90 - 90 Store closing expense (2) - - - 981 - 981 Equity losses from investment in affiliate (3) - - - 5,125 - 5,125 General and administrative expense (4) 30,184 2,956 33,140 28,397 2,440 30,837 Franchising and commercial contribution (5) (3,399 ) - (3,399 ) (2,972 ) - (2,972 ) Non-store activity contribution (6) (1,807 ) (472 ) (2,279 ) (1,846 ) (322 ) (2,168 ) Store contribution $ 26,975 $ 2,882 $ 29,857 $ 22,580 $ 3,474 $ 26,054 Total revenues from external customers $ 231,739 $ 43,924 $ 275,663 $ 226,991 $ 45,852 $ 272,843 Franchising and commercial revenues (11,700 ) - (11,700 ) (5,489 ) - (5,489 ) Revenues from non-store activities (6) (7,926 ) (1,273 ) (9,199 ) (8,179 ) (1,213 ) (9,392 ) Store location net retail sales $ 212,113 $ 42,651 $ 254,764 $ 213,323 $ 44,639 $ 257,962 Store contribution as a percentage of store location net retail sales 12.7 % 6.8 % 11.7 % 10.6 % 7.8 % 10.1 % Total net loss as a percentage of total revenues -2.8 % -4.0 % -3.0 % -4.8 % -1.5 % -4.2 % (1) Store depreciation, amortization and impairment includes depreciation and amortization of all capitalized assets in store locations, including leasehold improvements, furniture and fixtures, and computer hardware and software and store asset impairment charges, included in cost of merchandise sold. (2) Store closing expense represents asset impairment and other charges related to the closure of the Friends 2B Made concept. (3) Equity losses from investment in affiliate represent the Company’s portion of losses of Ridemakerz. (4) General and administrative expenses consist of non-store, central office general and administrative functions such as management payroll and related benefits, travel, information systems, accounting, purchasing and legal costs as well as the depreciation and amortization of central office leasehold improvements, furniture and fixtures, computer hardware and software, including assets related to the virtual world, and intellectual property. General and administrative expenses also include a central office marketing department, primarily payroll and related benefits expense, but exclude advertising expenses, such as direct mail catalogs and television advertising, which are included in store contribution. (5) Franchising and licensingcommercial contribution includes franchising and licensingcommercial revenues and all expenses attributable to the international franchising and licensing and entertainmentcommercial segments other than depreciation, amortization and interest expense/income. Depreciation and amortization related to the franchising and licensingcommercial segments is included in the general and administrative expense caption. Interest expense/income related to the franchising and licensingcommercial segments is included in the interest expense (income) caption.(6) Non-store activities include our webstores, and seasonal and event-based locations as well as intercompany transfer pricing charges. and closings and related expenses; (7) changes in consumer preferences; (8) the effectiveness of our inventory management; (9) the actions of our competitors or mall anchors and co-tenants; (10) seasonal shopping patterns and holiday and vacation schedules; and (11) weather conditions.assure youensure that this will continue to be the case. European-based store sales have historically been weighted more heavily in the fourth quarter as compared to North American stores. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years. The 2008 fiscal fourth quarter had 14 weeks.$17.8$17.3 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 as compared with $10.8cash used in operating activities of $10.9 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009, or an increase of $7.0$6.4 million. Generally, changes in cash from operating activities are driven by changes in net income or loss and changes in operating assets and liabilities. In 2010, the use of cash resulting from the change in operating assets and liabilities increased as compared to the year ago period,was driven primarily driven by increases in non-proprietary inventory partially offset by the changesnet loss for the first nine months of 2010, the decrease in the timingaccrued expenses and other liabilities, specifically sales taxes and gift cards, and increased inventory. The increase in cash used fo r inventory relates primarily to purchases of accounts payableincremental inventory necessary to launch new proprietary and prepaid expenses.non-proprietary product lines. Additional increases resulted from earlier receipt of holiday product, inventory for pop-up store openings and increased in-transit inventory due to longer required lead times. In 2009, the use of cash resulting fromin operating activities was driven primarily by the net loss for the first nine months of 2009, which was primarily due to a decline in sales in the same period. In 2009, the change in operating assets and liabilities was driven primarily by decreases in accounts payable and accrued expenses dueand offsetting decreases in inventory, primarily attributable to overall cost reductions as compared to the Company’s overall cost reduction efforts.year ago period, and an increase in prepaid expenses, specifically income taxes.$6.4$10.2 million for the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 as compared to $4.1$7.2 million for the twenty-sixthirty-nine weeks ended July 4,October 3, 2009. Cash used in investing activities during the twenty-sixthirty-nine weeks ended JulyOctober 2, 2010 primarily relates to investments in software and equipment upgrades to the Company’s e-commerce platform and new store construction costs. Cash used in investing activities during the thirty-nine weeks ended October 3, 20102009 primarily relates to investments in central office information technology systems new store construction costs and the acquisition of trademarks and other intellectual property. Cash used in investing activities during the twenty-six weeks ended July 4, 2009 primarily relates to new store construction costs and additional investment in Ridemakerz.$3.2$7.2 million in the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 which consisted primarily of cash used for repurchases of the Company’s common stock. We had no cash flows from financing activities in the twenty-sixthirty-nine weeks ended July 4,October 3, 2009. No borrowings were made under our line of credit in either the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 or July 4,October 3, 2009.July 3,October 2, 2010, we had a consolidated cash balance of $31.2$24.7 million, overnearly 60% of which was held in the United Kingdom. We also have a line of credit, which we can use to finance capital expenditures, and working capital needs throughout the year. The credit agreement is with U.S. Bank, National Association and was amended effective October 28, 2009. The bank line continues to provide availability of $40 million for the first half of the fiscal year and a seasonal overline of $50 million. The seasonal overline is in effect from July 1 to December 31 each year. Borrowings under the credit agreement are secured by our assets and a pledge of 65% of our ownership interest in our foreign subsidiaries. The credit agreement expires on December 31, 2011 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates, and investments. It also prohibits us from declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the credit agreement. Borrowings bear interest at LIBOR plus 2.05%. Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge coveragecover ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. As of July 3, 2010: (i)October 2, 2010 we were in compliance with these covenants;covenants, (ii) there were no borrowings under our line of credit;credit, (iii) there was a standby letter of credit of approximately $1.1 million outstanding under the credit agreement and (iv) there was approximately $48.9 million available for borrowing under thet he line of credit.10-1510 to 15 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 charged quarterly and paid in advance. $12 million to $15 million on capital expenditures. Capital spending through the twenty-sixthirty-nine weeks ended July 3,October 2, 2010 totaled $6.4$10.2 million, on track with our full year plans. Capital spending in fiscal 2010 is primarily forrelates to investments in software and equipment upgrades to the continued installationCompany’s e-commerce platform and upgrades of central office information technology systems, the opening of three new stores and the relocation of one store.tot o 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 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.August 6,November 8, 2010, we have repurchased approximately 2.43.0 million shares of our common stock at an average price of $9.46$8.78 per share for an aggregate amount of $23.0$26.3 million.July 3,October 2, 2010, the book value of our investment in Ridemakerz had been reduced to zero. We still retained an ownership interest of approximately 25%26%. Under the current agreements, we could own up to approximately 30%27% of fully diluted equityequit y in Ridemakerz.at LIBOR plus 2.05%. We had no borrowings outstanding during the first halfnine months of fiscal 2010. Accordingly, a 100 basis point change in interest rates would result in no material change to our annual interest expense. The second component of interest rate risk involves the short term investment of excess cash in short term, investment grade interest-bearing securities. These investments are considered to be cash equivalents and are shown that way on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations.July 3,October 2, 2010, the end of the period covered by this quarterly report. (a)
Total Number of
Shares (or Units)
Purchased (1) (b)
Average
Price Paid
Per Share
(or Unit) (c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2) (d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under the
Plans or Programs 152 $ 8.32 — $ 29,628,734 187,021 $ 7.96 187,021 $ 28,140,460 57,531 $ 7.71 56,909 $ 27,701,610 244,704 $ 7.90 243,930 $ 27,701,610 Period Jul. 4, 2010 – Jul. 31, 2010 - $ - - $ 27,701,610 Aug 1, 2010 – Aug. 28, 2010 442,501 $ 6.02 442,501 $ 25,037,959 Aug. 29 2010 – Oct. 2, 2010 237,431 $ 5.58 237,201 $ 23,714,009 Total 679,932 $ 5.87 679,702 $ 23,714,009 (1) Includes shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted shares which vested during the applicable period. Our equity incentive plans provide that the value of shares delivered to us to pay the withheld to cover tax obligations is calculated as the average of the high and low trading price of our common stock on the date the relevant transaction occurs. (2) On March 3, 2010, we announced the further extension of our $50 million share repurchase program of our outstanding common stock until March 31, 2011. The program was authorized by our board of directors. Purchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity depending on market conditions, applicable regulatory requirements, and other factors. Purchase activity may be increased, decreased or discontinued at any time without notice. Shares purchased under the program are subsequently retired. Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the Registrant (incorporated by reference from Exhibit 2.1 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142) Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of our Current Report on Form 8-K, filed on November 11,8, 2004) Amended and Restated Bylaws (incorporated by reference from Exhibit 3.43.2 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142) Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to our Registration Statement on Form S-1, filed on October 1, 2004, Registration No. 333-118142) Stock Purchase Agreement by and among the Registrant, Catterton Partners IV, L.P., Catterton Partners IV Offshore, L.P. and Catterton Partners IV Special Purpose, L.P. and the Purchasers named therein dated as of April 3, 2000 (incorporated by reference from Exhibit 4.2 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142) Stock Purchase Agreement by and among the Registrant and the other Purchasers named therein dated as of September 21, 2001 (incorporated by reference from Exhibit 4.3 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142) Amended and Restated Registration Rights Agreement, dated September 21, 2001 by and among Registrant and certain stockholders named therein (incorporated by reference from Exhibit 4.5 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142) Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear) Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Bear) Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear) Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Bear) August 12,November 11, 2010(Registrant)By: By: /s/ Maxine Clark Maxine Clark Chairman of the Board and Chief Executive Bear By: By: /s/ Tina Klocke Tina Klocke Chief Operations and Financial Bear, Treasurer and Secretary 23