UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
FORM 10-Q
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 2, 2011
 
For the quarterly period ended October 2, 2010
 
OR
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to              
 
For the transition period from             to             
Commission file number: 001-32320
BUILD-A-BEAR WORKSHOP, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware43-1883836
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
1954 Innerbelt Business Center Drive
St. Louis, Missouri
63114
(Address of Principal Executive Offices)(Zip Code)
 
(314) 423-8000
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  ¨
Accelerated filer x
   
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
 
As of November 8, 2010,August 3, 2011, there were 19,554,04319,076,347  issued and outstanding shares of the registrant’s common stock.
 

 
1
 
 
BUILD-A-BEAR WORKSHOP, INC.
INDEX TO FORM 10-Q
 
  Page
Part I Financial Information 
   
 Item 1.Financial Statements (Unaudited) 
 Consolidated Balance Sheets     3
 Consolidated Statements of Operations     4
 Consolidated Statements of Cash Flows     5
 Notes to Consolidated Financial Statements     6
   
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations     1211
   
 Item 3.Quantitative and Qualitative Disclosures About Market Risk     2120
   
 Item 4.Controls and Procedures     2120
  
Part II Other Information
 
   
 Item 1A.Risk Factors     2221
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds     2221
 Item 6.Exhibits     2322
  
 Signatures     2423
 
 
2
 

PART I-FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except share and per share data)
 
  July 2,  January 1,  July 3, 
  2011  2011  2010 
          
ASSETS 
Current assets:         
Cash and cash equivalents $34,742  $58,755  $31,168 
Inventories  46,156   46,475   57,115 
Receivables  4,606   7,923   3,513 
Prepaid expenses and other current assets  22,580   18,425   17,370 
Deferred tax assets  7,585   7,465   7,231 
Total current assets  115,669   139,043   116,397 
             
Property and equipment, net of accumulated depreciation of $173,418, $163,606 and $155,494, respectively  81,225   88,029   92,634 
Goodwill  33,542   32,407   31,742 
Other intangible assets, net  1,043   1,444   2,813 
Other assets, net  15,070   14,871   10,740 
Total Assets $246,549  $275,794  $254,326 
             
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:            
Accounts payable $33,280  $36,325  $30,341 
Accrued expenses  6,818   15,488   6,597 
Gift cards and customer deposits  23,487   28,880   22,891 
Deferred revenue  6,852   6,679   9,131 
Total current liabilities  70,437   87,372   68,960 
             
Deferred franchise revenue  1,571   1,706   1,792 
Deferred rent  26,606   28,642   31,686 
Other liabilities  375   361   806 
             
Stockholders' equity:            
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at July 2, 2011, January 1, 2011 and July 3, 2010
  -   -   - 
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 19,198,941, 19,631,623 and 20,272,578 shares, respectively  192   196   203 
Additional paid-in capital  72,979   76,582   78,130 
Accumulated other comprehensive loss  (7,580)  (9,959)  (11,244)
Retained earnings  81,969   90,894   83,993 
Total stockholders' equity  147,560   157,713   151,082 
Total Liabilities and Stockholders' Equity $246,549  $275,794  $254,326 
  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 
 
See accompanying notes to condensed consolidated financial statements.
 
 
3
 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share and per share data)
 
  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 
  Thirteen weeks ended  Twenty-six weeks ended 
  July 2, 2011  July 3, 2010  July 2, 2011  July 3, 2010 
             
Revenues:            
Net retail sales $80,391  $72,488  $174,550  $172,274 
Commercial revenue  736   985   1,841   1,951 
Franchise fees  714   661   1,440   1,344 
Total revenues  81,841   74,134   177,831   175,569 
                 
Costs and expenses:                
Cost of merchandise sold  51,926   50,334   110,151   109,440 
Selling, general and administrative  40,539   36,403   81,803   75,935 
Store preopening  146   77   193   88 
Interest expense (income), net  (105)  (77)  (1)  (108)
Total costs and expenses  92,506   86,737   192,146   185,355 
Loss before income taxes  (10,665)  (12,603)  (14,315)  (9,786)
Income tax benefit  (3,990)  (4,126)  (5,388)  (2,987)
Net loss $(6,675) $(8,477) $(8,927) $(6,799)
                 
Loss per common share:                
Basic $(0.37) $(0.45) $(0.50) $(0.36)
Diluted $(0.37) $(0.45) $(0.50) $(0.36)
                 
Shares used in computing common per share amounts:             
Basic  17,839,349   18,866,448   17,964,763   18,920,494 
Diluted  17,839,439   18,866,448   17,964,763   18,920,494 
 
See accompanying notes to condensed consolidated financial statements.
 
 
4
 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
  Twenty-six weeks ended 
  July 2, 2011  July 3, 2010 
       
Cash flows from operating activities:      
Net loss $(8,927) $(6,799)
Adjustments to reconcile net loss to net cash used in operating activities:
        
Depreciation and amortization  12,730   13,629 
Stock-based compensation  2,389   2,458 
Deferred taxes  294   (1,661)
Excess tax benefit from share-based payments  (297)  (507)
Impairment of store assets  -   306 
Barter credit utilization  151   - 
Loss on disposal of property and equipment  310   71 
Change in assets and liabilities:        
Inventories  540   (13,026)
Receivables  3,350   1,425 
Prepaid expenses and other assets  (4,078)  1,179 
Accounts payable and accrued expenses  (11,824)  (6,445)
Gift cards and customer deposits  (5,462)  (6,326)
Deferred revenue  37   240 
Lease related liabilities  (2,100)  (2,887)
Net cash used in operating activities  (12,887)  (18,343)
Cash flows from investing activities:        
Purchases of property and equipment  (5,998)  (5,997)
Purchases of other assets and other intangible assets  (139)  (413)
Purchases of short term investments  (3,115)  - 
Proceeds from sale or maturitiy of short term investments  2,076   - 
Cash used in investing activities  (7,176)  (6,410)
Cash flows from financing activities:        
Exercise of employee stock options and employee stock purchases  56   13 
Excess tax benefit from share-based payments  297   540 
Purchases of Company's common stock  (5,073)  (3,286)
Cash used in financing activities  (4,720)  (2,733)
Effect of exchange rates on cash  770   (1,745)
Net decrease in cash and cash equivalents  (24,013)  (29,231)
Cash and cash equivalents, beginning of period  58,755   60,399 
Cash and cash equivalents, end of period $34,742  $31,168 
  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  $- 
 
See accompanying notes to condensed consolidated financial statements.
 
 
5
 
  
Notes to Condensed Consolidated Financial Statements
 
1. Basis of Presentation
 
The condensed consolidated financial statements included herein are unaudited and have been prepared by Build-A-Bear Workshop, Inc. and its subsidiaries (collectively, the Company) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated balance sheet of the Company as of January 2, 20101, 2011 was derived from the Company’s audited consolidated balance sheet as of that date.  All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of mana gement,management, 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.  As a toy retailer, the Company’s sales are highest in the fourth quarter, followed by the first quarter.  The timing of holidays and school vacations can impact quarterly results.  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, 20101, 2011 included in the Company’s annual report on Form 10-K filed with the SEC on March 18, 2010.17, 2011.
 
The commercial segment, formerly referred to as the licensing and entertainment segment, includes the Company’s transactions with other business partners, mainly in licensing and wholesale transactions.  Licensing revenue has historically included an immaterial amountCertain reclassifications of wholesale revenue.  In the 2010 third quarter, the wholesale revenues became significant.  Accordingly, the name and description of the segment has been expanded to more fully describe the significant activities. No changes to prior year licensing revenue amounts were requiredhave been made to conform to the current year presentation.
Certain revenues within the Commercial 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 thirty-nine weeks ended October 3, 2009 was an increase to both commercial revenue and cost of sales of $0.6 million and $1.4 million, respectively.
 
2. Prepaid Expenses and Other Assets
 
Prepaid expenses and other current assets consist of the following (in thousands):
 
 October 2,  January 2,  July 2,  January 1,  July 3, 
 2010  2010  2011  2011  2010 
Prepaid rent $8,017  $8,334  $8,016  $7,959  $7,963 
Prepaid income taxes  4,373   6,600   6,732   2,458   4,579 
Other  6,857   4,395   7,832   8,008   4,828 
 $19,247  $19,329  $22,580  $18,425  $17,370 
 
3. Goodwill
 
Goodwill is accounted for in accordance with ASCFinancial Accounting Standards Board Accounting Standards Codification (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 thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 (in thousands):
 
Balance as of January 2, 2010 $33,780 
   Effect of foreign currency translation  (736)
Balance as of October 2, 2010 $33,044 
    
Balance as of January 1, 2011 $32,407 
Effect of foreign currency translation  1,135 
Balance as of July 2, 2011 $33,542 
 
Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  This testing requires comparison of carrying values to fair values, and when appropriate, the carrying value of impaired assets is reduced to fair value.  Goodwill will be tested for impairment no later than January 1,December 31, 2011.
 
4. Asset Impairment
During the 2010 second quarter, the Company reviewed the inputs used to determine the fair value of certain key money deposits, included in other intangible assets and other store deposits, included in other assets, net, through expected undiscounted cash flows over the remaining life of the related assets. Accordingly, the carrying value of the assets was reduced to fair value, calculated as the net present value of estimated future cash flows for each asset group, and asset impairment charges of $0.3 million were recorded in the second quarter of fiscal 2010, which are included in selling, general and administrative expenses as a component of net loss before income taxes in the retail segment. The inputs used to determine the fair value of the assets are Level 3 inputs as defined by ASC section 820-10.
6
5. Other Non-current Assets
In the 2010 third quarter, certain other non-current assets were obtained through a single wholesale transactions whereby the Company exchanged $5.8 million of inventory, 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 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.
6. Stock-based Compensation
 
The Company accounts for stock-based compensation in accordance with ASC Section 718.  The Company uses the straight-line expense attribution method for all stock-based compensation awards with graded vesting.
 
For the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 2, 2010,2011, selling, general and administrative expenses includes $1.2$1.1 million ($0.7 million after tax) and $3.7$2.4 million ($2.21.5 million after tax), respectively, of stock-based compensation expense.  For the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009,2010, selling, general and administrative expense includes $1.1$1.2 million ($0.7 million after tax) and $3.1$2.5 million ($1.91.5 million after tax), respectively, of stock-based compensation expense.
 
As of OctoberJuly 2, 2010,2011, there was $8.1$8.2 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 1.61.7 years.
 
7.
6
5. Stock Incentive Plans
 
On April 3, 2000, the Company adopted the 2000 Stock Option Plan (the Plan). In 2003, the Company adopted the Build-A-Bear Workshop, Inc. 2002 Stock Incentive Plan; in 2004, the Company adopted the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan, and in 2009, the Company amended and restated the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (collectively, the Plans).
 
Under the Plans, as amended, from January 3, 2009, up to 3,230,000 shares of common stock were reserved and may be granted to employees and nonemployees of the Company. The Plan allows for the grant of incentive stock options, nonqualified stock options, stock appreciation rights (SAR) and restricted stock. Options granted under the Plan expire no later than 10 years from the date of the grant. The exercise price of each incentive stock option shall not be less than 100% of the fair value of the stock subject to the option on the date the option is granted. The exercise price of all options shall be the fair market value on the date of the grant. The vesting provision of individual options is at the discretion of the compensation committee of the board of directors and generally ranges from one to four years. Each shar eshare 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.
 
7
(a) Stock Options
 
The following table is a summary of the balances and activity for the Plans related to stock options for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 2010:2011:
 
       Weighted  Aggregate        Weighted  Aggregate 
    Weighted  Average  Intrinsic     Weighted  Average  Intrinsic 
 Number of  Average  Remaining  Value  Number of  Average  Remaining  Value 
 Shares  Exercise Price  Contractual Term  (in thousands)  Shares  Exercise Price  Contractual Term  (in thousands) 
Outstanding, January 2, 2010  805,347   $9.51       
Outstanding, January 1, 2011  1,125,223   $8.73       
Granted  390,088    6.62         303,667    6.22       
Exercised  28,484    0.87         38,392    4.98       
Forfeited  40,332    8.98         5,817    12.08       
Outstanding, October 2, 2010  1,126,619   $8.75   7.3  $382 
Outstanding, July 2, 2011  1,384,681   $8.27   7.3  $572 
                                
Options Exercisable As Of:                                
October 2, 2010  419,132   $13.59   4.5  $96 
July 2, 2011  581,755   $11.36   5.2  $251 
 
The Company generally issues new shares to satisfy option exercises.
 
The expense recorded related to options granted during the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 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 2, 2011 were: (a) dividend yield of 0%; (b) volatility of 65%; (c) risk-free interest rates ranging from 2.1%2.0% to 3.4%2.5%; and (d) an expected life of 6.25 years.
The expense recorded related to options granted during the thirteen and thirty-nine weeks ended October 3, 2009 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 2.3%3.0% to 3.1%3.4%; and (d) an expected life of 6.25 years.
 
7
(b) Restricted Stock
 
The following table is a summary of the balances and activity for the Plans related to restricted stock granted as compensation to employees and directors for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 2010:2011:
 
    Weighted     Weighted 
    Average Grant     Average Grant 
 Number of  Date Fair Value  Number of  Date Fair Value 
 Shares  per Award  Shares  per Award 
Outstanding, January 2, 2010  1,450,313   $7.23 
Outstanding, January 1, 2011  1,468,373   $5.96 
Granted  401,976    6.61   460,970    6.21 
Vested  283,302    11.68   312,981    9.09 
Canceled or expired  79,674    6.69   51,840    6.18 
Outstanding, October 2, 2010  1,489,313   $6.25 
Outstanding, July 2, 2011  1,564,522   $5.40 
 
The total fair value of shares vested during the thirty-ninetwenty-six weeks ended OctoberJuly 2, 2011 and July 3, 2010 and October 3, 2009 was $1.9$2.0 million and $0.9$1.8 million, respectively.
 
8
8.6. Earnings per Share
 
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):
 
 Thirteen weeks ended  Thirty-nine weeks ended 
 October 2,  October 3,  October 2,  October 3,  Thirteen weeks ended  Twenty-six weeks ended 
 2010  2009  2010  2009  July 2, 2011  July 3, 2010  July 2, 2011  July 3, 2010 
                        
Net loss $(1,378) $(4,763) $(8,176) $(11,557) $(6,675) $(8,477) $(8,927) $(6,799)
Weighted average number of common                                
shares outstanding  18,426,860   18,876,697   18,755,941   18,844,009   17,839,349   18,866,448   17,964,763   18,920,494 
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   17,839,349   18,866,448   17,964,763   18,920,494 
                                
Loss per share:                                
Basic $(0.07) $(0.25) $(0.44) $(0.61) $(0.37) $(0.45) $(0.50) $(0.36)
Diluted $(0.07) $(0.25) $(0.44) $(0.61) $(0.37) $(0.45) $(0.50) $(0.36)
 
In calculating diluted loss per share for the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 2, 2011, options to purchase 1,384,681 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 under the provisions of ASC 260-10.  An additional 1,564,522 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-six weeks ended July 2, 2011 due to their anti-dilutive effect.
In calculating diluted loss per share for the thirteen and twenty-six weeks ended July 3, 2010, options to purchase 1,126,6191,143,027 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 1,489,3131,522,087 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 thirty-ninetwenty-six weeks ended October 2,July 3, 2010 due to their anti-dilutive effect.
 
In calculating diluted loss per share for the thirteen and thirty-nine weeks ended October 3, 2009, options to purchase 814,253 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 1,493,243 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 thirty-nine weeks ended October 3, 2009 due to their anti-dilutive effect.
9.7. Income Taxes
 
The Company accounts for uncertainty in income taxes in accordance with ASC Section 740-10.  As of OctoberJuly 2, 2011, January 1, 2011 and July 3, 2010, and January 2, 2010, the Company hadthere was approximately $0.5$0.3 million, $0.3 million and $0.6$0.5 million respectively, of unrecognized tax benefits.  During the next twelve months, it is reasonably possible to reduce unrecognized tax benefits by $0.2$0.1 million either because the tax positions are sustained on audit settlements are reached or expiration of the statute of limitations expired.limitations.
 
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of October 2, 2010 and January 2, 2010, there was approximately $0.1 million of accrued interest related to uncertain tax positions.
8
 
10.8. Comprehensive Income or Loss
 
Comprehensive income (loss) for the thirteen and thirty-nine weeks ended October 2, 2010 was $1.6 million and $(10.1) million, respectively. Comprehensive (loss)loss for the thirteen weeks and thirty-ninetwenty-six weeks ended October 3, 2009July 2, 2011 was $(6.4)$6.7 million and $(6.2)$6.5 million, respectively.  Comprehensive loss for the thirteen and twenty-six weeks ended July 3, 2010 was $9.0 million and $11.7 million, respectively.  The difference between comprehensive income or loss and net loss resulted from foreign currency translation adjustments.
 
11.9. Segment Information

The Company’s operations are conducted through three operating segments consisting of retail, commercial and international franchising, and commercial.franchising.  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 commercial segment includes the Company’s transactions with other businesses, mainly comprised of licensing the Company’s intellectual properties for third party use and wholesale activities.  The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe, outside of France, Asia, Australia, Africa, the Middle East, Mexico and Africa. The commercial segment, formerly referred to as the licensing and entertainment segment, includes the Company’s transactions with other business partners, mainly comprised of the licensing of the Company’s intellectual property, including entertainment properties, for third party 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.South America. 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.
 
9
Following is a summary of the financial information for the Company’s reportable segments (in thousands):
 
     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 
        International    
  Retail  Commercial  Franchising  Total 
Thirteen weeks ended July 2, 2011            
Net sales to external customers $80,391  $736  $714  $81,841 
Income (loss) before income taxes  (11,435)  401   369   (10,665)
Capital expenditures, net  3,786   -   29   3,815 
Depreciation and amortization  6,136   -   70   6,206 
Thirteen weeks ended July 3, 2010                
Net sales to external customers $72,488  $985  $661  $74,134 
Income (loss) before income taxes  (13,481)  623   255   (12,603)
Capital expenditures, net  3,128   -   26   3,154 
Depreciation and amortization  6,643   -   119   6,762 
                 
Twenty-six weeks ended July 2, 2011                
Net sales to external customers $174,550  $1,841  $1,440  $177,831 
Income (loss) before income taxes  (15,820)  811   694   (14,315)
Capital expenditures, net  6,074   -   63   6,137 
Depreciation and amortization  12,604   -   126   12,730 
Twenty-six weeks ended July 3, 2010                
Net sales to external customers $172,274  $1,951  $1,344  $175,569 
Income (loss) before income taxes  (11,574)  1,193   595   (9,786)
Capital expenditures, net  6,347   -   63   6,410 
Depreciation and amortization  13,408   -   221   13,629 
                 
Total Assets as of:                
July 2, 2011 $234,125  $9,566  $2,858  $246,549 
July 3, 2010 $247,527  $3,726  $3,073  $254,326 

 
109
 
 
The Company’s reportable segments are primarily determined by the types of products and services that they offer.  Each reportable segment may operate in many geographic areas. The Company allocates revenues to geographic areas based on the location of the customer or franchisee. The following schedule is a summary of the Company’s sales to external customers and long-lived assets by geographic area (in thousands):
 
  North          
  America (1)  Europe (2)  Other (3)  Total 
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 

  North          
  America (1)  Europe (2)  Other (3)  Total 
Thirteen weeks ended July 2, 2011            
Net sales to external customers $67,315  $13,812  $714  $81,841 
Property and equipment, net  69,879   11,346   -   81,225 
Thirteen weeks ended July 3, 2010                
Net sales to external customers $61,326  $12,147  $661  $74,134 
Property and equipment, net  80,742   11,892   -   92,634 
                 
Twenty-six weeks ended July 2, 2011                
Net sales to external customers $146,498  $29,893  $1,440  $177,831 
Property and equipment, net  69,879   11,346   -   81,225 
Twenty-six weeks ended July 3, 2010                
Net sales to external customers $146,294  $27,931  $1,344  $175,569 
Property and equipment, net  80,742   11,892   -   92,634 

(1)North America includes the United States, Canada and Puerto Rico
(2)Europe includes company-ownedCompany-owned stores in the United Kingdom and Ireland and, prior to 2011, France
(3)Other includes franchise businesses outside of the United States, Canada, Puerto Rico, the United Kingdom Ireland and FranceIreland
12. Investment in Affiliate
The Company holds a minority interest of approximately 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 agree ments, the Company could own up to approximately 27% of fully diluted equity in Ridemakerz. In the thirteen and thirty-nine weeks ended October 3, 2009, the Company recorded non-cash pre-tax charges of $4.6 million or $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.
As of October 2, 2010 and January 2, 2010, the book value of the Company’s investment in Ridemakerz was $-0-.
13. Closure of Friends 2B Made Concept
In September 2008, the Company announced plans to close its Friends 2B Made concept, a line of make-your-own dolls and related products. The closure plan affected the Company’s nine Friends 2B Made locations, all but one of which were inside or adjacent to a Build-A-Bear Workshop store, separate Friends 2B Made fixtures in approximately 50 Build-A-Bear Workshop stores, and the concept’s Web site. During the thirteen and thirty-nine weeks ended October 3, 2009, the Company recorded pre-tax charges of $0.2 and $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.

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our annual report on Form 10-K for the year ended January 2, 2010,1, 2011, as filed with the SEC, and the following: general economic conditions may continue to deteriorate, which could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending; customer traffic may continue to decrease in the shopping malls where we are located, on which we depend to attract guests to our stores; we may be unable to generate interest in and demand for our interactive retail experience, or to identify and respond to consumer preferences in a timely fashion; our marketing and on-line initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic; we may be unable to generate comparable store sales growth; we may be unable to renew or replace our store leases, or enter into leases for new stores on favorable terms or in favorable locations, or may violate the terms of our current leases; we may be unable to effectively manage the operations and growth of our Company-ownedcompany-owned stores; we may be unable to effectively manage our international franchises or laws relating to those franchises may change; the availability and costs of our products could be adversely affected by risks associated with international manufacturing and trade, including foreign currency fluctuation; we are susceptible to disruption in our inventory flow due to our reliance on a few vendors; high petroleum products prices could increase oursome product and inventory transportation costs and adversely affect our profitability; we may be unable to effectively manage our international franchises or laws relating to those franchises may change; we may be unable to operate our European Company-ownedcompany-owned stores profitably; fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; we may be unable to repurchase shares at all or at the times or in the amounts we currently anticipate or the results of the share repurchase program may not be as beneficial as we currently anticipate; our products could become subject to recalls or product liability claims that could adversely impact our financial performance and harm our reputation among consumers; we may improperly obtain or be unable to protect information from our guests in violation of privacy or security laws or expectations; we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise; we may suffer negative publicity or negative sales if the non-proprietary toy products we sell in our stores do not meet our quality or sales expectations; our products could become subject to recalls or product liability cla 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-ownedcompany-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; and 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.resources. 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.
 
Overview
 
We are the leading, and only international, company providing a “make your own stuffed animal” interactive entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals.  Our concept, which we developed primarily for mall-based retailing, capitalizes on what we believe is the relatively untapped demand for experience-based shopping as well as the widespread appeal of stuffed animals. The Build-A-Bear Workshop experience appeals to a broad range of age groups and demographics, including children, teens, their parents and grandparents.
 
We are growing our business in our company-owned stores and in our e-commerce by building synergies between our core products, our partnerships with other world class brands and through added engagement in and out of our iconic stores.  Build-A-Bear Workshop is a powerful global brand and we see significant opportunities for growth outside of North America and the United Kingdom.  The Build-A-Bear Workshop brand is a strong platform--kids love us and Moms trust us, which gives us the foundation to potentially go to market with other retail concepts and products as well as include these products in our retail stores and website.  We are in a strong financial position to drive further international growth and at the same time, continue to buy back stock and invest in other strategic initiatives for the benefit of all Build-A-Bear Workshop stakeholders.  
As of OctoberJuly 2, 2010,2011, we operated 291289 stores in the United States, Canada, and Puerto Rico, 5653 stores in the United Kingdom and Ireland, and France, and had 5870 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 simulatessimulate our interactive shopping experience, as well as non-traditional store locations in fourthree Major League Baseball® ballparks, one location in a zoo,  and one location in a science center.center and an airport. Seasonal locations, such as ballparks pop-up locations and zoos, are excluded from our store count.
 
On April 2, 2006, we acquired all of the outstanding shares of The Bear Factory Limited, a stuffed animal retailer in the United Kingdom, and Amsbra Limited, our former U.K. franchisee. The results of the acquisitions’ operations have been included in the consolidated financial statements since that date. We are currently operating 36 of the acquired stores. Since 2006, our European operations have grown to 56 stores, including two 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.
12
We operate in three reportable segments (retail, commercial and international franchising, and commercial)franchising) that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:
 
Company-owned retail stores located in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland, France, all non-traditional store locations and multiple e-commerce Web siteswebsites or “Web stores”“webstores”;
 
International stores operated under franchise agreements; and
The commercial segment, formerly the licensing and entertainment segment, includes the Company’s transactionsTransactions with other business partners, mainly comprised of the licensing of the Company’sour intellectual property, including entertainment properties, for third partythird-party use and wholesale product sales.sales; and

International stores operated under franchise agreements.
 
11
Selected financial data attributable to each segment for the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 and OctoberJuly 3, 20092010 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
 
Store contribution, for our consolidated operations, was 11.7%10.2% for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 and 10.1%10.6% for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 20092010 and consolidated net loss as a percentage of total revenues was 3.0%5.0% for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 and 4.3%3.9% for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009.2010. See “Non-GAAP“— Non-GAAP Financial Measures” for a definition of store contribution and a reconciliation of store contribution to net loss.  The increasedecrease in our store contribution over the prior year was primarily due to the decrease in comparable store sales partially offset by the improvements in gross margin that were driven by increases inincreased merchandise margin, improved  sales leverage on fixed store occupancy costs and decreases in marketing spend and store payroll as compared to the prior period.margin.
 
We use comparable store sales as one of the performance measures for our business. Comparable store sales percentage changes are based on net retail sales, excluding our webstore and seasonal and event-based locations. Stores are considered comparable beginning in their thirteenth full month of operation.  Stores with relocations or remodels that result in a significant change in square footage are excluded from the comparable stores sales calculation until the thirteenth full month of operation after the change.  The percentage change in comparable store sales for the periods presented below is as follows:
 
 Thirteen weeks ended Thirty-nine weeks ended
 October 2, October 3, October 2, October 3, Thirteen Weeks Ended Twenty-Six Weeks Ended
 2010 2009 2010 2009 July 2, 2011 July 3, 2010 July 2, 2011 July 3, 2010
                        
North America  5.3%  (16.0)%  (0.5)%  (18.2)% 8.3% (9.7)% (2.0)% (3.3)%
Europe  (6.6)%  2.5%  (4.7)%  5.3% 1.3% (11.2)% (1.7)% (3.6)%
Consolidated  3.1%  (12.9)%  (1.2)%  (15.0)% 7.1% (10.0)% (2.0)% (3.3)%
 
We believe ourthe changes in comparable store sales were impacted byfor the periods presented are primarily attributable to the following factors:
 
We believe that our improved integrationthe calendar shift of product, marketingthe Easter holiday and store operationsassociated school breaks to the fiscal 2011 second quarter from the fiscal 2010 first quarter positively impacted our North Americanconsolidated comparable store sales infor the third quarter.  With this focused message,thirteen weeks ended July 2, 2011.
For the twenty-six weeks, we believe that we were able to capitalize on mall traffic with a 4.6% increasedecline in the number of transactions andnegatively impacted our consolidated comparable store sales in fiscal 2011 partially offset by a slight increase in the average transaction value, andvalue.
 
We believe that in the economic recession and associatedUK, the increase in VAT coupled with cutbacks in government spending has resulted in a decline in consumer confidence continue to impact consumersentiment and a corresponding decline in spending, andnegatively impacting our comparable store sales particularly in Europe.Europe for the first half of 2011.  We believe that this decline was partially offset by the impact of pent up demand created by adverse weather in December 2010 which drove sales in early 2011.  In this same period, European comparable store sales also benefited from better weather as compared to the same period in 2010, making the year over year comparison easier. 
 
We are addressingThe Company is working to continue the positive trend in the 2011 second quarter comparable store sales with the following key initiatives:
 
We are improvingcontinuing our focus on product innovation and introducing limited edition products supported by enhancing the size of our new product launchesa fully integrated approach to marketing and the design and value of our animals and related products;promotion;
 
We are executing a fully integrated product, marketing and store operations strategy by having one product statement supported by one focused message and one strong promotion that updates regularly. We are using powerful store visualsintend to drive incremental sales from existing traffic by expanding our assortment of brand right toys; and integrated and clean marketing to drive conversion;
 
We are focused on increasing engagement in the digital world, both through our online virtual world for children, buildabearville.com,bearville.com, and our social media efforts, to drive brand interaction and traffic to our stores; and
We are adding complimentary experiential products to our assortment that reinforce our brand essence.stores.
 
 
1312
 
 
Expansion and Growth Potential
 
Retail Stores:
 
The table below sets forth the number of Build-A-Bear Workshop Company-owned stores in the United States, Canada, Puerto Rico (collectively, North America), the United Kingdom, Ireland, and France (collectively, Europe) for the periods presented:
 
 Thirty-nine weeks ended
 October 2, October 3,
 2010 2009 Twenty-Six Weeks Ended 
       July 2, 2011  July 3, 2010 
Beginning of period  345   346   344   345 
Opened  4   1   1   1 
Closed  (2)  (2)  (3)  - 
End of period  347   345   342   346 
 
During fiscal 2010,2011, we opened one Build-A-Bear Workshop store in North America and three new stores in Europe.  We have plans to close a small number ofanticipate opening approximately five stores and open no  permanent locations in the 2010 fourth quarter.closing five to ten stores.  We believe there is a market potential for at least 350 Build-A-Bear Workshop stores in North America,the United States and Canada and approximately 70 to 75 stores in the United Kingdom and Ireland.
 
In the fiscal 2008 third quarter, we announced plans to close the Friends 2B Made concept, our proprietary line of make-your-own dolls and related products. All remaining closures were completed during the fiscal 2009 third quarter. Other than the one stand-alone store, these Friends 2B Made stores were not included in our store count, but rather were considered expansions of existing Build-A-Bear Workshop stores.
Non-Traditional Store Locations:
 
In fiscal 2004, we began offering merchandise in seasonal, event-based locations such as Major League Baseball®Baseball® ballparks. We expect to expand our future presence at select seasonal, event-based locations contingent on their availability.availability and the financial terms associated with the venue.  As of OctoberJuly 2, 2010,2011, we had a total of fourthree ballpark locations, one store within a zoo, and one store within a science center.center and one store within an airport. Seasonal locations, such as ballparks pop-up locations and zoos are excluded from our store count.
We plan to open 11 In 2010, we opened our first pop-up locations in the 2010 fourth quarter.stores.  Pop-up stores are temporary locations that typicallygenerally have an initial lease termterms of six to 15 months.  These stores will not be included ineighteen months and are excluded from our store count.  These locations are intended to capitalize on short-term opportunities in specific locations.  As of July 2, 2011, eight pop-up stores were open.
 
International Franchise Revenue:
 
Our first franchised location opened in November 2003.  The number of international, franchised stores for the periods presented below can be summarized as follows:
 
 Thirty-nine weeks ended
 October 2, October 3,
 2010 2009 Twenty-Six Weeks Ended 
       July 2, 2011  July 3, 2010 
Beginning of period  65   62   63   65 
Opened  5   6   10   3 
Closed  (12)  (7)  (3)  (8)
End of period  58   61   70   60 
 
As of OctoberJuly 2, 2010,2011, we had master franchise agreements, which typically grant franchise rights for a particular country or countries, covering 1516 countries.  We anticipate signing additional master franchise agreements in the future.  We expect our current and future franchisees to open approximately threefive to fiveten stores in the fourth quarterfiscal 2011, net of fiscal 2010.closures.  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.Ireland.
 
 
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Results of Operations
 
The following table sets forth, for the periods indicated, selected statement of income data expressed as a percentage of total revenues, except where otherwise indicated. Percentages may not total due to immaterial rounding:indicated:
 
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Thirteen weeks ended  Thirty-nine weeks ended  Thirteen weeks ended Twenty-six weeks ended
 October 2,  October 3,  October 2,  October 3,  July 2, July 3, July 2, July 3,
 2010  2009  2010  2009  2011 2010 2011 2010
Revenues:                        
Net retail sales  91.6%  97.2%  95.8%  98.0% 98.2% 97.8% 98.2% 98.1%
Licensing revenue  7.6   1.8   3.5   1.2 
Commercial revenue 0.9  1.3  1.0  1.1 
Franchise fees  0.8   1.0   0.8   0.8  0.9  0.9  0.8  0.8 
Total revenues  100.0   100.0   100.0   100.0  100.0  100.0  100.0  100.0 
                            
Costs and expenses:                            
Cost of merchandise sold(1)  62.7   62.4   62.4   63.8  64.0  68.5  62.4  62.8 
Selling, general and administrative  39.1   42.5   41.7   41.7  49.5  49.1  46.0  43.3 
Store preopening  0.3   0.1   0.1   0.0  0.2  0.1  0.1  0.1 
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) (0.1) (0.1) (0.0) (0.1)
Total costs and expenses  101.9   110.2   104.2   107.7  113.0  117.0  108.0  105.6 
Income (loss) before income taxes (13.0) (17.0) (8.0) (5.6)
Income tax (benefit) expense (4.9) (5.6) (3.0) (1.7)
Net income (loss) (8.2)% (11.4)% (5.0)% (3.9)%
                            
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)
                
                
Retail Gross Margin % (1)
  38.6%  36.5%  37.4%  35.4%
Retail Gross Margin % (2) 35.8% 30.9% 37.4% 36.8%
(1)Cost of merchandise sold is expressed as a percentage of net retail sales and commercial revenue.
 
(1)(2)Retail gross margin represents net retail sales less cost of retail merchandise sold, which excludes cost of wholesale merchandise sold.  Retail gross margin was $ 35.4$28.8 million and $98.8$65.4 million for the thirteen and twenty-six weeks ended July 2, 2011, respectively, and $22.4 million and $63.4 million for the thirteen and thirty-nine weeks ended October 2,July 3, 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.

Thirteen weeks ended OctoberJuly 2, 20102011 compared to thirteen weeks ended OctoberJuly 3, 20092010
 
Total revenues. Net retail sales increased to $91.7Total revenues were $81.8 million for the thirteen weeks ended OctoberJuly 2, 2010 from $89.72011 compared to $74.1 million for the thirteen weeks ended OctoberJuly 3, 2009,2010, an increase of $2.0$7.7 million, or 2.2%10.4%.  Net retail sales were $80.4 million for the thirteen weeks ended July 2, 2011 compared to $72.5 million for the thirteen weeks ended July 3, 2010, an increase of $7.9 million, or 10.9%. This increase was primarily attributable to a $2.6$4.8 million increase in comparable store sales, a $0.8$1.3 million increase in sales from pop-up and other non-store locations and a $0.4$0.8 million increase in sales from new stores.  These increasesThere were partially offset by a $0.7$0.9 million negativedecline in sales from non-comparable store locations, primarily closures and relocations.  Other changes in net retail sales, which included the positive impact of foreign currency translation, $0.6 million inthe changes in deferred revenue and $0.5 million decreased sales from non-comparable locations.foreign currency, totaled $1.7 million.
 
We believe the increase in comparable store sales for the period is primarily attributable to the calendar shift of the Easter holiday and associated school breaks from the fiscal 2010 first quarter to the fiscal 2011 second quarter which positively impacted our comparable store sales were impacted byfor the following factors:
We believe that our improved integration of product, marketing and store operations positively impacted our North American comparable store sales in the third quarter.  With this focused message, we believe that we were able to capitalize on mall traffic with a 4.6% increase in the number of transactions and a slight increase in average transaction value, and
We believe that the economic recession and associated decline in consumer confidence continue to impact consumer spending and our comparable store sales, particularly in Europe.
thirteen weeks ended July 2, 2011.
 
Commercial revenue formerly referred to as licensing revenue, increased to $7.6was $0.7 million for the thirteen weeks ended OctoberJuly 2, 20102011, a decrease of $0.3 million from $1.7$1.0 million for the thirteen weeks ended OctoberJuly 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.2010.  Revenue from franchise fees decreased to $0.8was $0.7 million for the thirteen weeks ended OctoberJuly 2, 2010 from $0.92011 and July 3, 2010.
Gross margin. Total gross margin was $29.2 million for the thirteen weeks ended October 3, 2009, a decrease of $0.1 million. This decrease was primarily dueJuly 2, 2011, compared to the decline in the number of franchised locations and in franchisee store sales reflecting the global economic slowdown.
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Gross margin. Total gross margin increased to $37.4$23.1 million for the thirteen weeks ended October 2,July 3, 2010, from $34.7an increase of $6.1 million, or 26.2%.  Retail gross margin increased to $28.8 million for the thirteen weeks ended October 3, 2009, an increase of $2.7 million, or 7.7%. Retail gross margin increasedJuly 2, 2011 compared to $35.4$22.4 million for the thirteen weeks ended October 2,July 3, 2010, from $32.7 million for the thirteen weeks ended October 3, 2009, an increase of $2.7$6.4 million, or 8.3%28.6%.  As a percentage of net retail sales, retail gross margin increased to 38.6%35.8% for the thirteen weeks ended OctoberJuly 2, 2010 from 36.5%2011from 30.9% for the thirteen weeks ended OctoberJuly 3, 2009, an increase of 2102010.  This 490 basis points as a percentage of net retail sales (bps). This increase resultedwas primarily from improved sales le verageattributable to 320 bps improvement in leverage on storefixed occupancy costs and a slight improvement130 bps increase in merchandise margin.margin, resulting primarily from a positive change in product mix.
 
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Selling, general and administrative.  Selling, general and administrative expenses decreased to $39.1were $40.5 million for the thirteen weeks ended OctoberJuly 2, 2010 from $39.32011 as compared to $36.4 million for the thirteen weeks ended OctoberJuly 3, 2009.2010, an increase of $4.1 million, or 11.4%.  As a percentage of total revenues, excluding the single wholesale transaction, selling, general and administrative expenses decreasedincreased slightly to 41.5%49.5% for the thirteen weeks ended OctoberJuly 2, 20102011 as compared to 42.5%49.1% for the thirteen weeks ended OctoberJuly 3, 2009, a decrease2010, an increase of 10040 bps.  The decreasedollar increase was primarily attributable to consulting costs related to continuing efforts to improve efficiencies and reduce expenses and a shift in advertising expenses following the Easter shift, partially offset by decreases in corporate expenses.  The increase in selling, general and administrative expenses as a percent of revenue was primarily due to the overall increase in expenses, offset by improved leverage on store salaries and other fixed components of overhead costs, 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.specifically, central office and store payroll and depreciation.
 
Store preopening. Store preopening expense was $0.3 for the thirteen weeks ended October 2, 2010 as compared to $0.1 million for the thirteen weeks ended OctoberJuly 2, 2011 and July 3, 2009. The increase in store preopening for2010.  We expect to open three new stores during the period wasfiscal 2011 third quarter, the result of three store openingssame as in the fiscal 2010 third quarter as compared to one store opening in the same period last year.  Additionally, we plan to open 11 pop-up stores in 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.
 
Store closing. Store closing expense was $0.3 million for the thirteen weeks ended October 3, 2009 and consisted primarily of inventory write-offs and construction costs incurred to reformat locations for return to the landlord related to the closure of the Friends 2B Made concept.
Equity losses from investment in affiliate. Equity losses from investment in affiliate was $4.6 million for the thirteen weeks ended October 3, 2009 and is the result of the allocation of losses related to our investment in Ridemakerz. 
Interest expense (income), net. Interest income, net of interest expense, was $83,000$105,000 for the thirteen weeks ended OctoberJuly 2, 20102011 as compared to $44,000$77,000 for the thirteen weeks ended OctoberJuly 3, 2009.2010.
 
Provision for income taxes. The income tax benefit was $0.5$4.0 million for the thirteen weeks ended OctoberJuly 2, 20102011 as compared to $4.6the income tax benefit of $4.1 million for the thirteen weeks ended OctoberJuly 3, 2009.2010.  The effective tax rate was 27.5%37.4% for the thirteen weeks ended OctoberJuly 2, 20102011 compared to 49.4%32.7% for the thirteen weeks ended OctoberJuly 3, 2009.2010.  The decreaseincrease in the effective tax rate was primarily attributable to the impact of recording a valuation allowances recorded for losses incurredallowance in certain tax jurisdictions and lower tax rates in foreign jurisdictions.the previous year.
 
Thirty-nineTwenty-six weeks ended OctoberJuly 2, 20102011 compared to thirty-ninetwenty-six weeks ended OctoberJuly 3, 20092010
 
Total revenues. Total revenues were $177.8 million for the twenty-six weeks ended July 2, 2011 compared to $175.6 million for the twenty-six weeks ended July 3, 2010, an increase of $2.3 million, or 1.3%.  Net retail sales decreased to $264.0were $174.6 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 2010 from $267.42011 compared to $172.3 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009, a decrease2010, an increase of $3.4$2.3 million, or 1.3%.  This declineincrease was primarily attributable to a $3.1$3.0 million decline in comparable store sales, a $1.5 million change in deferred revenue and a $1.3 million decreaseincrease in sales from non-comparable locations.  These declines were partially offset bypop-up and other non-store locations and a $1.0 million positive impact of foreign currency translation, $0.9$1.7 million increase in sales from new storesstores. These were partially offset by a $3.2 million decrease in comparable store sales and $0.6a $2.1 million increasedecline in other non-store locations.sales from non-comparable store locations, primarily closures and relocations.  Other changes in net retail sales, which included the positive impact of the changes in deferred revenue and foreign currency, totaled $2.9 million.
 
We believe the decrease in comparable store sales was attributed primarily to the following factors:
For the twenty-six weeks, we believe that a decline in transactions negatively impacted our comparable store sales were impacted asin fiscal 2011 partially offset by a slight increase in the economic recession and associatedaverage transaction value.
We believe that in the UK, the increase in VAT coupled with cutbacks in government spending has resulted in a decline in consumer confidence continuesentiment and a corresponding decline in spending, negatively impacting our comparable store sales in Europe for the first half of 2011.  We believe that this decline was partially offset by the impact of pent up demand created by adverse weather in December 2010 which drove sales in early 2011.  In this same period, European comparable store sales also benefited from better weather as compared to impact consumer spending, particularlythe same period in Europe.2010, making the year over year comparison easier. 
 
Commercial revenue formerly referred to as licensing revenue, increased to $9.6was $1.8 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 from $3.3$2.0 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009, an increase of $6.3 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 $2.1 million for the thirty-nine weeks ended October 2, 2010, from $2.2 million for the thirty-nine weeks ended October 3, 2009, a decrease of $0.1$0.2 million.  This decrease was primarily duerelated to the declineanniversary of new Wii and Nintendo DS games in the number2010 first quarter with no comparable release in 2011.  Revenue from franchise fees increased to $1.4 million for the twenty-six weeks ended July 2, 2011 from $1.3 million for the twenty-six weeks ended July 3, 2010, an increase of franchised locations and in franchisee store sales reflecting the global economic s lowdown.
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$0.1 million.
 
Gross margin. Total gross margin increased to $103.5$66.2 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 from $98.8$64.8 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009,2010, an increase of $4.7$1.5 million, or 4.7%2.2%.  Retail gross margin increased to $98.8$65.4 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 from $94.7$63.4 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009,2010, an increase of $4.1$2.0 million, or 4.3%3.2%.  As a percentage of net retail sales, retail gross margin increased to 37.4% for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 from 35.4%36.8% for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009, an increase of 200 bps.2010.  This 60 bps increase resulted primarily from a 9050 bps improvementincrease in merchandise margin 70 bps impr oved sales leverage on store occupancy costs and a 40 bps improvementincrease in leverage onoccupancy costs partially offset by increased buying and distribution costs.
 
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Selling, general and administrative. Selling, general and administrative expenses were $115.0$81.8 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 as compared to $113.7$75.9 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009,2010, an increase of $1.4$5.9 million, or 1.2%7.7%.  As a percentage of total revenues, excluding the single wholesale transaction, selling, general and administrative expenses increased to 43.6%46.0% for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 as compared to 41.7%43.3% for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009,2010, an increase of 190270 bps.  Both theThe dollar increase was primarily attributable to consulting costs related to continuing efforts to improve efficiencies and thereduce expenses and increases in advertising and payroll costs.  The increase in selling, general and administrative expenses as a percent of revenue werewas primarily due to increasesthe increase 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 werecosts, partially offset by reductions in marketing expenses.improved leverage on the fixed components of costs.
 
Store preopening. Store preopening expense was $0.3$0.2 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 as compared to $0.1 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009. The increase2010.  We expect to open three new stores during the fiscal 2011 third quarter, the same as in store preopening for the period was the result of four store openings in fiscal 2010 as compared to one store opening in the last fiscal year.  Additionally, we plan to open 11 pop-up stores in the 2010 fourththird 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.
 
Store closing. Store closing expense was $1.0 million for the thirty-nine weeks ended October 3, 2009 and consisted primarily of lease termination charges, inventory write-offs and construction costs incurred to reformat locations for return to the landlord related to the closure of the Friends 2B Made concept.
Equity losses from investment in affiliate. Equity losses from investment in affiliate was $5.1 million for the thirty-nine weeks ended October 3, 2009 and is the result of the allocation of losses related to our investment in Ridemakerz. 
Interest expense (income), net. Interest income, net of interest expense, was $0.2 million$1,000 for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 as compared to $0.1 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009.2010.  The decrease in interest income was primarily attributable to interest costs related to an ongoing sales and use tax audit.
 
Provision for income taxes. The income tax benefit was $3.5$5.4 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 as compared to $9.4the income tax benefit of $3.0 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009.2010.  The effective tax rate was 30.0%37.6% for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 compared to 44.9%30.5% for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009.2010.  The decreaseincrease in the effective tax rate was primarily attributable to the impact of recording a valuation allowances recorded for losses incurredallowance in certain tax jurisdictions and lower tax rates in foreign jurisdictions. the previous year.
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Non-GAAP Financial Measures
 
We use the term “store contribution” in this quarterly report on Form 10-Q. Store contribution consists of income before income tax expense, interest, store depreciation, amortization and impairment, store preopening expense, store closing expense and equity losses from investment in affiliate and general and administrative expense, excluding franchise fees, income from commercial 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.
 
We use store contribution as a measure of our stores’ operating performance. Store contribution should not be considered 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.
 
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The following table sets forth a reconciliation of store contribution to net income for our 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):
 
 Thirty-nine weeks ended  Thirty-nine weeks ended  Twenty-six weeks ended  Twenty-six weeks ended 
 October 2, 2010  October 3, 2009  July 2, 2011  July 3, 2010 
 North        North        North        North       
 America  Europe  Total  America  Europe  Total  America  Europe  Total  America  Europe  Total 
Net loss $(6,417) $(1,759) $(8,176) $(10,854) $(703) $(11,557) $(8,071) $(856) $(8,927) $(5,330) $(1,469) $(6,799)
Income tax expense (benefit)  (3,531)  20   (3,511)  (9,530)  122   (9,408)  (5,100)  (288)  (5,388)  (2,798)  (189)  (2,987)
Interest expense (income)  (65)  (126)  (191)  (54)  (38)  (92)  74   (75)  (1)  (38)  (70)  (108)
Store depreciation, amortization and impairment (1)  11,848   2,082   13,930   13,243   1,975   15,218   7,853   1,135   8,988   8,031   1,481   9,512 
Store preopening expense  162   181   343   90   -   90   172   21   193   83   5   88 
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)
General and administrative expense (2)  23,829   1,591   25,420   19,642   1,772   21,414 
Franchising and licensing contribution (3)  (1,631)  -   (1,631)  (2,009)  -   (2,009)
Non-store activity contribution (4)  (1,375)  (350)  (1,725)  (1,204)  (273)  (1,477)
Store contribution $26,975  $2,882  $29,857  $22,580  $3,474  $26,054  $15,751  $1,178  $16,929  $16,377  $1,257  $17,634 
                                                
Total revenues from external customers $231,739  $43,924  $275,663  $226,991  $45,852  $272,843  $147,938  $29,893  $177,831  $147,638  $27,931  $175,569 
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)
Franchising and licensing revenues  (3,281)  -   (3,281)  (3,295)  -   (3,295)
Revenues from non-store activities (4)  (8,317)  (987)  (9,304)  (5,056)  (829)  (5,885)
Store location net retail sales $212,113  $42,651  $254,764  $213,323  $44,639  $257,962  $136,340  $28,906  $165,246  $139,287  $27,102  $166,389 
Store contribution as a percentage of store                                                
location net retail sales  12.7%  6.8%  11.7%  10.6%  7.8%  10.1%  11.6%  4.1%  10.2%  11.8%  4.6%  10.6%
Total net loss as a percentage of total                                                
revenues  -2.8%  -4.0%  -3.0%  -4.8%  -1.5%  -4.2%  (5.5)%  (2.9)%  (5.0)%  (3.6)%  (5.3)%  (3.9)%
(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)(3)Franchising and commercial contribution includes franchising and commercial revenues and all expenses attributable to the international franchising and commercial segments other than depreciation, amortization and interest expense/income. Depreciation and amortization related to the franchising and commercial segmentsactivities is included in the general and administrative expense caption.  Interest expense/income related to thecommercial and franchising and commercial segmentsactivities is included in the interest expense (income) caption.
(6)(4)Non-store activities include our webstores, pop-ups and seasonal and event-based locations, as well as intercompany transfer pricing charges.
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Seasonality and Quarterly Results
 
Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including:including, but not limited to: (1) changes in general economic conditions and consumer spending patterns; (2) increases or decreases in our comparable store sales; (3) fluctuations in the profitability of our stores; (4) changes in foreign currency exchange rates; (5) the timing and frequency of our marketing initiatives, including national media appearances and other public relations events; (6) the timing of our new store openings 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.
 
The timing of new store openings may result in fluctuations in quarterly results as a result of the revenues and expenses associated with each new store location.  We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening.  We expect our growth, operating results and profitability to depend in some degree on our ability to increase our number of stores.
 
Historically, for North American stores open more than twelve months, seasonality has not been
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As a significant factortoy retailer, our sales are highest in our resultsfourth quarter, followed by the first quarter.  The timing of operations, although weholidays and school vacations can impact our quarterly results.  We cannot ensure 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.
 
Liquidity and Capital Resources
 
Our cash requirements are primarily for the opening of new stores, information systems, including Web site enhancements and maintenance and working capital. Historically, we have metbeen able to meet these requirements through cash flow provided by operations,operations.  In our history, we have also generated capital generated from the sale and issuance of our securities to private investors and through our initial public offering, and our revolving line of credit.
 
Operating Activities. Cash used in operating activities was $17.3$12.9 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 as compared with cash used in operating activities of $10.9$18.3 million for the thirty-ninetwenty-six weeks ended OctoberJuly 3, 2009,2010, or an increasea decrease of $6.4$5.5 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 2010,2011, the use of cash was driven primarily by the net loss for the first nine months of 2010, the decrease in accrued 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 incremental inventory necessary to launch new proprietary and non-proprietary product lines.  Additional increases resultedresulting 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 in 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 by decreases in accounts payable and accrued expenses and offsetting decreases in inventory, primarily attributable to overall cost reductionsdecreased as compared to the year ago period, driven primarily by decreases and an increaseaccounts payable and accrued expenses and increases in receivables, partially offset by decreases in inventory.  In 2010, the use of cash resulting from the change in operating assets and liabilities increased as compared to the year ago period, primarily driven by increases in non-proprietary inventory partially offset by the changes in the timing of accounts payable and prepaid expenses specifically income taxes.
 
Investing Activities. Cash used in investing activities was $10.2 million for the thirty-nine weeks ended October 2, 2010 as compared to $7.2 million for the thirty-ninetwenty-six weeks ended OctoberJuly 2, 2011 as compared to $6.4 million for the twenty-six weeks ended July 3, 2009.2010, an increase of $0.8 million.  Cash used in investing activities during the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 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, 2009 primarily relatesrelated to investments in central office information technology systems and new store construction costs as well as the purchase of short term investments, net of maturities.  Cash used in investing activities during the twenty-six weeks ended July 3, 2010 primarily related to investments in central office information technology systems, new store construction costs and the acquisition of trademarks and other intellectual property.property
 
Financing Activities. Cash used in financing activities was $7.2$4.7 million and $2.7 million in the thirty-ninetwenty-six weeks ended OctoberJuly 2, 2011 and July 3, 2010, respectively, which consisted primarily of cash used for repurchases of the Company’s common stock.  We had no cash flows from financing activities in the thirty-nine weeks ended October 3, 2009. No borrowings were made under our line of credit in either the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 or OctoberJuly 3, 2009.2010.
 
Capital Resources. As of OctoberJuly 2, 2010,2011, we had a consolidated cash balance of $24.7$34.7 million, nearly 60%over 30% of which was held inoutside of the United Kingdom.States.  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.December 31, 2010.  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, 20112012 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%1.8%.  Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge covercoverage ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. As of OctoberJuly 2, 20102011: (i) 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 agreementagreement; and (iv) there was approximately $48.9 million available for borrowing under t hethe line of credit.
 
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Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases.  Our leases in North America typically have a ten-year term and contain provisions for base rent plus percentage rent based on defined sales levels.  Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume is not achieved. In addition, some of these leases contain various restrictions relating to change of control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases.
 
Our leases in the U.K. and Ireland typically have terms of 10 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.
 
Our French leases each have terms of 10 years. French leases for premier retail properties frequently have entry fees and/or key money payments required to be made in conjunction with signature of the leases. Such entry fees or key money payments may be recovered, in whole or in part, upon disposal of the leases. The leases typically provide the lessee with the first right for renewal at the end of the lease. Rent deposits consisting of three months rent are also required to be paid on execution of the leases. Rents are negotiated on a fixed basis, but are reviewed annually in relation to an inflation index and therefore also have a variable rent component. Rents are charged quarterly and paid in advance.
In fiscal 2010,2011, we expect to spend approximatelya total of $12 to $15 million on capital expenditures.  Capital spending through the thirty-ninetwenty-six weeks ended OctoberJuly 2, 20102011 totaled $10.2$6.1 million, on track with our full year plans.  Capital spending in fiscal 20102011 is primarily relates to investments in softwarefor the, the opening of six new stores, the relocation of four stores and equipmentcontinued installation and upgrades to the Company’s e-commerce platform and new store construction costs.of central office information technology systems.
 
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We believe that cash generated from operations and available borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for the near future.  Our credit agreement expires on December 31, 2011.2012.
 
On February 20, 2007, we announced that our board of directors had authorized a $25 million share repurchase program of our outstanding common stock over the following twelve months. The program was authorized by our board of directors.stock.  On March 10, 2008, we announced an expansion of our share repurchase program to $50 million for an additional twelve months.million.  On March 3, 2009, we announced a twelve month extension of our share repurchase program. On March 3, 2010,2, 2011, we announced that our share repurchase program had been extended to March 31, 2011.2012.  We currently intend to purchase up to an aggregate of $50 million of our common stock in the open market (including through 10b5-1 plans), through privately negotiated transactions or through an accelerated repurchase transaction.  The primary source of funding for the program is expected t oto 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.
From the inception  As of our share repurchase program in 2007 through November 8, 2010, we have repurchasedAugust 3, 2011, approximately 3.03.8 million shares of our common stock at an average price of $8.78$8.33 per share have been repurchased under this program for an aggregate amount of $26.3 million.$31.5million, leaving $18.5 million of availability under the program.
 
Off-Balance Sheet Arrangements
 
We hold a minority interest in Ridemakerz, LLC, which is accounted for under the equity method. We 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, we 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 was exercisable on April 30, 2008 and expires on April 30, 2012.  As of OctoberJuly 2, 2010,2011, the book value of our investment in Ridemakerz had been reduced towas zero.  We still retainedretain an ownership interest of approximately 26%15%.  Under the current agreements, we could own up to approximately 27%24% of fully diluted equit yequity in Ridemakerz.
 
Critical Accounting Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates.  Such differences could be material to the financial statements.
 
We believe the application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates, including those related to inventory, long-lived assets, goodwill and revenue recognition, are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
 
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Our critical accounting policies and estimates are discussed in and should be read in conjunction with our annual report on Form 10-K, as filed with the SEC on March 18, 2010,17, 2011, which includes audited consolidated financial statements for our 2010, 2009 2008 and 20072008 fiscal years. There have been no material changes to the critical accounting policies and estimates disclosed in the 20092010 Form 10-K.
 
Recent Accounting Pronouncements
 
There are no new accounting pronouncements for which adoption is expected to have a material effect on the Company’s financial statements in future accounting periods.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Our market risks relate primarily to changes in interest rates, and we bear this risk in two specific ways. First, our revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, our results of operations and our cash flows can be impacted by changes in interest rates.  Outstanding balances under our credit facility bear interest at LIBOR plus 2.05%1.8%. We had no borrowings outstanding during the first nine monthshalf of fiscal 2010.2011.  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 or short-term investments, based on their original maturity and are shown that wayclassified accordingly 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.
 
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We conduct operations in various countries, which expose us to changes in foreign exchange rates. The financial results of our foreign subsidiaries and franchisees may be materially impacted by exposure to fluctuating exchange rates. Reported sales, costs and expenses at our foreign subsidiaries, when translated into U.S. dollars for financial reporting purposes, can fluctuate due to exchange rate movement. While exchange rate fluctuations can have a material impact on reported revenues, costs and expenses, and earnings, this impact is principally the result of the translation effect and does not materially impact our short-term cash flows.
 
Although we enter into a significant amount of purchase obligations outside of the U.S., these obligations are settled primarily in U.S. dollars and, therefore, we believe we have only minimal exposure at present to foreign currency exchange risks for our purchase obligations. Historically, we have not hedged our currency risk and do not currently anticipate doing so in the future.
 
We do not engage in financial transactions for trading or speculative purposes.

Item 4. Controls and Procedures.
 
Disclosure Controls and Procedures:Procedures. The Company’s management, with the participation of the Company’s Chief Executive Bear and Chief Operations and Financial Bear, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this report. BasedOur disclosure controls are designed to provide reasonable assurance of achieving their objectives and based on  suchthe aforementioned evaluation, the Company’s management, including the Chief Executive Bear and Chief Operations and Financial Bear, have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of OctoberJuly 2, 2010,2011, the end of the period covered by this quarterly report.
 
It should be noted that our management, including the Chief Executive Bear and the Chief Operations and Financial Bear, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all error and all fraud.  A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Changes in Internal Control Over Financial Reporting:Reporting. The Company’s management, with the participation of the Company’s Chief Executive Bear and Chief Operations and Financial Bear, also conducted an evaluation of the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.
 
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PART II – OTHER INFORMATION
 
Item 1A. Risk Factors
 
There have been no changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended January 2, 20101, 2011 as filed with the SEC on March 18, 2010.17, 2011.
 
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
ISSUER PURCHASES OF EQUITY SECURITIES
 
Period 
(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
 
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 
Period 
(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) the May Yet Be Purchased Under the Plans or Programs
 
Apr. 3, 2011 – Apr. 30, 2011  168  $6.00   -  $21,249,805 
May 1, 2011 – May 28, 2011  252,983  $6.75   252,800  $19,542,996 
May 29, 2011 – Jul. 2, 2011  136,367  $6.62   136,208  $18,641,289 
Total  389,518  $6.70   389,008  $18,641,289 
(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, 2010,2, 2011, we announced the further extension of our $50 million share repurchase program of our outstanding common stock until March 31, 2011.2012.  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.
 
 
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Item 6. Exhibits
 
The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:
 
Exhibit No. Description
   
2.1 Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the Registrant (incorporated by reference from Exhibit 2.1 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)
   
3.1 Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of our Current Report on Form 8-K, filed on November 8,11, 2004)
   
3.2 Amended and Restated Bylaws (incorporated by reference from Exhibit 3.23.4 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)
   
4.1 Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to our Registration Statement on Form S-1, filed on October 1, 2004, Registration No. 333-118142)
   
4.2 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)
   
4.3 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)
   
4.4 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)
   
31.1 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)
   
31.2 Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Operations and Financial Bear)
   
32.1 Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear)
   
32.2 Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Operations and Financial Bear)
101.INSXBRL Instance
101.SCHXBRL Extension Schema
101.CALXBRL Extension Calculation
101.DEFXBRL Extension Definition
101.LABXBRL Extension Label
101.PREXBRL Extension Presentation
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: NovemberAugust 11, 20102011
 
BUILD-A-BEAR WORKSHOP, INC.
(Registrant) 
    
 By:/s/ Maxine Clark 
  Maxine Clark 
  Chairman of the Board and Chief Executive Bear 
    
 
By:/s/ Tina Klocke 
  Tina Klocke 
  Chief Operations and Financial Bear, Treasurer and Secretary 
    
 
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