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Note 2 - Summary of Significant Accounting Policies | 12 Months Ended
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Feb. 02, 2019
Notes to Financial Statements |
Significant Accounting Policies [Text Block] |
( 2 ) | Summary of Significant Accounting Policies
For each accounting topic that is addressed in its own note, the description of the accounting policy may be found in the related note. The Company’s other significant accounting policies applied in the preparation of the accompanying consolidated financial statements are as follows: Principles of Consolidation The accompanying consolidated financial statements include the accounts of Build-A-Bear Workshop, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts are eliminated in consolidation. Fiscal Year The Company operates on a 52 - or 53 -week fiscal year ending on the Saturday closest to January 31. The periods presented in these financial statements are fiscal 2018 ( 52 weeks ended February 2, 2019) and fiscal 2017 ( 52 weeks ended December 30, 2017). References to years in these financial statements relate to fiscal years or year ends rather than calendar years. In January 2018, the Company’s Board of Directors approved a change in the Company’s fiscal year-end, which previously ended on the Saturday closest to December 31, to the Saturday closest to January 31. Accordingly, the Company is presenting audited financial statements for a five week transition period, December 31, 2017 through February 3, 2018. See Note 16 — Transition Period Financial Information for additional information. Cash and Cash Equivalents Cash and cash equivalents include cash and short-term highly liquid investments with an original maturity of three months or less held in both domestic and foreign financial institutions. The majority of the Company’s cash and cash equivalents exceed federal deposit insurance limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk on cash and cash equivalents. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined on an average-cost basis. Inventory includes supplies of $2.9 million and $2.7 million as of February 2, 2019 and December 30, 2017, respectively. A reserve for estimated shortage is accrued throughout the year based on detailed historical averages. The inventory reserve was $0.9 million and $1.0 million as of February 2, 2019 and December 30, 2017, respectively. Receivables Receivables consist primarily of amounts due to the Company in relation to tenant allowances, wholesale and corporate product sales, franchisee royalties and product sales, certain amounts due from taxing authorities and licensing revenue. The Company assesses the collectability of all receivables on an ongoing basis by considering its historical credit loss experience, current economic conditions, and other relevant factors. Based on this analysis, the Company has established an allowance for doubtful accounts of $5.4 million and $3.1 million as of February 2, 2019 and December 30, 2017, respectively. Property and Equipment Property and equipment consist of leasehold improvements, furniture and fixtures, computer equipment and software, building and land and are stated at cost. Leasehold improvements are depreciated using the straight-line method over the shorter of the useful life of the assets or the life of the lease which is generally ten years. Furniture and fixtures and computer equipment are depreciated using the straight-line method over the estimated service lives ranging from three to seven years. Computer software includes certain costs, including internal payroll costs incurred in connection with the development or acquisition of software for internal use and is amortized using the straight-line method over a period of three to five years. New store construction deposits are recorded at the time the deposit is made as construction-in-progress and reclassified to the appropriate property and equipment category at the time of completion of construction, when operations of the store commence. Maintenance and repairs are expensed as incurred and improvements are capitalized. Gains or losses on the disposition of fixed assets are recorded upon disposal. Other Intangible Assets Other intangible assets consist primarily of initial costs related to trademarks and other intellectual property. Trademarks and other intellectual property represent third -party costs that are capitalized and amortized over their estimated lives ranging from one to three years using the straight-line method. Other Assets Other assets consist primarily of the non-current portion of prepaid income taxes, deferred leasing fees and deferred costs related to franchise agreemen ts. Deferred leasing fees are initial, direct costs related to the Company’s operating leases and are amortized over the term of the related leases. Deferred franchise costs are initial costs related to the Company’s franchise agreements that are deferred and amortized over the life of the respective franchise agreement. Long-lived Assets Whenever facts and circumstances indicate that the carrying value of a long-lived asset may not be recoverable, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. The Company performs an annual assessment of the store assets in the direct-to-consumer (“DTC”) segment, based on operating performance and forecasts of future performance. Total impairment charges were $5.9 million and $0.1 million in fiscal years 2018 and 2017, respectively and recorded within cost of merchandise sold and selling, general and administrative (See Note 5 – Property and Equipment for further discussion regarding the impairment of long-lived assets). The calculation of fair value requires multiple assumptions regarding our future operations to determine future cash flows, including but not limited to, sales volume, margin rates and discount rates. If different assumptions were used in the analysis, it is possible that the amount of the impairment charge may have been significantly different than what was recorded. Deferred Rent Certain of the Company’s operating leases contain predetermined fixed escalations of minimum rentals during the original lease terms. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as deferred rent. The Company also receives certain lease incentives in conjunction with entering into operating leases. These lease incentives are recorded as deferred rent at the beginning of the lease term and recognized as a reduction of rent expense over the lease term. In addition, certain of the Company’s leases contain future contingent increases in rentals. Such increases in rental expense are recorded in the period that it is probable that store sales will meet or exceed the specified target that triggers contingent rental expense. Revenue See Note 3 — Revenue for additional accounting information. Cost of Merchandise Sold Cost of merchandise sold - retail includes the cost of the merchandise, including royalties paid to licensors of third -party branded merchandise; store occupancy cost, including store depreciation and store asset impairment charges (See Note 5 – Property and Equipment for further discussion regarding the impairment of long-lived assets); cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to customers. Cost of merchandise sold - commercial includes the cost of the merchandise, including royalties paid to licensors of third -party branded merchandise; cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to customers. Selling, General, and Administrative Expenses Selling, general, and administrative expenses include store payroll and related benefits, advertising, credit card fees, store supplies and store closing costs, as well as central office management payroll and related benefits, travel, information systems, accounting, insurance, legal, and public relations. It also includes depreciation and amortization of central office leasehold improvements, furniture, fixtures, and equipment, as well as amortization of trademarks and intellectual property. In addition, bad debt expenses and accounts receivable related charges are recorded. Further, it includes store preopening expenses which represent costs incurred prior to store openings, remodels and relocations including certain store set-up, labor and hiring costs, rental charges, payroll, marketing, travel and relocation costs. These costs are expensed as incurred and are included in selling, general and administrative expenses. Advertising The costs of advertising and marketing programs are charged to operations in the first period the program takes place. Advertising expense was $16.5 million and $19.0 million for fiscal years 2018 and 2017, respectively. Income Taxes Income taxes are accounted for using a balance sheet approach known as the liability method. The liability method accounts for deferred income taxes by applying the rate, based on enacted tax law, that will be in effect in the period in which the temporary differences between the book basis and the tax basis of assets and liabilities reverse or are settled. Deferred taxes are reported on a jurisdictional basis. Tax positions are reviewed at least quarterly and adjusted as new information becomes available. The recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These estimates of future taxable income inherently require significant judgment. To the extent it is considered more likely than not that a deferred tax asset will be not recovered, a valuation allowance is established. The Company assesses its total liability for uncertain tax positions on a quarterly basis. The Company recognizes estimated interest and penalties related to unrecognized tax benefits in income tax expense. See Note 8—Income Taxes for further discussion including the impact of the December 22, 2017 enactment of The Tax Cuts and Job Act (“Act”). I ncome Per Share Under the two -class method, basic income per share is determined by dividing net income allocated to common stockholders by the weighted average number of common shares outstanding during the period. In periods of net loss, no effect is given to the Company’s participating securities as they do not contractually participate in the losses of the Company. Diluted income per share reflects the potential dilution that could occur if options to issue common stock were exercised. In periods in which the inclusion of such instruments is anti-dilutive, the effect of such securities is not given consideration. Stock-Based Compensation The Company has share-based compensation plans covering certain management groups and its Board of Directors. The Company accounts for share-based payments utilizing the fair value recognition provisions of ASC 718. The Company recognizes compensation cost for equity awards over the requisite service period for the entire award and forfeitures as they occur. See Note 12 — Stock Incentive Plans for additional information. Selling, general and administrative expense included $3.4 million for both fiscal years 2018 and 2017 and $0.2 million for the five weeks ended February 3, 2018, of stock-based compensation expense. Comprehensive Income ( Los s ) Comprehensive income (loss) is comprised of net income (loss) and foreign currency translation adjustments. D eferred Compensation Plan The Company maintains a Deferred Compensation Plan for the benefit of certain management employees. The investment funds offered to the participant generally correspond to the funds offered in the Company’s 401 (k) plan, and the account balance fluctuates with the investment returns on those funds. The fair value of the assets, classified as trading securities, and corresponding liabilities are based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1 ). As of February 2, 2019, the current portions of the assets and related liabilities of less than $0.1 million are presented in prepaid expenses and other current assets and accrued expenses in the accompanying consolidated balance sheets, and the non-current portions of the assets and the related liabilities of $1.0 million are presented in other assets, net and other liabilities in the accompanying consolidated balance sheets. As of December 30, 2017, the current portions of the assets and related liabilities of $0.1 million are presented in prepaid expenses and other current assets and accrued expenses in the accompanying consolidated balance sheets, and the non-current portions of the assets and the related liabilities of $1.0 million are presented in other assets, net and other liabilities in the accompanying consolidated balance sheets. Fair Value of Financial Instruments For purposes of financial reporting, management has determined that the fair value of financial instruments, including cash and cash equivalents, receivables, short term investments, accounts payable and accrued expenses, approximates book value at February 2, 2019 and December 30, 2017. Use of Estimates The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The assumptions used by management in future estimates could change significantly due to changes in circumstances, including, but not limited to, challenging economic conditions. Accordingly, future estimates may change significantly. Significant items subject to such estimates and assumptions include the calculation of revenue from gift card breakage, valuation of long-lived assets, including deferred income tax assets, and the determination of deferred revenue under the Company’s customer loyalty program. Sales Tax Policy The Company’s revenues in the consolidated statement of operations are net of sales taxes. Foreign Currency Assets and liabilities of the Company’s foreign operations with functional currencies other than the U.S. dollar are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the year. Translation adjustments are reported in accumulated other comprehensive income, a separate component of stockholders’ equity. Gains and losses resulting from foreign exchange transactions, including the impact of the re-measurement of the Company’s balance sheet, are recorded as a component of selling, general and administrative expenses. The Company recorded a loss of $1.0 million in fiscal 2018, income of $1.6 million and $0.4 million in fiscal 2017 and for the five weeks ended February 3, 2018, respectively. R ecent Accounting Pronouncements – Adopted in the current year In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2018 - 15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350 - 40 ). This standard amends the existing guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this standard, in the third quarter of 2018, and it did not have a material impact on the consolidated financial statements. In March 2018, the FASB issued ASU 2018 - 05, Income Taxes (Topic 740 )—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, that codified SEC Staff Accounting Bulletin (“SAB”) No. 118, as it relates to allowing for recognition of provisional amounts related to the Act in the event that the accounting is not complete and a reasonable estimate can be made. Where necessary information is not available, prepared, or analyzed to determine a reasonable estimate, no provisional amount should be recorded. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the Act. The Company has applied the guidance in this update to its financial statements for fiscal years 2017 and 2018 and recorded adjustments related to the Act within the one year measurement period. See Note 8 — Income Taxes for additional information. Effective December 31, 2017, the Company adopted the new revenue recognition guidance (Topic 606 ) and all the related amendments using the modified retrospective method for contracts that were not completed as of December 31, 2017. Topic 606 requires an entity to recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. Nearly all of the Company’s revenue is derived from retail sales (including e-commerce sites) and is recognized when control of the merchandise is transferred to the customer. The Company’s most significant Topic 606 impact relates to accounting for gift card breakage. The Company's adjustment for gift card breakage reflects the impact of the change to recognize gift card breakage proportionately as gift card balances are used rather than when it is deemed remote that the unused gift card balance would be redeemed, as done for certain categories of gift cards under the previous standards. In addition, the Company has identified minor changes to the timing of revenues for certain outbound licensing arrangements and international franchise agreements. As a result of this change, the Company expects a negative impact to revenue and pre-tax income with the remaining balance of the cumulative effect adjustment predominantly impacting fiscal years 2019 and 2020. The comparative historical financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. As a result of applying the modified retrospective method to transition to Topic 606, the following adjustments were made to the consolidated balance sheet as of December 31, 2017 ( dollars in thousands):
Balance Sheet |  | Balance as of December 30, 2017 |  |  | Adjustments due to Topic 606 |  |  | Balance as of December 31, 2017 |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Prepaid expenses and other current assets |  | $ | 13,346 |  |  | $ | (13 | ) |  | $ | 13,333 |
Deferred tax assets |  |  | 6,381 |  |  |  | (2,880 | ) |  |  | 3,501 |
Adjustment: assets |  |  |  |  |  | $ | (2,893 | ) |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Accrued expenses (1) |  |  | 15,189 |  |  |  | 151 |  |  |  | 15,340 |
Gift cards and customer deposits |  |  | 33,926 |  |  |  | (12,297 | ) |  |  | 21,629 |
Stockholders’ equity |  |  |  |  |  |  |  |  |  |  |  |
Retained Earnings |  |  | 49,760 |  |  |  | 9,253 |  |  |  | 59,013 |
Adjustment: liabilities and stockholders' equity |  |  |  |  |  | $ | (2,893 | ) |  |  |  |
( 1 ) - The impact on the balances due to the adoption of Topic 606 includes income tax payable. The following tables reflect the impact of adoption of Topic 606 for select accounts on the Company’s consolidated statement of income for the fifty-two weeks ended February 2, 2019 and its consolidated balance sheet as of February 2, 2019 and the amounts as if the previous standards were in effect (“Without Adoption of Topic 606” ) (dollars in thousands):
|  | For the fifty-two weeks ended February 2, 2019 |
Income Statement |  | As Reported |  |  | Without adoption of Topic 606 |  |  | Effect of Change |
Income Statement |  |  |  |  |  |  |  |  |  |  |  |
Net retail sales |  | $ | 326,304 |  |  | $ | 329,081 |  |  | $ | (2,777 | )
Commercial revenue |  |  | 6,560 |  |  |  | 6,560 |  |  |  | - |
International franchising |  |  | 3,721 |  |  |  | 3,721 |  |  |  | - |
Total revenues |  |  | 336,585 |  |  |  | 339,362 |  |  |  | (2,777 | )
Total costs and expenses |  |  | - |  |  |  | - |  |  |  | - |
Income tax expense (benefit) |  |  | (574 | ) |  |  | (485 | ) |  |  | 89 |
Net loss |  |  | (17,933 | ) |  | $ | (15,245 | ) |  | $ | (2,688 | )
|  | February 2, 2019 |
Balance Sheet |  | As Reported |  |  | Without adoption of Topic 606 |  |  | Effect of Change |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Accrued expenses (1) |  | $ | 10,047 |  |  | $ | 9,985 |  |  | $ | (62 | )
Gift cards and customer deposits (1) |  |  | 21,643 |  |  |  | 31,163 |  |  |  | 9,520 |
Stockholders’ equity |  |  |  |  |  |  |  |  |  |  |  |
Retained earnings (1) |  |  | 37,094 |  |  |  | 30,529 |  |  |  | (6,565 | )
Net effect of Change in Liabilities and Stockholders' equity |  |  |  |  |  |  |  |  |  | $ | 2,893 |
( 1 ) The impact on the balances without adoption of Topic 606 includes the activity for the fifty-two weeks ended February 2, 2019, and the December 31, 2017 adjustment. The activity for the five weeks ended February 3, 2018 was not significant. The impact of adoption of Topic 606 on the Company's consolidated statement of cash flows from operating activities for the fifty-two weeks ended February 2, 2019 was not significant. Recent Accounting Pronouncements – Pending adoption In February 2016, the FASB issued new guidance on leases (“Topic 842” ), which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of Topic 842 is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities for all leases with terms greater than 12 months. The lease liability will be measured at the present value of the lease payments over the lease term. The right-of-use asset (“ROU”) will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs (e.g., commissions). Presentation of leases within the consolidated statements of operations, except for additional impairment of ROU assets, which could be material given the size of ROU assets, and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. Topic 842 requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. In fiscal 2017, the Company established a cross-functional team to use a detailed approach to assess the impact of the new standard. The assessment included reviewing all forms of leases, performing a completeness assessment over the lease population, considering the policy elections offered by the standard and evaluating its business processes and internal controls to meet Topic 842’s accounting, reporting and disclosure requirements. The Company has made enhancements to its financial information systems and internal controls in response to the new rule requirements including the implementation of a lease tracking software for managing and reporting information related to its retail leases. Topic 842 will be effective for the Company beginning in fiscal 2019 and requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The Company has elected certain practical expedients, including the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs as well as an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The Company also elected the optional transition method that gives companies the option to use the effective date as the date of initial application on transition, and as a result, the Company will not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. The Company has elected to make the accounting policy election for short-term leases. Consequently, short-term leases will be recorded as an expense on a straight-line basis over the lease term. The Company did not elect the hindsight practical expedient. Upon adoption of Topic 842 on February 3, 2019 or the first day of fiscal year 2019, management expects a significant impact, exclusive of any impairment considerations, on its consolidated balance sheet as the Company will record material assets and obligations primarily related to approximately 350 retail and corporate office locations. The Company is finalizing the impact of Topic 842 on its consolidated financial statements and expects the adoption to result in the recording of operating lease liabilities of approximately $200 million as of the effective date, excluding non-lease components which the Company is still accumulating and evaluating. The Company expects that the right of use asset will be lower than the lease liability upon adoption of Topic 842 due to certain impairments of the right of use assets at the effective date. The Company is still evaluating the possible effects of impairment of certain ROU assets as of the effective date and the associated cumulative-effect adjustment to the opening balance of retained earnings. The Company does not expect that the adoption of ASC 842 will result in a material impact to its consolidated statements of cash flows and they are currently assessing the impact to its consolidated statements of operations. See Note 10 – Commitments and Contingencies for further detail of the Company’s future minimum lease payments.

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