## ITEM 7. 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. Factors that might cause such a difference include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Annual Report on Form 10-K. 

## Overview 

We are the only global company that offers an interactive “make your own stuffed animal” retail 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. As of December 28, 2013, we operated 323 Company-owned stores and had 86 franchised stores operating in international locations under the Build-A-Bear Workshop brand. In addition to our stores, we sell our products on our e-commerce Web site, buildabear.com. 

We operate in three segments that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows: 

• Retail – Company-owned retail stores located in the United States, Canada, Puerto Rico, the United Kingdom and Ireland, and a web store; 

• International Franchising – Other international stores operated under franchise agreements; and 

• Commercial – Transactions with other business partners, mainly comprised of wholesale product sales and licensing our intellectual property, including entertainment properties, for third-party use. 

Selected financial data attributable to each segment for fiscal 2013, 2012 and 2011, are set forth in Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 

For a discussion of the key trends and uncertainties that have affected our revenues, income and liquidity, see the “— Revenues,” “— Costs and Expenses” and “— Stores” subsections of this Overview, along with the "Risk Factors" and "Results of Operations." 

We believe that we have an appealing retail store concept that, for North American stores open for the entire year, averaged $1.1 million in fiscal 2013, and $1.0 million in fiscal 2012 and 2011in net retail sales per store. Consolidated store contribution consists of store location net retail sales less cost of product, marketing and store related expenses. Store depreciation, amortization and impairment and non-store 

general and administrative expenses are excluded as are our web store and temporary and seasonal locations. See “— Non-GAAP Financial Measures” for a reconciliation of store contribution to net loss. Store contribution as a percent of store location net retail sales was 15.8% for fiscal 2013, 12.7% for fiscal 2012 and 14.7% for fiscal 2011. Total company net loss as a percentage of total revenues was 0.6% for fiscal 2013, 12.9% for fiscal 2012 and 4.3% for fiscal 2011. 

Our 2013 performance demonstrated progress on our turnaround plan and our objective to achieve sustainable, long-term profitable growth as we hired a new chief executive, executed a significant real estate strategy and implemented stringent cost controls throughout the organization. In 2012, our results were negatively impacted by the declining sales in the UK. In North America, the 2012 results reflected the early results of turnaround efforts, increased costs for marketing, newly imagined store design remodels and openings and store closings. In 2011, our results reflected stabilizing economic trends and modest mall traffic increases but continuing low levels of consumer confidence. In 2011, our store contribution percentage was essentially flat with 2010, as declining sales were offset by lower store expenses, specifically payroll and supplies. 

Our 2014 plan builds on the progress we made in 2013 in implementing our key strategies. We plan to continue to improve store productivity and profitability through our real estate optimization efforts, reposition our marketing programs to refine the consumer value equation and build on core competencies to lay the groundwork to further leverage the strength of our Build-A-Bear brand. Additionally we intend to work aggressively on expense rationalization as we continue to align our cost structure with our smaller store base and value engineer our products, along with an end to end review of our supply chain. 

In 2013, we reduced cost of sales and selling, general and administrative expenses by $14 million, including one-time charges. These savings resulted from our real estate optimization strategies, aligning overhead costs with a smaller store base and continued aggressive expense rationalization. This comes after savings of $25 million in 2009, $3 million in 2011 and $7.5 million in 2012. We ended fiscal 2013 with no borrowings under our bank loan agreement and with $45 million in cash and cash equivalents after investing $19 million in capital projects. 

Following is a description and discussion of the major components of our statement of operations: 

## Revenues 

Net retail sales: Net retail sales are revenues from retail sales (including our web store and other non-store locations), are net of discounts, exclude sales tax, include shipping and handling costs billed to customers, and are recognized at the time of sale. Revenues from gift cards are recognized at the time of redemption. Our guests use cash, checks, gift cards and third party credit cards to make purchases. We classify stores as new, non-comparable and comparable stores. Stores enter the comparable store calculation in their thirteenth full month 

