Build-A-Bear Workshop's IT Investment for Enhanced Engagement

1 | P a g e Build-A-Bear Workshop’s Strategic IT Investment Name Institution Affiliate Course Date

2 | P a g e Executive Summary This comprehensive report analyzes Build-A-Bear Workshop Inc.’s strategic IT investment project, focusing on leveraging its online platform to enhance physical workshop visits. The proposed project aims to create an integrated online-to-offline experience, allowing customers to explore and customize stuffed bears through an interactive web application. The goal is to drive increased physical workshop visits by generating excitement and personal investment from the digital experience. The analysis begins by evaluating the project’s alignment with Build-A-Bear Workshop’s strategic goal of increasing workshop visits through an online platform. The project entails developing an intuitive web interface with 3D modelling capabilities to enable the virtual design and customization of bears. This aligns with the company’s objectives, aiming to boost customer engagement and drive in-person visits. The project’s financial viability is substantiated by a positive net present value (NPV) of $316,116.43, demonstrating that the expected returns exceed the initial investment cost. The project’s robust financial foundation is substantiated by the key metrics and concepts discussed in Part E. The Weighted Average Cost of Capital (WACC), standing at 9%, is well within an acceptable range and serves as a crucial benchmark for evaluating the cost of capital. Moreover, the Marginal Cost of Capital (MCC) aligns with the WACC, signifying that the project’s funding cost corresponds with the broader capital structure of the company. Importantly, the project’s potential to generate positive returns is reinforced by its projected profitability, as evidenced by an approximate Average Rate of Return (ARR) of 0.516. This figure highlights the projected ability of the project to yield favorable average returns, and the robustness of its financial viability is further affirmed by the positive Net Present Value

3 | P a g e (NPV) of $316,116.43. These combined financial indicators underscore the project’s attractiveness and its potential to drive significant positive impact. The report also delves into Build-A-Bear Workshop’s current financial position through key financial ratios. Liquidity, solvency, and profitability ratios provide insights into the company’s financial health and performance.

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4 | P a g e A. IT Investment Project This section will examine the proposed IT investment project to leverage Build-A-Bear Workshop’s online platform to enhance physical workshop visits. This strategic goal involves utilizing technology to drive more customers to the company’s physical locations. Build-A-Bear Workshop has set a strategic plan to increase visits to its physical workshops by utilizing its online platform effectively. Our project involves creating an integrated online-to-offline experience. We propose developing an interactive web application that bridges the gap between the digital and physical worlds. This application will enable customers to explore workshop offerings, preview available customizable options, and even initiate the bear-making process online. Customers can then seamlessly transition from the virtual platform to in-person workshops, where their pre-selected choices are ready for assembly. The project entails building an intuitive web interface that integrates with Build-A-Bear’s existing website. We will incorporate 3D modelling and customization features to enable customers to virtually design their stuffed Bears, selecting styles, outfits, and accessories. The desired outcome is a more informed and engaged customer base, resulting in increased physical workshop visits driven by the excitement and personal investment garnered from the online experience. Our project is intricately aligned with the chosen strategic goal of Utilize the website to increase visits to Build-A-Bear’s physical workshops. By offering an interactive and immersive online preview of the workshop experience, we intend to intrigue customers’ curiosity and enthusiasm. This, in turn, should drive an uptick in visits to the physical workshops as customers are inspired to see their digital designs come to life.

5 | P a g e While this project involves a substantial initial investment of $3,000,000, the anticipated increase in physical workshop visits will generate revenue over time. The projected cash flows align with the company’s financial fact sheet, justifying the investment and demonstrating a positive return on investment in line with Build-A-Bear’s long-term goals. Considering the projected cash flows and prevailing interest rates, the project’s potential to enhance workshop visits aligns well with the initial investment, rendering it financially viable. The NPV for the project is also positive, as calculated in section E. B) Current Financial Position Analysis Net Profit Net profit, also known as net Income or net earnings, is a fundamental financial metric that represents the total amount of money a company has earned after deducting all its expenses, taxes, interest, and other costs from its total revenue during a specific period, usually a quarter or a year (Hasanaj & Kuqi, 2019). The net profit for Build-A-Bear Workshop Inc in the quarter ended April 29, 2023 was $14,608, which was obtained from cell B12 in Condensed Consolidated Statements of Operations the spreadsheet. Notably, this net Income reflects a significant increase from the previous year’s earnings of $14,191, as recorded in cell C14. Retained Earning Retained Earnings refer to the cumulative sum of a company’s net profits that have been retained within the business rather than distributed to shareholders as dividends (Beaver, 2010). For Build-A-Bear Workshop Inc., the retained earnings for the quarter concluding on April 29,

6 | P a g e 2023, were derived from the Condensed Consolidated Balance Sheets, specifically from cell B27. During this period, the retained earnings were recorded at $50,676. This figure reflects a decrease of 17.43% compared to the previous quarter that ended on January 28, 2023, wherein the retained earnings were $61,375 (cell B27). This decline in retained earnings signifies the change in accumulated net profits that the company chose to retain rather than distribute as dividends during these respective quarters. Liquidity Ratios The liquidity ratio, a fundamental financial metric, assesses a company’s ability to meet its short-term financial obligations by evaluating the relationship between its liquid assets and current liabilities. Current ratio =The current ratio, a vital measure in financial analysis, gauges a company’s short-term solvency by comparing its current assets to its current liabilities. It is calculated by dividing the total current assets by the total current liabilities. Formula: Current Ratio Total Current Assets Total Current Liabilities For Build-A-Bear Workshop Inc, the data extracted from Condensed Consolidated Balance Sheets reveals that the company’s Current Assets amounted to $126,118(B7), while its Current Liabilities stood at $92,448 (B19). Calculating the Current Ratio using these figures yields: Current Ratio = $126,118 / $92,448 = 1.36. This figure indicates a decrease from the previous value of 1.45, recorded on January 28, 2023. Working Capital Working capital, in financial analysis, refers to the measure of a company’s operational liquidity and short-term financial health (Beaver, 2010). Formula for Working Capital: Working Capital = Current Assets - Current Liabilities

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7 | P a g e The Current Assets of $126,118, extracted from cell B7 within the Condensed Consolidated Balance Sheets, was compared to the Current Liabilities of $92,448, obtained from cell B19 of the same statement. Utilizing these values yields a working capital of $33,670, reflecting a decrease from the $46,280 recorded on January 28, 2023, as retrieved from the company’s financial records. This reduction in working capital suggests a decline in liquidity and the capacity to meet short-term financial obligations effectively. Solvency Ratios The solvency ratio, a critical financial metric, evaluates a company’s long-term financial stability by assessing its ability to cover its obligations and debt through its existing assets and earnings (Coulon, 2020). In this section, we are going to explore two significant solvency ratios: Fixed Assets to Long-term Liabilities and the Ratio of Liabilities to Stockholder’s Equity. Ratio of Fixed Assets to Long Term Liabilities The Ratio of Fixed Assets to Long-term Liabilities ratio measures the proportion of a company’s long-term assets funded by long-term liabilities and is calculated by dividing total fixed assets by total long-term liabilities. The formula is as follows. In $ thousands The ratio of Fixed Assets to Long-term Liabilities = Net Fixed Assets / Long- term Liabilities For , Build-A-Bear Workshop Inc Net Fixed Assets is defined as Net Property and Equipment and Long-term Liabilities = Total Liabilities – Total Current Liabilities Net Fixed Assets equal to $50,385 was obtained from cell B9 in the Condensed Consolidated Balance Sheet . Total Liabilities equal to $152,738 was obtained from subtracting Total

8 | P a g e stockholder equity $108,972 in cell B28 of Condensed Consolidated Balance Sheet . From Total Liabilities and Stockholder Equity of $261,710 in cell B29 of Condensed Consolidated Balance Sheet . Total Current Liabilities equal to $92,448 was obtained from cell B19 in the Condensed Consolidated Balance Sheet . Thus, Long- term Liabilities is: Long-term Liabilities = $152,738 – $92,448 = $60,290 Using these values gives the following result in thousand dollars: Ratio of Fixed Assets to Long-term Liabilities = $50,385 / $60,290= 0.84 Ratio of Liabilities to Stockholders’ Equity The Ratio of Liabilities to Stockholders’ Equity, also known as the Debt-to-Equity Ratio, measures the proportion of a company’s total liabilities to its stockholders’ equity. It assesses the level of financial leverage utilized by the company, indicating the extent to which external funds (liabilities) are being used to finance its operations in relation to the shareholders’ investment (equity) (SHIMKO, 2022). Ratio of Liabilities to Stockholders’ Equity = Total Liabilities / Total Stockholders’ Equity For Build-A-Bear Workshop Inc, the Ratio of Liabilities to Stockholders’ Equity, also known as the Debt-to-Equity Ratio, is calculated by dividing the sum of Total Liabilities equal to= Current liabilities +Long Term Liabilities. The current liabilities is obtained from cell B19 in the $92,448 Condensed Consolidated Balance Sheet. The long term debt is calculated above as Long- Term Liabilities Long term Liability of =$60,290 is obtained by adding the operating lease liability long term on cell B20 Consolidated Balance Sheet and other long term liabilities on cell B21 of the Condensed Consolidated Balance Sheet .

9 | P a g e Total Liability =$60,290+$92,448 =$152,738 The Total stockholder Equity to $108,972 obtained from cells B28 of Condensed Consolidated Balance Sheet. Using these values gives the following results in thousand dollars Ratio of Liabilities to Stockholders Equity =$152,738 /$108,972 =1.40 The company has higher debt than equity since the ratio is more than 1. Profitability Ratios Profitability Ratio assesses a company’s ability to generate profits relative to its sales or assets (Kurniani, 2021). In this section, we are going to analyze Build-A-Bear Workshop Inc’s financial performance using two key ratios: the Assets Turnover Ratio and the Return on Total Assets. 1) Assets Turnover The Assets Turnover Ratio is a financial metric used to assess the efficiency of a company’s utilization of its assets in generating revenue. It quantifies the revenue earned for each unit of assets employed by the company. The formula for calculating the Assets Turnover Ratio is: Assets Turnover Ratio = Sales / Average Total Assets Excluding Long-term Investments To determine Long-term Investments on April 29, 2023, it’s calculated as For Build-A-Bear Workshop Inc Average Total Assets Excluding Long-term Investments = ((Total Assets 4/29/23 – Long-term Investments 4/29/23 )+ (Total Assets 4/30/2022 – Long-term Investments 4/30/2022 )) / 2 Long-term Investments 4/29/2023 =Total Assets on 4/29/2023 - Total Current Assets 4/29/ 2023 ,

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10 | P a g e Long-term Investments 4/30/2022 = Total Assets 4/30/2022 – Total Current Assets 4/30/2022 Sales equal to $120,050 was obtained from cell B4 Condensed Consolidated Statements of Operations and Comprehensive Income. Total Assets on April 29, 2023, equaled $261,710, acquired from cell B12 of the Condensed Consolidated Balance Sheets. The Total Assets on April 30, 2023, stood at $256,425, extracted from cell D12 of the Condensed Consolidated Balance Sheets. Total Current Assets on April 29, 2023 was $126,118 obtained from cell B7 of Condensed Consolidated Balance Sheets, while Total Current Assets on April 30, 2022, amounted to $127,703, obtained from cell D7 of Condensed Consolidated Balance Sheets. Long-term Investments 4/29/2023 =Total Assets on 4/29/2023 - Total Current Assets 4/29/ 2023 , Long-term Investments 4/29/2023 = $261,710- $126,118 =$135,592 Long-term Investments 4/30/2022 = Total Assets 4/30/2022 – Total Current Assets 4/30/2022 Long-term Investments 4/30/2022 = $256,425 - $127,733 =$128,692 Using the value above to generate Average Total Assets Excluding Long-term Investments is then calculated using the formula ((Total Assets 4/29/23 – Long-term Investments 4/29/23 ) + (Total Assets 4/30/22 – Long-term Investments 4/30/22 )) / 2), resulting in (($261,710- $135,592) + ($256,425 - $128,692)) / 2 ((126,118,)+(127,733))/2 = $126,925 . Using these values gives the following result (thoudand $):

11 | P a g e Finally, the Asset Turnover Ratio is calculated as Sales divided by Average Total Assets Excluding Long-term Investments, yielding $120,050 / $126,925 = 0.9458. 2) Return on Total Assets The Return on Total Assets ratio, an essential financial metric, evaluates a company’s efficiency in generating earnings from its total assets, reflecting its overall profitability and asset utilization (Mule et al., 2015). The formula for this ratio is given as: Return on Total Assets = (Net Income + Interest Expense) / Average Total Assets. where Average Total Assets is computed using Average Total Assets = (( Total Assets 4/29/23 )+ ( Total Assets 4/30/22 )) / 2 Net Income equal to $14,608 was obtained from cell B12 in the Condensed Consolidated Statements of Operations and Comprehensive Income. Interest Expense equal to $76 was obtained from cell B9 in the Condensed Consolidated Statements of Operations and Comprehensive Income. Total Assets 4/29/23 equal to $261,710 was obtained from cell B12 in The Condensed Consolidated Balance Sheets. Total Assets 4/30/22 equal to $256,425 was Obtained from cell D12 in the Condensed Consolidated Balance Sheets. Thus, Average Total Assets is: Average Total Assets = (( Total Assets 4/29/23 )+ ( Total Assets 4/30/22 )) / 2 = ( $261,710 + $256,425 ) / 2 = $259,067,500 Using these values gives the following result ( thousand dollar $): Return on Total Assets = ( Net Income + Interest Expense ) / Average Total Assets = ($14,608 + 76) / $259,067.5 = 0.0567 .

12 | P a g e Company’s Overall Current Financial Position The overall financial position of Build-A-Bear Workshop Inc can be assessed through various key financial metrics. The company reported a net profit of $14,705 for the Quarter Ended April 29, 2023, representing a notable increase from the previous year’s earnings of $14,191. The retained earnings declined by 17.43% compared to the previous quarter, indicating a change in accumulated net profits that the company retained rather than distributed as dividends. Liquidity ratios, such as the current ratio and working capital, reveal that the company’s short-term solvency and liquidity have experienced fluctuations. Solvency ratios, including the ratio of fixed assets to long-term liabilities and the ratio of liabilities to stockholders’ equity, reflect changes in the company’s long-term financial stability. The profitability ratios, namely the assets turnover ratio and the return on total assets, provide insights into the company’s efficiency in generating revenue and earnings from its assets. The calculated Return on Assets (ROA) of 5.97% suggests that the company generated approximately 5.97 cents in net Income and interest for every dollar of assets employed. These metrics collectively paint a comprehensive picture of Build-A-Bear Workshop Inc’s current financial position.

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13 | P a g e C) Budgeted Income Statement Build-A-Bear Workshop Inc Budgeted Income Statement For Quarter Ending July 31 , 2023 Everything in this section is in millions Revenue from sales 1,4 $436,220 Cost of goods sold 2,4 $209,056 Gross profit 3 $227,164 Total cost for all selling & administrative budget 4 $177,285 Income from operations 5 $49,879 Other revenue & expense: Interest revenue 4 $5 Interest expense 4 $10 Income before income tax 6 $49,874 Income tax 7 $10,474 Net income 8 $39,400 Income Statement The Budgeted Income Statement for the July 31, 2023 quarter presents a comprehensive overview of Build-A-Bear Workshop Inc’s projected financial performance. The key assumptions made in creating this statement are centred around sales projections and cost estimations. The revenue from sales is calculated by multiplying the desired units to be sold by the expected unit sales price. The cost of goods sold is determined based on the units to be sold, desired units in ending inventory, and estimated units in beginning inventory, with consideration for the cost of unit. Gross profit is then derived by subtracting the cost of goods sold from the revenue from sales.

14 | P a g e The total cost for all selling and administrative budget components, including sales salaries, advertising expenses, travel, officer expenses, and supplies, is considered in determining the Income from operations. The impact of interest revenue and expense is accounted for, contributing to the calculation of Income before income tax. Income tax is computed based on the tax rate applied to the Income before income tax. Finally, net Income is obtained by subtracting the income tax from the Income before income tax. These assumptions collectively form the foundation for the Budgeted Income Statement, offering insights into the company’s projected financial trajectory. D) IT Procurement Plan IT Procurement Plan Description The IT procurement plan for Build-A-Bear Workshop Inc encompasses the development of an integrated web application to amplify physical workshop visits, in alignment with the strategic goal of leveraging the online platform. This project envisions an immersive online-to- offline experience, allowing customers to virtually design and personalize their stuffed bears, outfits, and accessories. By enhancing customer engagement and fostering a sense of personal investment, the project aims to drive increased physical workshop visits. The technical aspects entail building a user-friendly interface, incorporating 3D modelling, and seamless integration with the existing website. IT Procurement Plan Resources The implementation of the IT procurement plan necessitates a comprehensive set of resources. Software development expertise is pivotal for crafting the interactive web application, enhancing user experience and integration. Additionally, hardware resources are essential for ensuring efficient and secure web hosting. A skilled team of personnel encompassing web

15 | P a g e developers, designers, and user experience specialists is vital to ensure the application’s successful creation and launch. Furthermore, the procurement of cloud-based services or Software as a Service (SaaS) solutions is integral for seamless scalability and maintenance. IT Procurement Plan Leasing Versus Buying: In the context of IT procurement decisions, careful evaluation of leasing versus buying components is essential. Leasing offers the advantage of reduced upfront costs, allowing the company to allocate capital strategically. However, buying components may yield greater control and long-term cost-effectiveness. In this plan, leasing cloud-based infrastructure and SaaS solutions could offer scalability and cost-efficiency, while buying essential hardware could provide greater ownership and customization control. The financial benefits include potential tax advantages for leasing and cost-saving opportunities for buying, while technical benefits encompass flexibility, security, and customization. This comprehensive IT procurement plan, including resource allocation and a balanced approach to leasing versus buying, strategically addresses Build-A-Bear Workshop’s goal of augmenting physical workshop visits through an innovative online experience. E. Funding the IT Investment Project Weighted Average Cost of Capital The Weighted Average Cost of Capital (WACC) is a crucial concept in finance that holds significant importance for businesses and investors alike. It represents the blended cost of financing a company through various sources, including equity and debt. By considering the cost of each component of capital in proportion to its weight in the company’s capital structure, WACC provides a comprehensive measure of the cost of funds used to support a company’s operations and investments.

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16 | P a g e The formula for computing the Weighted Average Cost of Capital (WACC) is: WACC = (PTCCS)*(CCS) + (PTCPS)*(CPS) + (PTCD)*(CD)*(1 - TR) PTCCS is the Percentage of Total Capital from Common Stock in our case is assume to 55% or the debt to equity ratio CCS is the Current Cost of Equity From the fact sheet is 11% PTCPS is the Percentage of Total Capital from Preferred Stock . Since Build-A- Bear Workshop’s does not offer preferred stock is assumed to be zero CPS is the Current Cost of Preferred Stock 12% PTCD is the Percentage of Total Capital from Debt (1-45%) the remaining percentage after the PTCCS CD is the Current Cost of Debt 7% the cost of debt from the fact sheet TR is the firm’s Effective Negotiated Tax Rate for project is 9% WACC = (PTCCS)*(CCS) + (PTCPS)*(CPS) + (PTCD)*(CD)*(1 - TR) WACC = 55%*11% + 0%*12% + 45%*(7%)*(1 – 9%)= 0.089165 Therefore, the WACC for the company is 8.91 which is equivalent to 9.0%. The WACC is within the range of 6 and 12% and therefore it is acceptable. Marginal Cost of Capital The Marginal Cost of Capital (MCC) is a financial concept that pertains to the incremental cost incurred by a company when raising an additional unit of capital to fund a new project or investment. It reflects the increase in the firm’s overall cost of capital as it seeks to expand its financing sources. In the context of investment decisions, the MCC is an essential criterion used to evaluate the financial viability of a project.

17 | P a g e Considering the calculated Weighted Average Cost of Capital (WACC) of 9% as a representative cost of raising additional funds, the MCC aligns with this value, as denoted by the equation MCC = WACC. This equivalence indicates that the cost associated with financing a new project is consistent with the overall average cost of capital. Average Rate of Return (ARR) The Average Rate of Return (ARR) calculation evaluates the profitability of an investment project over its lifespan. It is determined by dividing the average annual Income generated by the investment by the average investment amount. In the context of the project in question, the ARR is computed as the quotient of the Average Annual Income and Average Investment, resulting in a value of approximately 0.516. The Average Annual Income is derived by summing the Expected Cash Flow values from each year of the project’s five-year life cycle and then dividing by the project’s life cycle. ARR Average Annual Income sum of the Expected Cash Flow 3,868,333.00 Project Life Cycle 5 Average Annual Income 773,666.60 Average Investment Initial Cost of Project $3,000,000.00 Residual Value 0 Average Investment $1,500,000.00 ARR = Average Annual Income / Average Investment ARR 0.516

18 | P a g e Net Present Value (NPV) The Net Present Value (NPV) is a financial metric used to assess the profitability of an investment project by considering the present value of future cash flows relative to the initial cost of the project. The formula to calculate NPV is: NPV = Present Value of Cash Flows - Initial Cost of Project. 1) Initial Cost of Project of the project that was found on the financial sheet for the project was $3,000,000 . 2) Present Value of Cash Flow is computed by summing the product resulting from multiplying the Expected Cash Flow from each of the five years by the Present Value Factor for each corresponding year. In our case the WACC for the project was found to be 9% 3) To get the present value we need to multiply the cash flows with Present Value of $1 at Compound Interest at 9% as follows. Expected cash Flow 0 1 2 3 4 5 Initial Cost of Project (3,000,000) Residual Value 0 Cash Flow 1,750,000.00 1,250,000.00 710,000.00 108,333.00 50,000.00 Present Value of $1 at Compound Interest 9% 0.92 0.84 0.77 0.71 0.65 Present Value (3,000,000) 1,610,000.00 1,050,000.00 546,700.00 76,916.43 32,500.00 4) To get the NPV we need to use the following formula as follows. NPV = Present Value of Cash Flows - Initial Cost of Project. The sum of present value is as follows $1,610,000.00+ $1,050,000.00+ $546,700.00+$ 76,916.43+$32,500.00 =$ 3,316,116.43 NPV = Present Value of Cash Flows - Initial Cost of Project. NPV=$ 3,316,116.43 - $3,000,000. NPV=$316,116.43

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19 | P a g e For this specific project, the NPV is calculated as $316,116.43. This positive NPV indicates that the project’s anticipated returns, when discounted at 9%, exceed the initial investment cost. Consequently, the project is deemed financially favorable, as the NPV reflects the potential net gain from the investment.

20 | P a g e Reference Beaver, W. H. (2010). Financial Statement Analysis and the Prediction of Financial Distress. Foundations and Trends in Accounting , 5 (2), 99–173. https://doi.org/10.1561/1400000018 Coulon, Y. (2020). Key Liquidity and Solvency Ratios. Rational Investing with Ratios , 47–62. springer. https://doi.org/10.1007/978-3-030-34265-4_3 Hasanaj, P., & Kuqi, B. (2019). Analysis of Financial Statements. Humanities and Social Science Research , 2 (2), p17. Researchgate. https://doi.org/10.30560/hssr.v2n2p17 Kurniani, N. T. (2021). The effect of liquidity ratio, activity ratio, and profitability ratio on accounting profit with firm size as a mediation. Journal of Economics and Business Letters , 1 (3), 18–26. https://doi.org/10.55942/jebl.v1i3.122 Mule, K. R., Mukras, M. S., & Nzioka, O. M. (2015). Corporate size, profitability and market value: An econometric panel analysis of listed firms in Kenya. Repository.maseno.ac.ke . https://repository.maseno.ac.ke/handle/123456789/75 SHIMKO, O. V. (2022). Liabilities and stockholders’ equity of the world’s leading publicly traded oil and gas corporations. Economic Analysis: Theory and Practice , 21 (4), 690– 706. https://doi.org/10.24891/ea.21.4.690

Build Beer Financial Analyis Revised 26

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