Note 3 - Leases

9 Months Ended

Nov. 02, 2024

3. Leases

The majority of the Company's leases relate to retail stores and corporate offices. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Most new retail store leases have an original term of a five to ten-year base period and may include renewal options to extend the lease term beyond the initial base period. The extension periods are typically much shorter than the original lease term given the Company's strategic decision to maintain a high level of lease optionality. Some leases also include early termination options, which can be exercised under specific conditions. Additionally, the Company may operate stores for a period of time on a month-to-month basis after the expiration of the lease term. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property.

The table below presents certain information related to the lease costs for operating leases for the thirteen and thirty-nine weeks ended November 2, 2024 and October 28, 2023 (in thousands).

	*Thirteen weeks ended*				*Thirty-nine weeks ended*
	*November 2, 2024*		*October 28, 2023*		*November 2, 2024*		*October 28, 2023*

Operating lease costs	$	10,038	$	9,261	$	29,642	$	27,357
Variable lease costs ⁽¹⁾		2,294		2,134		6,949		6,374
Short term lease costs		18		34		77		74
Total Operating Lease costs	$	12,350	$	11,429	$	36,668	$	33,805

(1)

Variable lease costs consist of leases with variable rent structures, which are intended to increase flexibility in an environment with expected high sales volatility and provide a natural hedge against potential sales declines.

Other information

The table below presents supplemental cash flow information related to leases for the thirteen and thirty-nine weeks ended November 2, 2024 and October 28, 2023 (in thousands).

	*Thirteen weeks ended*				*Thirty-nine weeks ended*
	*November 2, 2024*		*October 28, 2023*		*November 2, 2024*		*October 28, 2023*
Operating cash flows for operating leases	$	10,737	$	9,994	$	30,852	$	29,775

As of November 2, 2024 and October 28, 2023, the weighted-average remaining operating lease term was 5.7 years and 4.0 years, respectively, and the weighted-average discount rate was 7.2% and 6.5%, respectively, for operating leases recognized on the Company's condensed consolidated balance sheets.

The value of our operating lease asset was $91.3 million and $67.8 million as of November 2, 2024 and October 28, 2023, respectively. The increase was driven by the Company entering into leases for new stores as well as securing longer-term extensions for existing stores resulting in contracts with more favorable terms.

For the thirteen and thirty-nine weeks ended November 2, 2024 and the thirteen and thirty-nine weeks ended October 28, 2023 the Company incurred no impairment charges against its right-of-use operating lease assets.

Undiscounted cash flows

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the balance sheet (in thousands).

Operating Leases
2024	$	5,439
2025		34,908
2026		24,183
2027		14,147
2028		8,736
Thereafter		37,086
Total minimum lease payments		124,499
Less: amount of lease payments representing interest		(26,149	)
Present value of future minimum lease payments		98,350
Less: current obligations under leases		(28,832	)
Long-term lease obligations	$	69,518

As of November 2, 2024, the Company had additional executed leases that had not yet commenced with operating lease liabilities of $26.5 million. These leases are expected to commence in fiscal 2024 and fiscal 2025 with lease terms of three to twenty years.

BUILD-A-BEAR WORKSHOP INC 10-Q