Build-A-Bear Workshop Inc (BBW) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2005 Build-A-Bear Workshop conference call. My name is Angela, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). And now I would like to turn the presentation over to your host for today's call, Molly Salky, Director of Investor Relations. Please proceed.

Good morning, everyone, and thank you for joining us for a review of our second-quarter results. With me this morning here at Build-A-Bear Workshop is Maxine Clark, Chairman and Chief Executive Bear; Barry Erdos, President and Chief Operating Officer Bear, and Tina Klocke, Chief Financial Bear. Our call is being broadcast live via the Internet. The earnings release is available on our corporate website in the IR section at www.buildabear.com, and a replay of both our call and webcast will be available later today.

And I need to remind everyone that discussions during this conference call may contain forward-looking statements. These forward-looking statements are inherently subject to risks and uncertainties. Our actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the risks section of our 2004 annual report on Form 10-K filed with the SEC, and we undertake no obligation to publicly update or revise any forward-looking statements.

Maxine and Barry have approximately 20 minutes of prepared remarks, and then we will open the call up to your questions. Members of the media should call us after the conference call today if they have questions, and we ask that you limit your questions to just one and then follow-up. This way we will get to everyone's question during our one-hour call. Feel free to requeue if you have further questions.

And now I would like to turn the call over to Build-A-Bear Workshop's Chairman and Chief Executive Bear, Maxine Clark.

Thank you. Good morning, everyone, and thank you for joining us on our earnings conference call. We consider our results to be solid, particularly in light of the year-to-year comparison challenges resulting from the Easter calendar shift, the positive impact of sales from our appearance on a syndicated talk show last year, and higher store preopening spending related to our New York City flagship store. We're pleased by both the strong performance we saw from our new stores, the continued improvement and strength in our merchandise margins and the continued comp store growth at our oldest stores.

In our discussion today I will provide a brief recap of our financial results, followed by a review of our marketing and brand building program, merchandise programs and an update on our new store plan. Then I will turn the call over to Barry for further details on our financial results and a discussion of our international franchising and licensing businesses. And then we will be glad to open the call for questions.

But first I would like to say how delighted I am that our directors elected Barry to the Board of Directors yesterday. Barry is a great partner and brings important financial and operating expertise to our Company. He has already made significant contributions since joining Build-A-Bear Workshop and will continue to add tremendous value. And now as our announcement indicated, we're actively working with outside advisors to identify additional qualified independent directors for our Board.

Now to start our discussion today, I would like to share a framework that we use when we plan and analyze our business growth. We separate the primary drivers of net income growth for our business into three categories. The drivers in order of their impact on our business this year are first, new stores; second, new initiatives, namely international franchisee and licensing, and third, comp stores and expense leverage.

Before discussing each of these drivers in detail, it is important to understand our highly productive and profitable store economic model which really forms the backbone of our business. Our store model is highly productive with average store sales per foot at $602, a level that is exceptional relative to most other specialty mall retailers.

Next is our strong growth profit margin that reflects both our excellent merchandise margins and the fact that our business model includes minimal markdowns and minimal product returns. Our store expenses include our investment in marketing and advertising and our store payroll expense, which is higher than some other specialty retailers by virtue of our average 45 minute in-store personal experience. All-in our store economic model delivers four-wall contribution exceeding 20%.

With capital investment in our typical store opened in 2004 averaging slightly above 400,000, the payback on stores is about one year. This model not only forms the backdrop for our drivers of growth, but also serves as a measure for our new store performance metrics as we make capital allocation decisions.

And now for more details on these growth drivers, and the first is new stores. Our plan is to open between 25 and 30 new stores in the United States and Canada each year. We will open 30 new stores this year. New stores typically achieve sales per square foot at or above our chainwide average in their first year of operation. Our marketing, public relations and in many markets the pent-up demand for our concept help drive strong sales performance from these stores. The strong sales levels combined with our highly profitable four-wall store business model makes these stores a strong driver for net income growth in their first full year of operation.

Second, our new initiatives we are pursuing, primarily our international franchising and third-party licensing arrangements. The Build-A-Bear Workshop brand is highly adaptable, whether it's a store in an international market or licensing arrangement with a lifestyle product manufacturer. We see these relationships offering meaningful revenue and earnings growth and brand enhancement opportunities. We consider the initial success we're achieving in these new initiatives combined with future contracts such as "friends 2B made" to be very exciting.

Third and finally are the growth opportunities coming from our comp stores and expense leverage. As we grow and gain critical mass, the costs associate with corporate overhead expenses will be reduced as a percent of revenue and will benefit from leveraging these costs. While our outlook for comp store sales growth is flat versus 18% positive comp store sales last year, these stores remain highly profitable and cash flow positive, particularly as they mature into year three and beyond and achieve their steady-state comp store sales growth rate in the low single digit range. These drivers of growth focus us on what is most important in our business and how we can drive shareholder value.

Now I will quickly recap our financial results. We have delivered a solid quarter, particularly in light of the calendar shift, year ago sales impact, and our higher New York store flagship opening. Second-quarter total revenue increased 12% to 74 million compared to last year with a growth driven by an increase of 7 million or more than 11% in the net retail sales.

For the first half, total sales were up nearly 18% with net retail sales accounting for the bulk of the growth. Total revenue benefited from growth of international franchise fees and licensing revenue which increased $230,000 in the second quarter and nearly 450,000 in the first quarter. In the first half, excuse me. 450,000 in the first half.

Comparable store sales declined 6.9% in the second quarter. For the first half, comp store sales were essentially flat with a decline of less than 1%. We continued to see the strongest comp store sales performance coming from our oldest stores which again points to the staying power of our stores and unique retail experience.

Second-quarter net income was 3.5 million and included flagship store preopening costs of $0.5 million net of tax. This compares to net income of 4.9 million in the fiscal 2004 second quarter.

Importantly, embedded in these results is a strong performance from new stores and the continued strong and improving merchandise margin. Barry will provide more information regarding these improvement in his detailed comments. Year-to-date net income was 11.5 million this year compared to 10.2 million in 2004 or growth of 12% on essentially flat comp store sales growth.

Let me turn now to a review of our marketing and brand building programs in the quarter. Marketing spending in the first half of 2005 was approximately 5.5% revenues this year compared to a spending rate of 5.8% of revenues last year. We continue to target full-year spending at slightly less than 8% of revenues this year or 28 to 29 million. Our total spending last year was 22.7 million or 7.6% of retail revenues.

Our integrated marketing programs in the second quarter included ongoing national television, which ran on national kids and family cable stations for approximately five weeks. We now have just over a year of experience with TV advertising under our belt. We continue to evolve and develop both the integration aspects of marketing, focusing on getting all of our marketing components to work together but also evolving our TV advertising.

We have completed a new round of awareness research that included both guests, moms and kids and nonguests. If we look at our past TV ads and ask the question, what about these ads makes you want to visit our store? Based on the feedback we have received, we have developed new TV ads that focus on our guests talking about their store experience and what makes Build-A-Bear Workshop special. You'll begin seeing these new ads on Monday.

We continue to leverage our database and keep our brand top of mind with our existing guests with direct-mail and e-mail programs. During the second quarter, we've mailed our summer catalog. Our direct mail strategies are a component of our integrated marketing programs and include five catalogs per year. Our back-to-school catalog will arrive in guest homes in early August.

Our in-store events continue to attract loyal guests and give guests a special reason to return and include the birthday celebration of our mascot, Pawlett Coufur, a Flamingo Fever Weekend in celebration of our limited edition pink flamingo, and the kickoff of our Summer Adventures Program, which includes a reading incentive program for our guests.

Another very special annual event for Build-A-Bear Workshop is our Stuff with Hugs program, which took place for the fifth year in mid-May. Through this program, we set aside one weekend a year for guests to make a very special bear that is then donated to a worthy cause. This year at every Build-A-Bear Workshop store in the world we were united to make bears. We estimate that over 40,000 bears were made and donated to UNICEF for distribution to children impacted by the tsunami tragedy.

During the quarter, our on-tour Mobile Workshop visit about 10 events across the country and attended the All-Star Baseball Game in Detroit earlier this month. We continued as well direct-mail and e-mail support of our highly successful product party program.

Our second-half programs are equally exciting and include the important Huggable Heroes program, our ever popular Bearemy's Birthday Bash coming up in August, launches of our new worldwide wildlife animals, our Nikki's Bear III, our collectible Halloween animals and costumes, our holiday catalog mailed in early November and new merchandise introductions tied to holiday and special license product arrangements, as well as our ongoing television advertising which is very important in the second half.

Along with these marketing programs, we introduced new merchandise in our stores during the second quarter. We are excited to report that since opening our first store in 1997 we have now sold approximately 30 million stuffed animals. We are regularly improving and developing programs related to our merchandise. Our 30 to 35 animal skins and approximately 400 SKUs regularly change to reflect seasonal fashion, holiday special offerings and introductions of new merchandise.

As always, bears reflect the latest fashion trends and the fashion desires of their owners. And while denim is a bear core favorite, we consistently update it. Skirts and skirt-sets have been a driver of our core merchandise this year in denim and in other materials, and the numbers are staggering. For example, so far this year we sold 600,000 skirts. This is just skirts, not skirt-sets. If you add the skirt-sets, it would be well over a million and over 400,000 pairs of sandals. And, of course, bears prefer the very popular flip-flop style sandal, which we have sold about 230,000 pairs year-to-date. When you figure our average store count for the season was about 175 stores, that is highly productive SKUs counts and productivity.

And where you can add bear bling -- that is glitter and jewels onto products -- we sell even more, and this fall metallics and shimmer and shine will be been more important for our fashion savvy bearwear. These numbers can give you a sense of how fashion is a key driver of our store traffic and how responsive we are to fashion trends and how much a store can sell of a strong item. Our guest wants the same clothes for their stuffed animals that they want for themselves.

In addition, we continue our sports offerings, which include Major League Baseball, National Basketball Association, the WNBA and the NHL team uniforms. We will have all official NFL uniforms in time for the kickoff of the football season this fall. And in August we will launch our NASCAR program in stores across the United States, and in our Mobile Workshop, we will attend four major NASCAR events this fall. NASCAR events are one of the most popular family entertainment venues in the United States, and we are excited to have five of the most popular and winningest drivers as our features -- Jeff Gordon, Jimi Johnson, Tony Stewart, Bobby LaVanta (ph) and Kevin Harvick (ph).

Other merchandise highlights in the quarter included the very successful Batman costumes introduced for the launch of our new Batman movie, Batman Begins. Also Harley-Davidson, Hello Kitty and, of course, special offerings to help celebrate the summer holidays.

Let me give you a quick update on our store locations in the United States and Canada. During the second quarter, we opened 13 new Build-A-Bear Workshop stores compared to opening seven stores in the fiscal 2004 second quarter. This store count includes our New York City flagship store, which had its quiet opening during the second quarter and official grand opening on July 8th.

Through the first half, we have opened 16 new stores compared to eight in the first half of 2004. We do not anticipate any store closings in 2005. As mentioned earlier, our new store openings have been exceptional. Stores in both new markets and in markets with existing stores have had very successful openings with strong continuing sales trends.

Our plan for 2005 remains to open a total of 30 stores in the United States and Canada. 16 of the 30 are in new markets and 14 are in markets with existing stores. Of the 30 total stores, four are in Canada, bringing our year-end 2005 Canada store count to nine. Second-half openings so far include our store in Mall of America in Minneapolis, which opened on July 15th and includes a "friends 2B made" store adjacent to and connected to the Build-A-Bear Workshop store. We will open one additional "friends 2B made" store in the St. Louis Galleria adjacent to our Build-A-Bear Workshop location in early September. The Galleria store will bring our "friends 2B made" store count to five at the end of its second year of operations, very comparable to Build-A-Bear Workshop which had four stores open at the end of its second year of operation.

The real highlight of the quarter for our Company was the opening of our flagship store located at Fifth & 46th Street in New York City. The store, which includes a "friends 2B made" store, opened with tremendous excitement and success. As we anticipated, the store is attracting many guests who are visiting New York City. We're finding that the many unique category offerings in the store are very well-received, in particular New York City theme merchandise; the T's by Me concept where guests can design their on bear-sized T-shirts; our sports selection, particularly New York City area sports teams; "friends 2B made" and in the international category we have outfits and accessories representing many foreign countries.

The store offers three private party rooms which will open in a few weeks and will include a cafe in September. A full line of our third-party license product is also available, and we hope you can visit to store when you're in the New York City area.

Let me now turn to a few comments regarding our outlook. We continue to believe that despite the flat comp store sales scenario we anticipated in the first half our outlook for fiscal 2005 is shaping up to be quite respectable. Fiscal 2005 earnings per diluted share guidance is $1.24 to $1.30, which represents net income growth of 26 to 32% compared to fiscal 2004. We believe our comp store sales performance this year reflects a transition period in our Company's development. The initial rollout of our nationally syndicated advertising campaign combined with our appearance on a nationally syndicated talk show helped to push our new store sales and comp store sales promotion performance rate to a record level last year. We expect to maintain our productivity of over $600 in sales per square foot, while we normalize our level of marketing spend and our rate of comp store sales growth.

We believe that Build-A-Bear Workshop's highly profitable four-wall store model is a formula for our continuing high-growth and sustainable business success going forward. That model combines strong new store performance with growing new initiatives, mainly international franchise and listening which has enabled us to achieve our profit growth targets even in a low single digit comp store sales environment. These three primary drivers of growth combined with our continued discipline towards cost control and focused efforts to improve our efficiency help us feel confident in our outlook for the future.

In summary, we look forward to delivering on our plans over the remainder of this year. We have confidence in our business strategies and believe that with our economy staying on track we can deliver a solid 2005 performance.

And now Barry will take you through more detail on our results and growth plans.

Thank you, Maxine, and good morning, everyone. I would like to provide some additional comments on our financial results and then spend time on our fiscal 2005 second-half outlook and why we're confident in that outlook.

Let me start with some additional details regarding our second-quarter performance. As we have said, our net retail sales increase in the quarter was driven primarily by sales from new stores opened during the last 12 months and sales from our Web stores. Web store sales, which are included as part of net retail sales and not in our comp store base, were up 18% in the second quarter and up 29% in the first half.

Revenue from international franchise fees and licensing contributed $420,000 in the quarter and $756,000 through the first half. Second-quarter net income reflected higher store preopening costs and the impact of comparable store sales decline on costs and expenses. This was partially offset by the impact of higher new store sales and increased interest income. Gross margin rate for retail gross profits as a percent of net retail sales declines 140 basis points to 46.8% as a result of a lack of leverage on fixed cost primarily occupancy expense. This lack of leverage masks our continuing strong and improving merchandise margins driven by our increased buying power and strong supplier relationships.

On a year-to-date basis, our gross margin rates stand at 48.7% above the 48.3% rate in the first half of 2004. Our SG&A expense as a percent of total revenues increased 160 basis points to 37.4% as store expenses primarily store payroll increased as a percent of revenue. Store preopening increased as we recognized the higher costs associated with the New York City flagship store. Spending for the New York City store totaled $900,000 in the second quarter. For the first half of 2005, New York City preopening costs totaled $1.5 million pretax or $0.05 per share.

And finally, on the income statement, interest income increased as we earned interest on a higher cash balance this year versus last year. The cash balance at the end of the quarter stood at 48 million compared to $26.3 million a year ago.

Further to the balance sheet, capital spending in the second quarter was $10.6 million, up as planned from $3.7 million in the year ago second quarter. Through the first half of the year, capital spending totaled $16.1 million, on track with our full-year spending estimate of approximately $30 million. Higher capital spending in 2005 reflects the higher than typical costs associated with the flagship store, more new store openings this year versus last year, and several key systems development projects underway or near completion.

We expect continued strong operating cash flows throughout 2005 and with our Board remain committed to evaluating alternative uses of our cash including reinvestment in our business, dividends, share repurchase and strategic opportunities, and determining which alternatives best enhance long-term shareholder value.

Let me turn now to an update on our international franchise business. We ended fiscal 2004 with 12 international stores in four countries and with franchise agreements in place with a total of eight countries. So far this year we added four new international stores for a total of 16. In April we opened a new store in South Korea and in May opened two stores in Denmark, and our first store in France in the world-famous Galleria's Lafayette (ph) department store in Paris.

We have also added four additional countries to our international franchisee program. We added the Benelux countries which include Belgium, the Netherlands and Luxembourg. Most recently, we added Norway. These country agreements bring the total number of international countries with franchise agreements to 12. Our 2005 plans call for opening 20 to 25 new stores. Our franchisees in Europe look to open 16 to 18 stores this year, including a total of eight to 10 stores in the United Kingdom, two in Denmark, two in France, one store in Sweden and two stores in the Netherlands. The bulk of these new stores is scheduled to open in the fourth quarter.

In addition to these European stores, our franchisees in Japan, Taiwan and Australia will be adding stores as well. International franchising revenues totaled 846,000 in fiscal 2004. Our outlook for 2005 is for this level of revenue to more than double to approximately $2 million.

As you may know, the franchise fee revenue includes the combination of initial onetime development or country fees paid when the franchise agreement is signed and is recognized over the life of the agreement, and a 7.5% royalty fee generated on those international stores' revenue.

Another component of our total revenues are licensing revenues. At this time we have entered into more than 25 licensing arrangements with third-party manufacturers to develop a collection of lifestyle Build-A-Bear Workshop branded products, including many Build-A-Bear Workshop's stuffed animals kits, sitting cards and calendars, scrapbook supplies, children's shoes, books and bedding fabric. Licensing revenues in the second quarter were as planned. Our outlook for 2005 is for this level of revenue to grow to approximately $1 million.

Importantly, we are very selective in our license arrangements and are looking at these initiatives as potential to enhance our brand, raise brand awareness and to drive increased revenues and earnings.

In closing, I will make a few additional observations concerning our earnings outlook and why we believe it is achievable. Our full-year guidance of net income in the range of $25.1 million to $26.3 million or diluted earnings per share of $1.24 to $1.30 is based on several important considerations regarding second-half performance.

First, our new store sales performance has been exceptional so far this year and is expected to continue, particularly with stores now in Mall of America and New York City, two of America's shopping meccas. We are assuming flat comp store sales for the year, and through the first half, comp store sales were essentially flat with a comp store decline of less than 1%. We have allocated a higher percentage of our marketing and advertising expending in the second half of the year compared to last year.

As mentioned by Maxine earlier, we have targeted our full-year marketing and advertising spend at $28 to $29 million compared to $23 million last year. A higher percentage of that spending, approximately 70%, is targeted for the second half of the year. 2004 approximately 65% of marketing investment on the $23 million spent was spent in the second half.

Also, our 2004 second-half results included some unusual charges that will not reoccur this year. Stock-based compensation or cheap stock charges were recognized in the third and third quarter and fourth quarter last year. These costs, which were embedded in SG&A expense, totaled $490,000 in the third quarter of last year and $1.4 million in the fourth quarter.

Also recognized in the fourth quarter last year was an unusually high level of bonus expense associated with our outstanding performance last year. A large amount of this bonus expense recognized in the fourth quarter included the uncertainty of achieving the bonus targets. The level of bonus expense is not expected to be as large this year, particularly in the fourth quarter. Thus, the bulk of our second-half earnings will fall into the fourth quarter.

Finally, last year in just our seventh year of operation we achieved a low double-digit operating margin of 10.8% and continue to expect improvement to this margin in 2005.

This concludes our prepared remarks. Now we would like to open the call up for your questions.

(OPERATOR INSTRUCTIONS). Brian Tunick, J.P. Morgan.

I guess two questions. I guess just focusing on the comps for a second I guess for 2Q and also expectations, Barry, for the back half, obviously you talked a little bit about the Easter shift, but I'm just trying to understand a little more about what happened in Q2. Was it traffic versus your average ticket going higher? Can you talk a little bit about the different class of stores comping? And then finally, just a little about regional performance, if there were any especially in markets where you opened new stores?

All right. Well, again I think we have sort of talked incessantly about the reasons for the second quarter and why at least I keep harping on looking at the first six months, which is I think a sure indicator. I was looking as the six months sort of balances out the effect of our being on TV, on that syndicated talk show, as well as the Easter shift. And we were flattish, which is pretty much you know, where we see the rest of the year.

The question about geographical is a very interesting question, and I would like to respond to it in this way. A great deal of our business, as I think most specialty stores, sort of congregate in that Northeast quadrant. And in Build-A-Bear, that represents about 25% of our store base, and our definition of the Northeast frankly starts in the mid-Atlantic area with Philadelphia and goes through New England, and that was our worst performing comp geographical section of the country. Sans or removing that from our total comps, year-to-date we are 4% positive, okay?

So Northeast has been sort of a drag on total comps. We have recognized that. Some of those issues are macro. Some are internal, which we are absolutely well into getting rectified. So I think it is an important factor to see that the bulk of our stores, the bulk of the country year-to-date are on the positive side of the ledger. So, as we improve the Northeast, again we think that is also an important part of the formula that gets us to flattish comps in the second half of the year.

And as far as cannibalization of the Northeast, I mean is that in the market that has been hit the most by new store openings? I'm just trying to understand --?

To a degree, yes, but I don't want to put all the reasons the Northeast is cannibalizing. Clearly it is one. But also understand that is probably our most productive store base in the country, and as we are talking about $600 a square foot total total total business, my sense is the Northeast is higher. So we already have great productivity which always is more difficult to positive comp. But again we still think there is room to get positive comps in the Northeast, and we are devoting a lot of energy to that.

But you're correct, some of it is cannibalization, but I don't want to put the entire weight wait on that reason.

But to add to that, when we were on our -- part of our major expansion to gain market share and market dominance, the Northeast was an area that we were concentrated on because we know how valuable that real estate is, and we wanted to make sure that we had the heads up and the lead in the first to market strategy there. So we put a concerted effort in 2002, 2003 and 2004 to concentrate a lot of our new store growth in that area, and so it did impact those stores. And there are some stores that due to -- I want to call it -- I don't know if I would call it really neighborhood aspect -- but the drive time to and from some of these stores we have put stores -- there is quite a few stores in Boston, quite a few stores in the Philadelphia area, quite a few stores in the New York suburbs and New Jersey, which are I would not call them close together for anybody's imagination, but we did make an effort to make sure that we were covered in the major malls in that area. And some of them have impacted each other as they opened up and into the first comp year.

Okay. And just a second question just for Barry. Just on as you are thinking about 2006 CapEx kind of growth over this year versus your comments about what you might do with the balance sheet, whether it is an acquisition or return some of the cash to shareholders, what kind of CapEx and store growth initiatives are you at least thinking about now for '06?

As Maxine said earlier, we plan to open approximately 25 to 30 new stores next year. The total CapEx spend on those stores will be less because there is no New York City flagship store, which was quite high obviously.

So clearly new store CapEx next year will be less than this year, which will allow us further cash on the balance sheet for us to take advantage of.

Sean McGowan, Harris Nesbitt.

I had a question about some of the fashion initiatives, but first, Barry, if I could ask you to clarify something on the franchise stores, did you say that year-to-date it was 4, and did I hear that all of those stores were in the second quarter, or was there one in the first quarter as well?

They all opened -- I think one opened late first quarter, and the rest were in the second.

Okay, thanks. The question on fashion is, to what extent do you get concerned about fashion risk? If things like denim were to take a downturn generally, is that something that could bite you later on?

No, we don't worry about that too much because we are on such short leadtimes. I mean we're just buying holiday now. You know based on our early back-to-school reads we just rebuy what we sell and bring in all the new items for holiday unlike most traditional toy retailers that have bought Christmas long ago and finished their planograms, and Target is setting their planograms for holiday as we speak. We are not even finished all of our ordering. So we have a lot of leadtime to change that.

But we're not talking about high, high, high fashion here. We buy to sellout. We buy very tight. More than likely we may miss a sale or two than we are greedy about grabbing an extra sale, and we're not talking about couture here. We're talking about interpreting mainstream fashion, what's going on in retailing today to our bear fashionwear, and adapting it appropriately. So I don't want to scare anybody about it, but it is pretty incredible to me anyway when you look at the kind of numbers we will sell on pleated denim skirts with rhinestones on them, and that is about how high fashion we are talking about. Or decorated jeans which are very very popular right now, about Mylar (ph) handbags, metallic handbags.

I mean the quantities that we can sell on a per store basis because our SKUs are so productive is really amazing. Every single item that we have is tested. Every single item gets tested before it is bought and expanded, or it is cut back if the test results are not good. So that is something that we have that is sort of an intercompany trade secret that really works well for us.

Also, we order to sellout. There is no reluctance on our part to leave business on the table as opposed to taking a risk and having to take extreme measures to move excess stock. So although these numbers sound staggering, I think if we were really aggressive in trying to sell all of these skirts, we would have ordered a lot more. So we're very well defined as to what we order supported by great analytics, and we are happy to sellout.

Janet Kloppenburg, JJK Research.

You talked a little bit about the Northeast and talked about some issues there with the stores. I don't think I have heard you discuss that before. Are there some management issues, or are there some regional issues that you think you can work out and that may have affected the business in the first half?

Well, without getting into the real nitty-gritty of the specifics, I think in the Northeast we just had probably a little above the norm. We probably had the greatest retention percent of any specialty retailer in the country, quite frankly. We just felt the need to make some changes, and we're in the process of doing so.

Okay. And do you think that those changes could have an effect on the business this year, or do you think it is something that will take a year or so to transition?

I don't think anything gets fixed overnight, but I have been in this business long enough when the right person is put in a store, you see dramatic results. So clearly we have made some changes. Some of those changes are already in place. We already see some good signs.

So I think we are writing the ship on what we can write. I think some of the macro issues will take a little bit more time. But again we're still talking about probably from a productivity standpoint a part of the country that is still outstanding, and as Maxine talked about, those kinds of productivity numbers on our store model bring a lot of profit to the business.

Okay. And then I think what you said is that 70% of your marketing spend is occurring in the second half of '05. I did not get what it was last year in the second half of '04, Maxine.

65%.

625. So of the $5 million incremental advertising that you are doing this year versus last, is it a couple of million dollars more in the second half than last year?

Yes. If you do the math, take 65% of 23 versus 70% of 29 --

Okay, because you had said 28 to 29, so (multiple speakers)

28 to 29 (multiple speakers)

Yes. And is most of that happening in the fourth quarter, or is it spread throughout?

Well, our advertising actually starts -- our quarter remember, our fourth quarter starts in October, and our television advertising also starts for that quarter in October. So they will have our -- the majority of it will be in that timeframe. Our television (multiple speakers)

In October, in October, Maxine?

It starts in October, and we will advertise through November and December. So it is our fourth quarter heavily, but a lot of people don't think of the fourth quarter as October. But at Build-A-Bear Workshop, it is October. And then -- --?

No, no, October, November December, you have a December year-end?

Right. But so our advertising will be structured into October, November, December, not November, December, January as some retailers would have called the fourth quarter.

We also will end our advertising in the second quarter in a few weeks. And then (multiple speakers) and we will end -- I'm sorry the third quarter in a couple of weeks and then just do our normal mailer or back-to-school mailers, our e-mail events, our in-store special events and gear up for the early television push in October.

Okay, great. And on the licensing side, I wondered if you guys could discuss any new businesses that would be coming online for the third and fourth quarter that were not in your business -- that were not licenses last year at this time?

Most of them are all done already and are in production and on order. But there is clothing and apparel that is hitting department stores now and into the fourth quarter. There is sleepwear, shoes and slippers. Those shoes are already in stores, and the slippers are hitting for the normal fourth-quarter fall business. And all of the reports that we are getting from the retailers that have that merchandise is that it is doing quite well. And so that is a plus over last year.

Target is expanding its presentation. All of the new stores -- I believe the new stores at target will open this weekend when they have their grand opening. All will start with an expanded selection of Build-A-Bear Workshop merchandise. They have virtually sold out of all of the other older merchandise, and they will be expanding as part of their fall floorsets, which is I believe starts in the first couple of weeks of August for their holiday season. We will have an expanded section of Build-A-Bear Workshop on stuffed animals. There are many stuffed animals with clothes and accessories and a broader line of toys, toys carrying cases, etc. So you will start to see a much bigger impact there. But the newness this year, Target had merchandise last year. The real newness is in the apparel shoes and accessories that will be in the department stores across the country.

Great.

I'm sorry. We will have to take our next question. (multiple speakers)

I am sorry. I apologize. Thank you.

Tracy Kogan, Credit Suisse First Boston.

I have two questions. The first for Maxine. Can you talk about how you are building customer awareness in the New York City flagship store, especially for the tourists?

And then secondly to Barry, it looks like you beat your guidance by a couple of pennies, but the annual guidance is the same. Was there maybe some shifting of expenses from Q2 to Q3? It looks like the preopening for the flagship was a little more than your previous guidance. Thanks.

First of all, our tourist plan in New York is integrated with our national plan, so all television advertising runs across the country. And starting next week with our new TV commercials, they will be tagged in the New York City area with the New York City store. We have partnerships with both the Hilton Hotel and starting in August with Starwood Hotels who have already told us that they have booked enormous amounts of weekends relative to what they booked for other family-oriented attractions in New York, Build-A-Bear Workshop weekends, whereas the customer when they schedule one gets a special package.

We have -- in some of the local magazines, there has been quite a bit of PR and more coming. But our real push really is in the fall season when people are back from their vacations and getting ready for the holiday season, and we want to make sure that we maximize all those customers that come into the city for the holidays at our restaurant opening in September and the launching of our parties, which already are getting highly scheduled, and the ticket on the average party in New York is considerable as you might imagine.

But none of that has started yet. That will all start in the fall season. So we really have sort of a planned continuing to re-energize and reenergize the consumer and the marketplace, those that live there and those that visit there as well. And we have a lot of exciting marketing activities that will happen special in the New York store around special events that we might do in other cities like we might have the birthday -- I'm just using this as an example -- Elmo's birthday in every single store. But in New York we can really celebrate the birthday with a party in our restaurant and make it into a much bigger personal appearance by Elmo. Some things that we are not able to do in other locations, and you will start to see that theater aspect of our business come alive in the fall season as we partner with our license -- some of the licensed characters and licensed themes that we feature in our stores from sports to NASCAR to Sesame Street to our holiday launch of our new holiday animal for the fall season. Does that answer your question?

Yes. Thanks, Maxine.

On the guidance, first of all, considering almost 7% negative comps, the quality of earnings we have achieved in the second quarter we feel good about. The upside on the second quarter still allow us to fall in the original range we gave for the year. So rather than change that inclusive of the improvement in the second quarter from our previous guidance, it still falls into that year range that we gave at our last guidance update.

Pauline Reader, Thomas Weisel Partners.

I was just wondering if you could comment on your comp stores, the percentage of customers that are new versus existing, and how that compares to last year first half -- this year versus first-half last year?

As we say all the time, every single day in a Build-A-Bear Workshop store 50% of the customers, approximately 50% of the customers are new and 50% are returning, and that does not change. That has been consistent all the time from the beginning of time. Always new customers and it's always about the same level.

Okay. So it has not changed year-over-year?

No.

Wayne Moore, Griffin Partners.

I wanted to congratulate you on a good quarter.

Thank you.

I had two questions. First, some analysts have kind of discussing the recent re-evaluation of the Chinese currency as being a concern for people who source the majority of their products out of that region, and kind of the overall concern would be for your Chinese suppliers. It would de facto 2.5% decrease in what they are receiving for their products.

So my first question is, have you discussed this with your Chinese suppliers? And do you feel that this could potentially increase the pricing for your products going forward?

Yes, we have discussed it with our suppliers. We have probably fewer than most people do very closely partnered with Build-A-Bear Workshop to work with us, and they have all guaranteed us that they will not be raising prices in the foreseeable future.

We work incredibly close. I think this is a little bit misunderstood concept because if you were to start facing products out of any other country in Asia, or America that would even be higher, but your base cost would be 20 to 30% higher in the first place. And then the products, the materials come from China for most everything.

One great thing about China is they have -- it is holistic. They can make and vertically produce just about everything from buttons to zippers to rhinestones in China and make sure you can get your products really quickly. The transportation costs would be higher, and the transportation leadtimes would be longer as well.

So it would be a lot. Other countries would have to do a lot to be able to offset the enormous price advantage that you have being in China, and we continue because of our leverage with our vendors of not only our own growth in the United States and Canada but all of our international franchisees, we are giving them more and more business all the time, and that is why our merchandise margins continued to improve. We have been able to negotiate and continue to negotiate better prices and certainly maintaining our price structure.

So I'm not saying that we should not be aware of it or concerned about it, and we are always looking for other opportunities to make products in other countries, but there's a lot that has to go into a country being able to be up and running, especially for a short leadtime business like Build-A-Bear Workshop.

And the other is that apparel companies have been able to diversify a little bit more, had to because of the quota restrictions that were in place in the apparel industry. So they moved to Singapore or Philippines, Taiwan, India. Again, it is a different product category. I think those of us in the toy business, the consumer electronics business and the shoe business are probably the most dependent on China. But overtime a lot of things have been changing in China, including the value of the product that they are able to give the customer continues to get better and better. We also pay in U.S. dollars so that makes a difference.

Right. You know, I definitely understand that. I think it is more of a concern, frankly, on their side; whereas the Yuan gets revalued upwards, what they are receiving in dollars becomes that percentage smaller. So it is really whether or not they pass those costs on. Really you know I understand your answer in terms of kind of the relationship you have built.

Another thing, we work directly with factories. We don't really have middle people (multiple speakers) in our factories. We have saved an enormous amount of time and money as well, but I think that that helps us have these relationships with really the factory owners and allows us to plan out -- which we have always done by the way. This is not new for us, but we buy our -- we own our denim. We never run out of denim products for our bears. There is certain materials that we keep there. It is a little bit easier when you are running 400 SKUs, and you stick to similar colors every season. Our shoe vendors, we don't have to be in a million factories. We really have a lot of efficiencies that in this kind of uncertainty really play to our advantage not our disadvantage.

Now my second question is kind of switching a little bit and really kind of I want to discuss the overall kind of business model going forward as you start to add locations and you start really kind of infilling in existing markets. Will we ever be at the point, and what point do you think it would be, when we would see kind of the existing store base continue or begin to comp in kind of the mid single digits positive? Or is this a case as we start to add more and more stores and start to somewhat cannibalize some of these markets, I mean is this something where really the growth going forward in numbers and net income is going to have to come from new stores rather than comp store growth of the existing base?

Well, I think that we right now the focus is still on that we have new stores to grow fortunately. But we don't plan to be -- we think that where there is 350 or so Build-A-Bear Workshop stores in the sales volume model that we currently have today, there is expansion opportunities beyond that if we want to go to smaller markets where we certainly don't have any competition. There's lots of markets you could put a Build-A-Bear Workshop store, and you know -- no offense to anybody who might live there -- but in the hinterlands of some places, and we could do less volume than our average, and it probably would not cannibalize anybody's sales.

So there's opportunities like that that we continue to explore, and I think will not negatively impact our comp store sales. But I just want to bring you back to our stores that are the oldest, those stores prior to 2001, prior to 2000, continue to have the strongest comp store sales gains in the range you are talking about. So there's every reason to believe that from those indications that we can get below to middle digit, single digit comp store increases and continue to improve our business. Those are numbers that we think are possible, and certainly if you look at our oldest stores, you can see that there.

This year is an anomaly in terms of the marketing that we pushed out there last year, and now we are up against it, and certainly that Oprah appearance last year was a big deal. But then that will be behind us, and I think things will normalize and stabilize, and our marketing spend will be less of a big gigantic jump on top of like it was last year and much more normalized.

Robert Hu (ph), JM Cohen.

I wonder if you can give me some color, especially on the comp store figures for mature stores? If you have a store, let's say, open in April of last year, then it will be included in the comp store figure that is just released for the second quarter for this year, right?

Correct.

And if it opened last year, it probably had some, you know, atmospheric number much higher than $600 per square foot that you see for your average store. Therefore, it will contribute to some of the negative numbers that you see in the comp store figures. But if you can give us some color on what the comp store for stores that are open for two years or longer has been historically, let's say, for '01, '02 and '03, that will very much put people like us who are holders of your common stock at ease.

Well, I think that again it is the same story. Our stores open very strong, and there is a pent-up demand for them. Last year the stores that opened up with the launch of the new TV advertising even launched stronger. So when they hit their comp store year this year, even though they have already comped and they are in our comp store base, those are the worst performing. They have the biggest challenge of all because they are opening up against enormous push of the business. Not us pushing it, but customer demand. So it takes them a couple of years to normalize.

But after that, the stores come into -- we consistently say that come into being small to it depends -- small, low single digit comp store to higher than that. It really depends on that market and what else we're building there. If we open -- if that store opens and then it gets to its comp year and it gets to a normalized state and then we open two more stores in that market, it changes their business, too.

Let me also add to that. First of all, we are a young company. But to me we have brand-new history that started last year when we energized our marketing campaign. So last year due to that energizing of marketing, stores that we opened in '03, which were 43 I believe, were double-digit comps last year. Okay? As we look at the stores that we opened last year entering the comp base this year based on the marketing, based on our always exciting openings, we're having a difficult time comping positive.

So as we look forward under this new history which began a year ago, the steady-state of this business really will be that it will be very difficult to get the kinds of comps that we experienced on stores reaching that comp base for the first time as we did last year. But as we have already seen last year and this year most importantly, those older stores as they sort of now reach the steady-state continue to be comp positive. And as this business grows and grows and the bulk of stores increases each year opening 25 to 30, the impact that stores entering the comp base for the first time keeps getting smaller and smaller.

So everybody trying to judge our comp performance this year really needs to also marry that to what we think the steady-state of our comp history and performance will be as again the stores increase in numbers and more and more stores reach sort of being older as opposed to first year. Long-winded response, but I think the future bodes okay from a comp standpoint on steady-state.

And we also know this about our stores because it has historically been they have opened up so strong. We don't plan them to have a comp store positive increase, and we put more pressure on the stores that have been open a longer period of time and they rise to that result. But again as it becomes smaller as new stores become a smaller part of our total store base, that will become less of a pressure on the higher performing stores.

And now I would like to turn the call back over to Ms. Molly Salky, Director of Investor Relations, for the closing remarks, please.

Thank you. And in closing, just let me thank you again for your participation today. We do want to make you aware of a change in our recording practices going forward. Beginning with the third quarter, we plan to report our retail sales and comp store sales with our earnings announcement, not as a separate announcement. So we will no longer report retail sales and comp store sales separate from our quarterly earnings, and we currently plan to report the third-quarter results the week of October 17th.

We will be speaking at the ThinkEquity Annual Growth Conference in San Francisco on Monday, September 12th and at the Susquehanna Retail Forum in New York City on Thursday, September 15th. We look forward to speaking to you at these conferences or sooner, and thank you again for your participation. Have a great day.

Thank you for your participation in today's conference. This does conclude your presentation, and you may now disconnect. Everyone have a wonderful day.