Build-A-Bear Workshop Inc (BBW) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Build-a-Bear Workshop earnings conference call. My name is Jackie and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to your host for today's call, Ms. Molly Salky. You may go ahead, Molly.

Thank you and good morning everyone. And thank you for joining us for a review of our fourth quarter fiscal 2005 results. I'm Molly Salky, Director of Investor Relations. And with me this morning are Maxine Clark, Chairman and Chief Executive Bear; Barry Erdos, President and Chief Operating Officer Bear; and Tina Klocke, Chief Financial Bear. In a moment, I will turn the call over to Maxine who will provide her perspective on the fourth quarter performance and our outlook for 2006. Following the presentation we'll open the call up for your questions. Members of the media who may be on our call today should contact us after this conference call with their questions. We ask that you limit your questions to one question and one follow-up. This way we can get to everyone's questions during this one-hour call. Feel free to re-queue if you have further questions.

Please know that our call is being recorded and broadcast live via the Internet. The earnings release is available on our corporate website at the investor relations section at www.buildabear.com, and a replay of both our call and webcast will be available later today.

I'd like to remind everyone that discussions during this 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 risk factors section of our 2004 annual report on Form 10-K filed with the SEC. And we undertake no obligation to update or revise any forward-looking statements. Now I'd like to turn the call over to Maxine for her comments.

Thank you, Molly. Good morning, everyone, and thank you for joining us to review our fourth quarter and full-year 2005 performance. We'll also share our outlook for 2006. Our strong performance in the fourth quarter and for the year underscores what we consider to be the key strengths of our business model and confirms that our strategy for growth and improvement are working. We're moving into fiscal 2006 with positive momentum, increased confidence and high expectations for our future.

There are four fundamentals of our business model that I believe are key for our investors to understand. First is our highly productive and profitable store model. In 2005, we improved upon our already-high sales per square foot with an increase to $615 per foot up from $602 per square foot in 2004. This sales level, combined with our high merchandise margins, which we do not erode with traditional retail markdowns, resulted in superior four-wall earnings. Our model is simple, with fewer than 400 -- 450 SKUs in a store and no meaningful markdowns, price promotions, shrink or product returns.

For the full year 2005, we delivered a 37% increase in net income, maintained our high-gross margin rate at 49.7% and leveraged our SG&A expenses. Our outstanding gross margin rate is even more impressive in light of the higher fuel costs we, like many retailers, faced this past year. Our gross margin rate reflects continued strong and improving merchandise margins. Because of these improving merchandise margins, we were able to absorb higher fuel costs and maintain our high gross margin rates. We look for our new distribution center to provide transportation cost improvements in the future.

Second among these fundamentals is our broad demographic appeal and the connection we have with our guests. With over 35 million stuffed animals sold thus far and over 14 million unique households in our North American database, we know our guests. We know that it's the experience that connects them to Build-a-Bear Workshop. The experience is fun and memorable and it creates an emotional attachment that keeps our customers coming back.

Again in 2005, our oldest stores -- those with the longest exposure in their market and the largest guest database -- had the strongest comp store sales performance. The average age of our store base is three years old. Our oldest stores -- those five years and older -- produced the strongest comp store sales gains with 4.1% growth in 2005. Those in the three to five year range had essentially flat comp store sales performance and our young stores -- those open less than three years -- had comp store -- sales declines of about 3%. We believe our stores mature into Year 3 and beyond and begin to achieve their steady state comp store sales growth rate at this point.

The third fundamental to our model is our abundant growth opportunities. Full year 2005 revenue growth of 20% was driven by new stores, increased sales over the Internet and growth of international franchise stores and licensing. The outlook is positive for these legs of growth in both the near term and longer term. Our concept remains unique with no direct national competition in North America, only a handful of small, mom and pop competitors.

During the fourth quarter we opened seven new Build-a-Bear Workshop stores compared to opening six stores in the fourth quarter of 2004. For the year we opened 30 new stores compared to 21 stores in 2004. Sales over the Internet are important and growing part of our business. These sales increased 44% to $4 million in the quarter and increased 39% to nearly $9 million for the year. Comparable store sales for the quarter and the year were slightly negative, down 0.6% in the quarter and down 0.2% for the year. These results are on top of year-ago comp store sales gains of 23% in the fourth quarter and 18% for the year provides a solid showing for our brand.

Our international franchise partners opened 18 stores in 2005, ending the year with a total of 30 stores in nine different countries. Our debt-free balance sheet and strong cash-flow characteristics -- as demonstrated by our positive operating cash flows of $55 million in 2005 -- provides a powerful engine to fuel our future growth -- fund our future growth.

Finally, a fundamental strength of our company is the highly experienced and talented management team we work with every day. Our management talent is broad and well established. More importantly our store associates continue to wow our guests every day. Again in 2005, our average turnover at both the store manager and store associate levels remained below historical industry averages. We view our ability to hire, train and retain our highly-guest-focused associates as a core competency at Build-a-Bear Workshop.

As I said earlier, we're confident that our strategies for growth are working. Our integrated marketing programs are a key strategy. We invested $27 million or 7.5% of revenues in marketing during 2005 and allocated a higher percentage of that spending in the fourth quarter. Fourth quarter marketing programs included our ongoing national TV advertising which ran for nine weeks as it did last year. Our new TV ads which we call 'out of the mouths of babes' aired on children's cable programming such as Nickelodeon, Cartoon Network, Nick at Nite and ToonDisney and also on programming targeted to adult women. Our holiday catalog arrived in the homes the first week of November and was mailed to a larger guest list this year versus last year.

And our mobile store ended this year with visits to three NASCAR races and the Nellis Air Force Base Air Show. Our objective is to take Build-a-Bear Workshop to where families go to have fun. Based on guest data that we collect we know that approximately 80% of the visitors to our mobile store are experiencing Build-a-Bear Workshop for the first time. And we see them returning to our mall stores after their mobile store experience. In January, for the second year, our mobile store attended the Super Bowl NFL Experience and realized a significant increase in both guest traffic and revenue.

We continue to follow a strategy of ongoing investment in infrastructure and technology. In 2005, we replaced our point-of-sale system and began several key information system upgrades, including our financial and human resource systems. And we've begun construction for a company-owned distribution center which will become fully operational in the fall. Importantly, this new DC allows us to put in place a warehouse management information system that will link our product planning and allocation system to improve overall inventory efficiency. We recently selected Manhattan Associates to provide our warehouse management system.

Also important for our continued growth is keeping our experience and our merchandise fresh, relevant and fun. We sell a brand experience at Build-a-Bear Workshop, and our merchandise is an important part of that experience. Our vendor relationships allow us to source our merchandise in a highly cost-effective way, maximize our speed to market and facilitate a rapid reorder of our best-selling items. These factors are reflected in our improving merchandise margins and high gross margin rate.

Our New York City flagship store which opened last summer continues to serve as an incubator for several new concepts that can be successful in more stores. For example we are remodeling and expanding our Myrtle Beach store, one of our most profitable stores, to include an expanded sports assortment, our friends 2B made store and a Tees by Me station. At Tees by Me, you can create a personalized design or message and have it placed on a T-shirt for your stuffed animal. The Myrtle Beach store expansion and additions will be complete in time for the busy spring vacation season the store enjoys at its location in Broadway at the Beach shopping area in Myrtle Beach, South Carolina.

And in mid-May we'll open a new store in historic Fanueil Hall in Boston. The store will include several new concepts, a Tees by Me station, a friends 2B made store and a make-your-own Wally the Green Monster store all in one fabulous location. We're very excited about the new store that is a highly popular tourist and shopping destination.

During the fourth quarter we planned our inventory appropriately and sold through our holiday products. Frosty the Snowman and his friends were another holiday product success for Build-a-Bear Workshop. Glittery Pony, a new addition to our collection, arrived in stores on December 9th. The purple pony can be accessorized with fairy wings, a princess hat and includes a princess castle, all adding to the play value of this new animal in our collection. And as is our tradition our stores were stocked with fresh merchandise and a new Valentine's Day teddy bear the day after Christmas, ready to wow the many guests who were ready to shop with the gift cards they received as holiday gifts. We know that our new and fun merchandise is a successful part of the formula that keeps guests coming back for more. From gauchos to glitter, flip flops to clogs -- we always have what the well-dressed bear will want.

Let me turn now to a discussion of our outlook for 2006. In our announcement today we provided guidance for diluted earnings per share in the range $1.57 to $1.63, or earnings per share growth of 16% to 21%. It's important to note that this guidance includes the impact of expensing stock-based compensation of approximately $0.08 per share and transition costs related to our new distribution center of approximately $0.04 per share. The guidance does not include the potential impact of transactions under discussion with the Hamleys Group Limited and Amsbra Limited, which Barry will discuss in more detail.

The growth plan assumes total revenue growth of approximately 20% including comp store sales in the flat to low-single digit range. We will open 30 new Build-a-Bear stores in the United States and Canada and double the number of friends 2B made locations, adding about five new locations this year. We will also add two new ball park stores and the first store in a zoo this year as well.

In addition, international franchisees will open between 20 and 25 new stores. The plan also assumes that we maintain our high gross margin rates in 2006 at a level similar to the rate achieved in 2005. The plan also factors in the investment we will be making in brand-building programs through integrated marketing. We expect to spend approximately $33 million or 7.6% of total revenues on marketing this year. Capital spending is expected to be in the range of $47 to $52 million with a new distribution center accounting for approximately $22 million of the total projected investment. New stores and technology-based infrastructure projects make up the remainder of the capital dollars.

2005 was a very good year for Build-a-Bear Workshop. We are now eager to deliver the 2006 growth plan. The new distribution center is an important building block for our growth beyond this year. And our pace of growth for friends 2B made and other new concepts will remain strategically placed while the distribution center is put into place. And now Barry will take you through more detail on our results and growth plans.

Thank you, Maxine. And good morning everyone. I'll add comments on our financial results on international franchising and licensing programs, on the new distribution center and then provide a few additional comments on our outlook. Moving now to some additional details regarding our fourth quarter performance.

As we've said, our net retail sales increase in the quarter of 18% was driven by sales from new stores opened during the last 12 months and higher sales over the Internet. Growth of Internet sales, which are included as part of net retail sales, increased 44% in the fourth quarter and over 39% for the year. Our website, which receives over one million unique visitors per month, continues to complement our store business. Whether you want to find the nearest store, order a gift, play a game or purchase a gift card, the website makes it easy, fun and often drives business into our stores.

Our gift card program this past holiday season included several new card styles that allowed the giver to customize and personalize their card. Our popular upsale program began on November 25th, a week earlier than in 2004. This year, spending $35 on anything qualified the guest to purchase a $10 gift card for $5. Our gift cards are available at Walgreens nationwide throughout the year. And remember that our gift card sales benefit our first quarter results when they are redeemed in January which for Build-a-Bear Workshop is the first quarter.

Fourth quarter net income growth reflected higher new store and Internet sales, lower performance-based bonus expense, lower stock-based compensation expense, increased interest income and lower store pre-opening expense. Gross margin rate declined 88 basis points to 52.08% as a result of higher transportation costs and lack of leverage on occupancy which was partially offset by purchasing and distribution cost efficiencies. Our fourth quarter SG&A expense as a percent of total revenues improved 380 basis points to 38.1%, due primarily to lower performance-based bonus expense and lower stock-based compensation in the quarter versus a year ago. And finally on the income statement, interest income increased as we earned interest on a higher cash balance this year versus last year. We ended the year with $91 million in cash on the balance sheet. Management and our board remain committed to evaluating alternatives -- 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.

Further to the cash flow statement, capital spending in the fourth quarter was $8.5 million up as planned from $5.2 million in the year-ago fourth quarter. For the year, capital spending totaled $31.1 million, on track with expectations and up from spending of $16.5 million in 2004. Higher capital spending in 2005 reflected the higher-than-typical costs associated with the flagship store, more new store openings and several key systems development projects under way or near completion.

Let me add a word or two about our international business. In our press release today, we confirmed that we are in discussions with the Hamleys Group Limited regarding the possible acquisition of the Bear Factory. Bear Factory is a United Kingdom-based stuffed animal retailer owned by the Hamleys Group. We also confirmed that we are in discussions to acquire our United Kingdom franchisee, Amsbra Limited. We have not reached definitive agreements with either of these parties and we cannot assure you that we will reach agreements. Therefore, it is not appropriate at this time for us to discuss the potential transactions further other than to say that we will update you if our discussions result in definitive agreements or if our discussions are terminated. Our guidance does not include the potential impact of transactions under discussion with the Hamleys Group Limited and Amsbra Limited.

Our international franchisees ended 2005 with 30 stores, having opened 18 new stores during the year. We more than doubled international franchise fees to nearly $2 million for the year. Our recent licensing agreements with India and Thailand are very exciting. India is our largest country agreement so far. Today, India is the fourth largest economy in the world in terms of purchasing power, the second fastest growing economy and has the youngest population in the world, with over 50% of the population under 21 years old. Real estate experts estimate that by 2008, there will be 300 malls occupying over 19 million square feet of retail space in India. We are thrilled with our partnership with the Murjani Group, a highly respected and experienced group with over 35 years of proven brand management and retail experience. Murjani is currently evaluating sites in several cities and anticipates opening the first store in India later this year.

Also exciting is our agreement in Thailand with Central Department Stores. In Thailand -- again, we couldn't have partnered with a more ideal franchisee -- Central Department Stores is the oldest and largest retailer in Thailand. Our first Thai store is scheduled to be located inside a central department store in Bangkok and will open a mid-summer. In 2006 we estimate an additional 20 to 25 new international franchise stores that will be opened. 2006 revenues from franchising should approximately double again with these additions.

As you know, the franchise fee revenue includes the combination of an additional one-time development fee paid when the franchise agreement is signed and recognized over the life of the agreement, and a 7.5% royalty fee on revenues generated by the franchise stores.

Another component of our total revenue is licensing revenue. We continue to actively work with third-party manufacturers to develop a collection of lifestyle Build-A-Bear Workshop branded products. Products today span the categories of toys, books, apparel and accessories, home furnishings, cards and stationary, gifts and food items. Licensing revenues for the year were $932,000 with the bulk of the dollars falling into the fourth quarter. We'll focus on approximately 20 core licensing partners in 2006.

With regard to our new distribution center let me add a couple thoughts. The new distribution center is an important strategic investment for Build-A-Bear Workshop. We've significantly broadened our national store presence and believe this investment will be instrumental in our future growth. The distribution center will improve inventory management via the use of a warehouse management system and linkage with our product planning and allocation systems. The DC location near Columbus, Ohio, will provide improved centralization, relative to our store base and thus improve speed to market and potentially reduce transportation costs in the future. Increased centralization of our inventory will provide us with increased operating efficiencies. The pace of growth of our new concepts will remain moderate while we complete this important project. Our plan is to have the new distribution center operating this fall.

In closing I'll make a few additional observations concerning our earnings outlook. As Maxine said we're moving into fiscal 2006 with positive momentum, increased confidence and high expectations for our future. As a practice we provide full-year guidance. However, I'd like to give you some information regarding the timing of certain events that impact the year.

If you are modeling us on a quarterly basis, please remember that because we are on a calendar year, the Easter holiday will fall in our second quarter this year. Easter is April 16th, last year Easter fell into our first-quarter, and it was March 27th.

Distribution center transition costs are anticipated to primarily impact the third fiscal quarter ending in September. Finally, the stock base compensation expenses are expected to be fairly evenly spread between the first half and the second half of the year.

Our sources of growth in 2006 will be consistent with 2005. Sales growth from new stores opened during the year, increased sales over the Internet, and flat to low single-digit comp sale increases, all supported by our integrated marketing program investment of approximately $33 million. A doubling of our international franchise fees will continue to benefit operating income. Store pre-opening expenses will decline in 2006, while internet income is estimated to increase as our cash balance grows. For modeling purposes, we suggest an effective tax rate of 38.5% and a fully diluted share count of 20.5 million shares.

Our investments for the future include our new distribution center, new stores and information systems, cash from operations will continue to fund of growth, our capital investment will be higher in 2006 estimated at $47 to $52 million, compared to $31 million in 2005, again, primarily related to the new distribution center. All in all, we believe our goals for 2006 are realistic, achievable and very exciting. This concludes our prepared remarks. Now I'll turn it back to Molly.

Thank you Barry. We'll open the call up for your questions now. Maxine, Barry and Tina are available to answer your questions. Jackie, can you queue up the questions, please?

Yes. [OPERATOR INSTRUCTIONS] And your first question comes from Bob Buchanan of AG Edwards. You may go ahead Bob.

Good morning and congratulations. Just a few tiny questions all rolled up into one if I may. Average ticket, is that still around $31? What kind of response are you getting from Friends 2B Made and might that concept be accelerated on the opening per the DC opening in the fall? And then lastly, on the flagship expenses, the pre-opening expenses did a substantial portion of those fall in a first-quarter of last year? Thank you.

Okay I'll take that on the -- and Tina can address the flagship expenses, if she's got that. The -- thank you, Bob for the congratulations. Average ticket is about $34.70, and that is now reported on a GAAP basis versus in prior years when it may have been on a non-GAAP basis. So it is a slight increase over the prior year. The Friends 2B Made, we will -- we will plan to open up more stores in 2007 -- I had to think about what year we're in -- once the warehouse is up and running. We cannot handle the volume of the SKUs in our current St. Louis area distribution center so we're going to have to wait until - because we cannot afford to do anything to muck up the Build-A-Bear business at all. Tina do you want to handle the --

Bob, primarily the pre-opening expense related to the New York store was the first and second quarter as we had to recognize the rent expense for time we were in construction, and some fell into the third quarter as a result of the grand opening.

Thank you very much. And your next question comes from Tracy Kogan from Credit Suisse. You may go ahead Tracy.

Good morning. My question first is on gift card sales, how much were they up during the quarter and what portion were redeemed in December versus last year? And then secondly on the marketing spend for the quarter, it looks like it came in a little lighter than you had guided to. On last quarter's call, I think it came in at $27 million and you had said $29. Was there any change in your initial plans during the quarter? Thanks.

The gift cards -- we, historically have not given out the amount of gift cards that we sell in the fourth quarter or on an annual basis. And, I'm sorry Tracy, the question was related to?

Redemption.

Redemption

The redemption is consistent this year over last year in December and in January.

The marketing spend was -- we spend it as we go, we have a plan for it and we spend it as we need it. And we determined in the fourth quarter that we could afford to pull back some of that money based on our original plans.

Thank you. And your next question comes from Brian Tunick from JP Morgan. You may go ahead Brian.

Okay, Thanks. I'll add my congrats as well.

Thank you.

Thank you.

I guess a couple of questions. I guess, first, as far as the sales productivity of the mature stores, how high are those numbers -- where are do you think the overall chain can go from the 600+ we are right now?

Well, it depends on the size of the store. I mean, we have some stores that range from $1,800 a foot to stores that are in the $4 or $500 a foot. So it really depends on the store and the location. And obviously, tourist stores tend to be highly productive for us but we have stores in markets that you would probably be quite surprised at that are getting well over the $615 a foot. So it doesn't have as much to do with age, it really has to do with the size of the store, the type of store it is, if it's a single store in the market versus other competitive stores. Brian not to hedge the question but it really is a lot of factors that go into the sales per square foot dynamic.

Thank you, and your next question comes from Sean McGowan from Harris Nesbit. You may go ahead Sean.

Two questions if I can. Barry, could you break out what the capital expenditures were for the distribution center versus normal store openings? And also, just generally on the subject of markdowns, we do see occasionally in stores that individual items come down in price, and I'm just wondering if that's not a markdown?

Well, I'll answer the markdown question and then Barry can go into the capital question. Occasionally we re-price things a little bit to test the price point or to move through some things but it's very rare, it's not even a percentage point in our -- to our sales. It's very, very low. And it may only happen in certain stores depending on whether it's a - we're trying to try something different in that store. So it's not because of distressed merchandise.

On the CapEx, as we said we'll endeavor to open approximately 30 stores a year. Other than New York, which sort of skewed the average, we're pretty consistent on all of the store openings, and will be likewise in 2006 on the 30 new stores. Again, as we said earlier, $22 million of our CapEx of what we reported, approximately $50 million is the distribution center.

Thank you. And your next question comes from John Zolidis from Buckingham Research. You may go ahead, John.

Hi, good morning and congratulations on a - some great profit performance in both the fourth quarter and the full year.

Thank you.

Thanks, John.

I have a broad question about gross margins which I'll try to get through here. Looking at the sources for gross margin improvement, and I'm talking about total gross margins not retail gross margins. I know we're getting some benefit from higher volume purchasing on the cost side. I was wondering if that can continue into '06? And then in addition, obviously the franchise fees come in at higher gross margins. And then lastly, on the internet, is that a higher gross margin, equivalent gross margin, or a lower gross margin business? Thank you.

I think as we go forward we have a slight benefit of being able to continue to improve our gross margins from product costs. The franchise gross margin is at a higher level than ours and then the internet is about - is consistent with the rest of the company.

Thank you. And your next question comes from Janet Kloppenburg from JJK Research. You may go ahead Janet.

Hi everybody and congratulations.

Thank you.

Thank you.

Thank you, Janet.

Just a couple of questions. First of all on the 30 stores that you'll be opening this year. I was wondering if you could talk about if most of those would be fill ins in existing markets or if you'd be opening in new markets. And also Barry, on the potential acquisition of Bear Factory and the purchase of Amsbra, can you detail for us the size perhaps of those business and the number of locations et cetera? Also on the India franchise business if you look for that to perhaps accelerate in terms -- help you accelerate the number of international franchise stores you open in '07 and beyond. Thank you.

I'll answer the first part. 22 out of our 30 stores are in brand new markets where Build-A-Bear Workshop does not have a store.

On the acquisition, all I will tell you is what's in the public domain already. Bear Factory has approximately 30 locations in the United Kingdom and franchisee stores in the rest of the world in Europe, Asia, and I believe -- in Asia. Our franchisee today has 11 locations, all in the United Kingdom, all in England. India -- just based on the sheer facts that I gave you relative to the size, the age, et cetera, we think the opportunity there to be massive from the sheer number of stores but clearly, we've got to keep the pace of store growth to the pace of the new centers opening. And rather than just hopping in on every center we'd like to see how those centers perform before we take advantage of that opportunity. But we're very, very excited about India and the opportunities it presents to us

Thank you. And your next question comes from Tom Filandro of SIG. You may go ahead Tom.

Thank you. A couple of questions. First Barry, maybe could you provide us a little more detail on how you're viewing inventory positioning going into the spring season in total and on a unit and store basis? And then I have a follow-up question on earnings.

Relative to inventory without giving details that we normally don't give we're up about 8% on a square-foot basis this year versus last year entering the year. But we're very comfortable with the positioning of that inventory, remembering this is not a fashion sensitive business. So, we clearly build up our inventories to take advantage of January, which is a strong month, which also leads into Valentine's Day. So, we're right on plan, right where we want to be relative to our inventories. And rather -- to give further statistics that we normally don't give, I think the key thing to take away is the nature of our inventory, again it's not fashion sensitive.

Thank you. And you have a follow-up question with John Zolidis from Buckingham Research. You may go ahead John.

Hi guys. I just wanted to follow up one question on the acquisitions. I'm sure you're reluctant to give a lot of details. But can you -- but broadly speaking, when you think about using the company's cash balance would it be fair to say that you would consider doing acquisitions that would not be accretive?

We make decisions on our cash balances and we take them into many things - into considerations with those cash balances. But, the primary driver is enhanced shareholder value. So everything we look at has one goal and one goal in mind and that's to enhance shareholder value. So rather than me saying what strategies we have versus dilutive and accretive I think if it's best for the shareholders, management and the board we'll move forward in that direction.

And you have a follow up question from Brian Tunick from J.P. Morgan. You may go ahead Brian.

Hi, thanks. I guess, two follow-ups. The first one is on the Friends 2B Made real estate. Maxine, are you seeing the side-by-sides or the standalones? Is there a significant difference and what kind of plans do you have for '06? And then the second question, I guess, Barry, just a little on the modeling side. I guess the first question is how we should think about Comps in the first half, perhaps between Q1 and Q2 given the Easter shift? And then finally on management compensation costs for Q4 of '06, I mean, what should we be looking at, the '04 or the '05 number, to use as a better guide? Thanks very much.

I'll answer the Friends 2B Made question. Right now, Brian, all of the stores are side-by-side, all five that are open are side-by-side and our plans are of the first three that we'll be opening up this year they will also be side-by-side to a Build-A-Bear store. But the last few that we'll be opening up we are working on separate locations and evaluating those. Again, one of our challenges is that we are in the best locations in the malls and we generally locate ourselves next to Limited Too and Children's Place and where other children's retail is.

So putting it in another place in the mall that would be farther away from that area would not necessarily be a great idea in a traditional mall, in the malls that we're in -- the A&B malls that we're in -- but possibly in a mall like a Mills Mall where they're bigger and do a lot more volume we could be in a different part of the racetrack and be very effective. So that's what we're really looking and evaluating. But right now, all the stores existing are next to a Build-A-Bear store but we're hopeful that the test this year of a store away from the Build-A-Bear store will open up even more opportunities for expansion of the brand into 2007.

Brian, on the comp question --the only guidance we are giving is annual guidance, which is as we said it's flat, low single digit, but positive. But clearly, as mentioned, we know the calendar switch relative to Easter, and that will be factored into it, but I will not give out first half or second half or quarterly guidance. On the question on the stock based compensation, I would model it more closely related to the fourth quarter of '05.

Thank you very much. And your follow-up question comes from Tom Filandro from SIG [sic]. Tom, you may proceed.

Hey, thanks. Barry, I want to ask a question a little question on the first half, because there are clearly a lot of moving parts -- Easter, inventories higher going in, which early could command better demand. You did indicate that the gift card business -- it seems like you guys have indicated that it was strong. I'm not really sure if that's the case. But redemption in January helped the first quarter. January weather was favorable, and pre-opening costs are lower.

Do we look at a 70/30 split that occurred last year in earnings to reverse itself this year? I mean, how should analysts model the first half with all these moving parts?

I think those are your percentages. As I said, we're going to stick to the annual guidance and report as the quarters end. But you're right on with some of those considerations that took place last year.

Thank you. And your next follow-up question comes from Tracy Kogan from Credit Suisse. You may proceed, Tracy.

Hi. Two follow-ups. First, can you update us on the performance of the Northeast stores? And then secondly, on the transportation costs, how much did that hurt your gross margin for the quarter? And should we expect that to continue into '06? Thanks.

The Northeast -- I would only tell you that it has improved when the first comment was made, I believe, after we reported the second quarter last year. It clearly is improving. And that's all I'd rather say, rather than speaking to a geographical comp situation. But clearly, the change in management and the re-emphasis on the area that we've put into place, we're getting paid for that work. The other part was?

[inaudible] costs.

We're not going to say how much that impacted our gross margin.

Other than it had an effect. But look, we don't think we're experts on the cost of fuel anymore. So - obviously, we're hoping for the best, but being prepared for the worst.

Thank you. And your next question comes from Rob Wilson, from Tiburon Research. You may go ahead, Rob.

Yes, thank you. You mentioned earlier that your holiday catalogue that was sent in the first week of November had a higher circulation than last year. Could you give us some magnitude of how much higher?

It was -- actually, what we did was we combined two mailings that we had last year. So it was probably about, in the two combined, maybe about a 0.5 million more -- over if you added the two together. But we really replaced a second mailing with just a stronger first mailing to reach more customers in our database, rather than split it up.

Thank you. And you have a follow-up question with Tom Filandro, from SIG [sic]. You may go ahead, Tom.

Well, I think I'll just give all my questions at once, because the operator keeps cutting us off. The transportation costs, I would assume, are expected to continue to rise in the first half. Until you get the DC online, you probably won't offset those costs; that's the first question. Second question is, on the gifts card business, can you give us some sense of distribution in the up-sale program, if it was improved versus a year ago? And third question, I heard Maxine allude to AUR or average ticket being up slightly. I know you did raise price on the holiday character or holiday skin. Are there any AUR opportunities heading into '06? Thank you. Sorry for so many questions.

That's okay, I'll take a couple of those. The -- we always have a strong gift card business, so just know that it's a substantial part of our business and it was -- the up-sale program the prior year was only on gift card purchases of over $25 in 2004, and this year we made it on any guest purchase of $35 or more. So there really was a stronger selling of gift cards. And a lot of our gift cards are redeemed immediately, like December 26th.

The lines are out the door. We're busy -- I think we've told you this before. Our week after Christmas is as big as most peoples' weeks before Christmas, and then, of course, it moves into January and even into February, especially with President's Day weekend holiday. So we still have gift cards to redeem, but that's very comparable to last year.

It is a very strong and important part of our business, and we look for ways on an ongoing basis to enhance it and to grow it. Although it's already highly developed, I think people would be very envious to have our percent of sales of gift cards, and the ticket on that is higher.

On the average transaction price, yes, there are opportunities for that. And one of the ways that we have enhanced our average unit retail is by some of the licensed products that we've sold. So we've been able to -- like Frosty the Snowman this year and Rudolph the Red-Nosed Reindeer, and our licensed apparel, those do help us raise our average ticket because they are significant parts of our business. And you can look for us to be pushing that envelope this year also, not from raising prices though -- I want to be clear on that. We don't go out and raise retail prices on comparable items.

We really look to give the customer more value for their money. So if it's the football that's NFL football, it sells for $15, versus basic Build-A-Bear football that wouldn't be branded to the Pittsburgh, Steelers, that would sell for $12. So when the customer chooses a licensed product, they're often choosing anywhere from $2 to $3 higher retail price point. And the same would be true when they pick Skechers Shoes or Limited Too merchandise.

And so those are important aspects of our business, and we want to be in the right fashion mode, the right fashion products. So if our gaucho outfits from the Limited Too collection sells for a higher price and the customer selects it, then so be it. But we aren't raising products on like-for-like products. We're not going in and just raising animal prices because of any kind of fuel costs or anything like that. We're negotiating harder and harder, and being very successful on our ability to negotiate better prices and better initial markup.

Relative to fuel, Tom, first of all, the experience we had in '05, obviously, those learnings have been incorporated into our guidance for '06 relative to those costs. However, some of those increased fuel costs are offset by greater efficiencies. One, our store base is getting larger, so we have very few trucks that go out unless they are 100% full, which has not always been the case. And as new stores come on board, we were able to take advantage of our West Coast third-party distribution center.

So all those things add a little offset to the higher costs. But as you said, we are anxiously awaiting completion of our distribution center to really see some benefits there.

Thank you.

And at this time, you have no further questions.

Thank you.

Jackie, can you ask if there are any further questions that people want to enter the cue for?

No problem. [OPERATOR INSTRUCTIONS] And you have a question from John Zolidis, from Buckingham Research. You may go ahead, John.

Hi. Just one last question. I know you talked about the gift cards a number of times. But can you quantify the percentage increase in gift card sales in the fourth quarter versus last year?

It was higher than last year.

I'm sorry. I don't know what it was in the prior year.

I know, and we don't give out that information. Just know that it was higher than last year.

It was -- I'm sorry; the increase was higher than last year's increase?

The percent of the total -- I don't know which one you want to look at. We had an improvement in gift card sales over the prior year, John.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS] And at this time, you have no further questions.

Well, thank you, Jackie. And in closing, let me thank everyone for your participation today. We'll be visiting with investors in Denver and in San Francisco in early March. So please let us know if you would like to be included in those meetings. Thank you again, and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a wonderful day.