Build-A-Bear Workshop Inc (BBW) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2006 Build-A-Bear Workshop earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Molly Salky, Director of Investor Relations. Please proceed.

Thank you, operator, and good morning, everyone and thank you for joining us for a review of our results for the 2006 fiscal first quarter ended April 1st. 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, our Chief Financial Bear. In a moment, I will turn the call over to Maxine, who will provide her perspective on our first-quarter performance and outlook. Barry will update you on our UK acquisition and progress on our company-owned distribution center construction, and Tina will follow with additional details on our first-quarter financial results. At the end of our remarks, we will open the call up for your questions.

Members of the media who may be on our call today should contact us after this 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 question during this one-hour call. Do 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 web site in the investor relations section at www.buildabear.com, and a replay of both our call and webcast will be available later today.

I would like 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, so 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 in our 2005 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 would 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 first-quarter performance. We are pleased with our performance in the first quarter. Our results were in line with our business plan. We reported growth in sales and earnings against a difficult comparison to last year, when our first quarter benefited from sales from the Easter holiday. As you know, Easter fell in April this year. Our results continue to illustrate the strength of our store model, delivering solid net income growth.

During the quarter, we also made important progress on several strategic fronts. First, on April 3rd, we announced the completion of the Bear Factory Amsbra, Ltd. acquisition. We hit the ground running in pursuit of our integration goals, and are pleased with the progress that we're making. I am personally thrilled with the phenomenal team of associates we have in the UK. They are talented, energized and 100 present onboard with the changes we're making to integrate our businesses and drive success.

Second, our Ohio distribution center construction is progressing on plan. We're targeting September for the center to become fully operational. As I said before, this is an important project for our company's future growth. Barry will give you more details on both of these projects in a moment.

Finally, we have added Singapore to our international franchisee family, and we are very close to finalizing agreements with several other important countries. Each of these fronts -- the UK acquisition integration, the Ohio distribution center and international franchising -- are important building blocks for our future growth, and during the coming quarters we expect to make further progress on each to position Build-A-Bear Workshop strongly for the future.

Let me turn now to a quick recap of our first-quarter results. With the shift in Easter and our year-ago comp-store sales growth of 5.4 present, we expected the sales comparison to be challenging. Our business is always best when kids are out of school, and the Easter holiday typically includes school breaks. So while a difficult year-over-year comparison, we saw our sales during the quarter perform very much as planned.

First-quarter total revenue increased 14.6% to $98.6 million. Net retail sales increased $12 million or 14%. This growth was fueled by our new stores and our sales over the Internet, which increased 16.6% to $2.5 million. Higher franchise fees and licensing revenues contributed to the quarter-over-quarter total revenue growth as well.

First-quarter net income increased to $8.3 million or $0.41 per diluted share, and includes stock-based compensation expense of $0.02 per share. This compares to net income of $8 million or $0.40 a share in the fiscal 2005 first quarter. Last year's stock-based compensation cost had no per-share impact. These higher stock-based comp costs, combined with higher performance-based bonus expense versus a year ago, are reflected in our selling, general and administrative expenses. Importantly, our merchandise margins remained very strong and steady in the first quarter, while overall retail gross margin declined due to higher fuel costs related to distribution of product to our stores and a lack of sales volume leverage on some fixed costs. Tina will provide additional details later in her discussion.

Our first-quarter marketing programs included ongoing national children's TV advertising. Our TV ads, Out of the Mouths of Babes, as we call them, aired on children's cable programming such as Nickelodeon, Cartoon Network, Nick at Nite and Toon Disney. Our spring catalog arrived on time in homes during the second week of March. We also continued to use radio advertising this past quarter on kids' national Radio Disney during February and March, to selectively support key events. As we mentioned last quarter, we will incorporate radio to a higher degree this year versus last year, primarily with Radio Disney, to support general brand-building and special events.

Our second-quarter national TV advertising began again this week. As we move into May, we have several marketing and brand-building programs that are incremental to last year. Starting May 12th, the first-ever Build-A-Bear Workshop animal collection will be featured in Happy Meals at any of the participating 15,000 McDonald's in the United States and Canada. When you purchase a Happy Meal, you will receive a Build-A-Bear Workshop mini stuffed animal friend in your Happy Meal box, which has been designed to look like our Cub Condo carrying case.

The promotion, which runs through June 8th, include 16 mini furry friends, all each with removable mix-and-match clothing, each with our trademark heart inside, and each designed to appeal to both boys and girls. I must say, they are very cute. McDonald's will feature the Build-A-Bear Workshop Happy Meals in TV advertising, radio advertising, in-restaurant and drive-through signage and on their happymeal.com website. Additional local marketing events through collaboration with our stores and the local McDonald's are planned. We see this partnership with McDonald's as a long-term brand-building opportunity, one of several in our repertoire of brand-building and awareness programs.

As part of our partnership with McDonald's, our annual Stuffed with Hugs event, now in its sixth year, will benefit Ronald McDonald Houses. This year, Stuffed with Hugs, called Hugs Away From Home, will launch on May 20th. Children of all ages are invited to visit their Build-A-Bear Workshop and make a special bear at no charge. We will donate these bears to children staying at Ronald McDonald Houses around the world.

Also incremental to last year is our new Celebrate Mom weekend, the weekend before Mother's Day, which includes some very special gifts with purchase during the Mother's Day weekend. Through our collaboration with JC Penney, we will give a free $10 JC Penney gift offer in a Build-A-Bear Workshop credit card case with any purchase of $15. And through a partnership with MasterCard, we can offer guests using their MasterCard to pay for their purchases an additional $10 MasterCard gift card. Any child who comes to our store will also be offered a free color-your-own picture frame and crayons, no purchase necessary. This is the final weekend before the Celebrate Mom sweepstakes taking place in our stores, which focuses on moms with great prize opportunities, special in-store events and mom-specific merchandise -- a special thank you and recognition of how important our mom guest is to us at Build-A-Bear Workshop. Both the McDonald's Happy Meal program and the Celebrate Mom sweepstakes are on top of our normal product launches and in-store events.

We continue to update our 30 to 35 animal skins and approximately 400 SKUs regularly, changing to reflect seasonal fashion, holiday special offerings and sport seasons. We know that keeping our experience and merchandise fresh, relevant and fun is an important part of our success equation.

On the bear fashion front, skirts continue to be very strong, as are bear-sized gaucho pants and shorts. Anything with glitter, like our crocheted disc purse, silver sequin belt and silver disc shrug, are top sellers. The important footwear fashions are flip-flops, and we know that our bears looked very stylish during this year's spring break.

As we said last quarter, we remain committed to our marketing and brand-building planned spending in 2006 at levels similar to that of 2005 on a percent of total revenue basis.

During the first quarter, we opened two new Build-A-Bear Workshop stores. In addition, we opened our first store in a zoo at the St. Louis Zoo. Our zoo store features new and unique zoo animal products and accessories including a striped lemur, a Humboldt penguin, a sea lion and the zookeeper clothing and accessories.

During the quarter, we opened one new ballpark store in San Francisco's AT&T Park. We also remodeled and expanded our Myrtle Beach, South Carolina store, our store number 6, one of our most profitable and highest-volume stores, to include an expanded sports assortment and NASCAR, a Friends 2B Made store and a T's By Me station. At T's By Me, you can create a personalized design or message and have it placed on a T-shirt for your stuffed animal.

On April 4th, we opened a second new ballpark store in the new Busch Stadium, known here in St. Louis as Baseball Heaven. Our store, Make Your Own Fredbird by Build-A-Bear Workshop, generated one of the largest opening day sales records in our company history.

We also opened our ballpark stores in Philadelphia, Cincinnati and in Cleveland, all in time for opening day of the baseball season. And those stores have been in operation, so they reopened.

Our second-quarter new store lineup is for 14 new stores, including a new store in historic Faneuil Hall in Boston. The store will include several added concepts, a T's By Me station, a Friends 2B Made store and a Make Your Own Wally the Green Monster shop, the Boston Red Sox mascot. This will be our first make-your-own-mascot store inside of a Build-A-Bear Workshop store.

Also coming this summer is our first Build-A-Dinosaur, located within the T Rex Cafe at the Legends at Village West in Kansas City. This store, similar to our St. Louis Zoo store, will offer an entirely new line of products from our mall-based stores, all under the Build-A-Dino brand. This new store, Where Best-Friend-o-saurs are made, will feature prehistoric Stone Age denim, fossil feet shoes and a line of baby Collectosaurs. And you can tell we have had fun with this one. We are working on other potential zoo locations, and will test our Build-a-Dino product in Build-A-Bear Workshop stores later this year to evaluate the possibility of expanding these products elsewhere in our chain.

Let me quickly recap our outlook for 2006. Today, we reaffirmed our previous guidance for fiscal 2006 earnings per share to be in the range of $1.44 to $1.53. This guidance includes the anticipated UK acquisition impact of approximately $0.10 to $0.13 per diluted share, stock-based compensation expense of approximately $0.08 per diluted share and distribution center transition costs of approximately $0.04 per diluted share. As we have previously indicated, the UK acquisition impacts primarily reflect the costs associated with rebranding, store conversion and integration of the Bear Factory stores, as well as a reduction in UK franchise fee revenues and lower interest income. Our 2006 plan remains to open approximately 30 new Build-A-Bear stores in the United States and Canada, and to double the number of Friends 2B Made locations, adding about five new locations this year.

As discussed earlier, we have added the two new ballpark stores as well. In addition, our international franchisees expect to open up to 20 new stores. In the UK, we look to open approximately three to five new stores, and are prepared to take advantage of additional real estate opportunities that may arise.

As I said in my opening remarks, during the quarter, we made progress on several strategic initiatives -- the UK acquisition integration, the Ohio distribution center and international franchising. We will continue to work on these important building blocks for growth throughout 2006.

And now, Barry will take you through more detail on the UK acquisition integration progress and our new distribution center.

Thank you, Maxine, and good morning, everyone. As Maxine said earlier, we have hit the ground running in our UK integration efforts. Simultaneous with the transaction closing, we successfully linked our information systems, providing a data connection on day one with no business interruptions. While our IT conversion is not yet complete, our systems are talking to each other, and we have visibility to key business metrics. We are scheduled to complete the IT integration this summer.

We are nearly complete with the remodeling and conversion of our first Bear Factory store in Reading. The store is scheduled to reopen next week. The remodeling and conversion went smoothly and according to plan. Our store teams are currently refining the conversion plan and timetable for the remaining stores.

From a people perspective, we couldn't be more pleased with the team we have in place. The people are enthusiastic, eager to learn the Build-A-Bear Workshop way and excited to be part of our company. Our plans remain to have the Bear Factory store conversions complete in time for the 2006 holiday season. We're putting marketing plans in place to host grand reopening events, brand-building and public relations when the store conversions are complete.

With regard to our new distribution center, let me add a couple of updates. The new distribution center is an important strategic investment for Build-A-Bear Workshop. We have significantly broadened our national store presence, and believe this investment will be instrumental in our future growth. The distribution center construction and systems development remains on schedule, with plans for the DC to open fully operational in September.

We have hired and put in place both a warehouse manager and a warehouse systems administrator, two important positions that are key to the project's success. Both of these leaders bring extensive retail distribution center experience and specific experience with Manhattan Associates, the warehouse management systems we have selected for our distribution center.

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 as well. The pace of growth of our new concepts will remain moderate while we complete this very important project.

Now, let me turn it over to Tina for some additional comments.

Thanks, Barry. I'll add some additional details regarding our first-quarter performance. To start, let me clarify that our UK acquisition closed in our second quarter, and therefore, our first quarter does not include costs associated with the integration of the acquisition. Second-quarter results will begin to reflect these costs as well as the reduction in franchise fee revenues as the Amsbra store revenues become part of our retail sales, and a reduction in interest income as we earn interest on a lower cash balance as a result of the acquisition.

As we said, our net retail sales increase in the quarter of 14% 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 our net retail sales, increased 16.6% in the first quarter. First-quarter net income growth reflected higher new store and Internet sales, lower preopening costs, higher interest income, partially offset by higher stock-based compensation, and performance-based bonus expense.

Gross margin rate declined 156 basis points to 48.98% as a result of higher fuel costs related to transporting our products to stores, combined with a lack of sales volume leverage on fixed costs, primarily occupancy costs. As Maxine mentioned earlier, our merchandise margins remain high and stable.

Our first-quarter SG&A expense as a percent of total revenue increased 126 basis points to 35.94%, due primarily to higher stock-based compensation and performance-based bonus expense in the current quarter versus a year ago. Store preopening expenses will be lower in 2006 compared to 2005, as last year included higher preopening costs associated with the New York City flagship store and the Mall of America store.

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 quarter with $80 million in cash on the balance sheet, including cash held in escrow pending our UK acquisition closing. Management and 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.

Further, to the cash-flow statement, our capital spending in the first quarter was $9.7 million, up as planned from $5.5 million in the year-ago first quarter. Our investments for the future include our new distribution center, new stores, the UK acquisition store conversions and information systems. Cash from operations will continue to fund our growth. Our capital investment will be higher in 2006, estimated at approximately $60 million including the UK acquisition capital expenditures.

In closing, I will make a few additional observations concerning our earnings outlook. As a practice, we provide full-year guidance. However, I would like to give you some information regarding the timing of certain events that are built into this year's estimates. Distribution center transition costs are anticipated to primarily impact the third fiscal quarter, ending in September. The stock-based compensation expenses are expected to be fairly evenly spread between the first half and second half of the year. And store preopening expenses are concentrated in the second and third quarters, as the bulk of new store openings occur in these quarters.

This concludes our prepared remarks. Now, I will turn the call back to Molly.

Thank you, Tina, and now we will open the call up to your questions. Maxine, Barry and Tina are all available to answer your questions.

(OPERATOR INSTRUCTIONS). Bob Buchanan.

Good morning and congratulations. Just a question -- I wonder if you could give us some help, because there's a lot of items on your income statement and a lot of moving parts. First of all, Barry, your international franchise fees and your licensing revenues for the year -- can you give us some ballpark guidance there?

(Indiscernible).

Okay, I'll just ask the other questions. Also hoping that maybe we could get some help on interest income, recognizing that it will be down from what it would have been, given the $41 million expense on UK, and also the DC outlet.

On the franchising, we see the franchising income for the year about $3 million. And on the licensing, approximately $900,000 to $1 million. Tina, do you want to take --?

The second question was on interest income?

Yes, just a ballpark number on that would be helpful.

We haven't specifically given guidance in the past on that specific line item, on interest income.

That sounds good. I'm using about $1.8 million, just FYI. And then preopening expense -- I know you spent about $2 million last year in the flagship. Any help on that, Barry or Tina?

Other than it will be less, as we said in the body of our statement, because we had unusually high preopening with New York and Mall of America, which we will not repeat this year. Remembering we opened approximately 30 stores last year, inclusive of those two high preopening type stores, against the 30 we will open this year without any extraordinary preopening. So, in general, on a per-store basis, preopening will be less.

And just lastly, I wondered if you could help us out on UK. I know you guys have been spending some time over there. I was just wondering if you have been able to select a leader and maybe some deputies over there in the UK. And then also, when do you expect to complete these conversions and remodels? I do you just did your first one, you said.

We have a great team over there, and as we have told you, we are operating it as a satellite region, so to speak. But the leader of the store operations team is a gentleman named Roger Parry, and he comes from the Bear Factory. He has been there quite a long time and is a great guy, great young man. Hopefully, he'll be here so you can meet him shortly at our annual meeting. And he has got a great team of people with him, and he reports to Scott. All store operations will report to Scott (Scott Seay, Chief Workshop Bear). Marketing reports to Teresa (Teresa Kroll, Chief Marketing Bear) in the marketing organization here, and we have an in-house marketing person that is dedicated to international, and then an IT person reports to our international IT person here in the office. And Greg Pickers, who is in charge of our accounting and control area, reports to Tina (Tina Klocke, Chief Financial Bear)

So all that has gone incredibly smoothly, and all those people are in place. We have a few open positions in terms of support positions, and those are moving along on schedule.

And, Barry, when do you think you'll get those conversions finished? I know you don't have a precise timetable yet.

Well, the objective is to have them all converted, the ones that we want converted, by the beginning of the fourth quarter, to coincide with the marketing strategy.

Evelyn Greenwald, SIG.

It's actually Tom Filandro. My question is related to this McDonald's deal. This partnership sounds very interesting. Two questions regarding it -- actually, three. First is, can you explain to us how the pay structure works out? Is this a barter deal, or is this a direct -- you guys pay them, they pay you?

The second question on the McDonald's deal -- is that inventory owned by McDonald's, or is it owned by Build-A-Bear?

And I guess the third -- I don't think you have done something like this in the past. I assume it's a transaction traffic driver and brand-builder that you are using this for. Is the something that we could see being utilized in the future as well, based on a certain level of success?

First of all, this isn't the traditional McDonald's Happy Meal promotion like they would do for Ice Age 2 or they would do for Cars, coming up after us, or any of those kinds of promotions that they would do. We don't pay them, and they handle all of the production and support. We work with them on design and brand, just like they would work with Disney or anybody else that they partner with. The inventory is owned by them. This is not a cost at all to Build-A-Bear Workshop. They pay for everything -- marketing, merchandising, store signing, all of that. And this is just exactly as if you took your kids in during any kind of Happy Meal promotion that goes on. They consider us, fortunately, famous enough to be included among the best brands that they support at McDonald's. So we are very excited about that.

I can't say whether it will be again or not; that's up to how successful it is. But we did have one regional promotion like this last year, in Texas -- a slightly different twist, where the customer was actually a purchase with purchase. So you could buy these selected Build-A-Bear Workshop Ronald McDonald collectible animals. And they did have a very successful event with those. But this one was along in progress, when that one was transpiring. So we are very hopeful that it will be one of the most successful Happy Meals they have ever had, and that it will happen again.

Is there any advertising on their part to let customers know that the Build-A-Bear --?

Yes. They do television and radio advertising plus in-store or in-restaurant advertising. It's the normal -- when you walk in there, you know how they display the Happy Meal. Also on the drive-through, their signing on the drive-through that they do for all their Happy Meals. So this is getting the full marketing support that McDonald's does for its top-tier promotions.

It sounds like a fantastic opportunity. One follow-up for Barry. Barry, could you just highlight -- I don't know if you mentioned it in your opening comments -- inventory position? I know at the beginning of the year or the beginning of the first quarter, you entered with a stronger inventory position. Can you just tell us where we are on a per-square-foot basis, and how the rest of the year should look?

At the end of the first quarter, our inventory on a per-square -- it was approximately $70, higher than last year. But predominantly, the reason for that was bringing in inventory for the Easter switch, nothing more than that. Once we sort of get through what we call Marpril -- March and April -- at the end of the second quarter, we will be back on plan and good relationship to last year's inventory on a square foot basis.

Just for clarification, it wasn't up $70 a foot; it is about $70 a foot.

And what is that compared to last year, so we can get a per-square-foot, year-over-year increase?

About 19% more than last year.

19% up? (multiple speakers) Tina, at the end of the -- or entering the -- at the end of the second quarter, that number should be in what type of a range of increase, year over year?

It probably should be in line with last year, before you take into account for the new stores. Our inventory is on plan, where we thought we would be at the end of the first quarter. Primarily, it's due to the later Easter holiday.

Sean McGowan, Harris Nesbitt.

My question is on the Easter shift. Given your history now and the number of locations, could you give us some idea of how much that shift may have affected sales in the quarter? And what sort of a shift -- (indiscernible) percentage points of comp might you expect to wind up with in the second quarter?

Let me put it this way. We don't report on those things. Obviously, last year, with the Easter switch, we had an outstanding first quarter and a lesser second quarter. But again, we emphasize, look at -- because of Easter, for our business, always moving -- at least sometimes -- to different quarters, looking at the first half of the year, we were sort of on the flattish side, where we guided everybody last year. And it's the same this year. So rather than me point out how much we picked up, we’ll pick up in the second quarter versus the first, I think, again, let's look at it spring versus spring, and we will be right where we talked about our guidance, from a flattish point of view.

And if I can follow up, then, can you talk about what models or units of product may have been particularly well-sold or good sellers in the first quarter?

Well, we always sell fashion very, very strongly. But all of our metrics in our business are very strong, from average transaction to shoes per transaction to sounds per transaction. Our new launches, our animal launches have all been successful. Our Limited Too fashion merchandise is good. Baseball got off to a great start this year. So we really feel, across all categories, merchandising successes can be reported. Our Easter merchandise was successful. We are already into summer. We change over the day after Easter. We go into our second pre-summer with swimwear and shorts and all the things that are hot for fashion. We always reflect what's going on in the marketplace.

And also, importantly, our units per transaction were also up. So I think the metrics are all going in the right direction, and our stores are concentrating on what is important and making sure the customers know all of the new and special items that are in our store. But remember, an average store, the usual store only has -- each store on an individual basis only has about 250 to 300 SKUs at any one time. And so everything is always important to change, although it might change out in a similar category, like a new handbag for a new handbag. We don't just keep adding SKUs. We replace items with the next generation of that item for the next season.

Janet Kloppenburg, JJK Research.

Congratulations on a good quarter. Barry, there's two conference calls going on at once. How did you answer that question about the outlook for the second quarter and the pickup in comps? Is there an anticipated pickup in comps because of the shift?

Well, we don't comment on that. But I think, as we talked about from an actual standpoint last year, when Easter was in the first quarter, comps were higher in the first quarter than the second quarter. Looking at it spring to spring and the year, we are still reiterating our guidance of being flattish.

And then, last year you had said that -- I think you had said between the first and second quarter, with the Easter and the Oprah event, maybe you didn't do as good a job of planning the comps by quarter, anticipating them to the extent that they actually came in at. How was it this year, Barry? Was it more in line with your thinking? Was the month-to-month business more in sync with your plan?

I would only say we are quick learners.

Maxine, I was wondering, on the McDonald's promotion -- is this a one-time event, or is this the kind of thing that you and McDonald's, the brand and McDonald's, may do from time to time going forward?

It's possible. It's up to them, again, based on the success. Like any of us in the retail business, McDonald's is in the retail business, too. So if the Build-A-Bear Workshop promotion drives success for them, then we have plans to keep moving on into the future. But currently, this is the event that's on the books, and there isn't one planned yet after this one. But we have an agreement to evaluate after this is over; they have rights to pick it up again, assuming it's successful, and do something different the next time.

And what is the duration of this event? When does it start, and when does it end?

It starts on May 12th, and it ends on June the 8th.

So you will be able to measure how that did. So that's exciting.

For them. They will be able to measure how it does for them.

But don't you think you might be able to see some anticipated pickup in your store traffic, or no?

We certainly hope so. We did this because we hope it raises brand awareness, but we don't know. We have never had any experience with it, so we haven't factored it in there, to know for sure. But it certainly is a plus, and we consider it an incremental event to our calendar. And we are looking forward to seeing lots of new customers. But we just don't know yet. We are very anxious to find that out.

We may not see it coinciding with the event. We might see the benefit of that subsequent to June 12th.

Maxine, can you elaborate a little bit on Build-a-Dino? Is this a new concept that's been tested? Will you open more of these going forward if this store does well? Why dinosaurs? Just a little bit about the nature of the concept.

Build-A-Dino -- we have, as we said, a one-store plan. And we developed this concept in consort with Schussler Creative and Landry's Restaurants. They are opening a restaurant. They will be opening several of these around the country, eventually, called the T-Rex Cafe. And so inside the T-Rex Cafe, they wanted to have family entertainment. And so there's many wonderful things inside there. But we think we're the premier event, which is Build-A-Dino. And all the animals have been specially designed under this brand. We own the brand, all of the marketing. Everything belongs to us. It's our brand, and we are just putting a shop in there similar to what we do at the ballpark.

And we are evaluating the dinosaur product to also be tested in other Build-A-Bear stores and possibly as its own store in the future. But we think that boys and girls love dinosaurs. We all know the popularity of Barney, although these dinosaurs are geared older than that. They are very cute. It's a whole separate brand, with just adorable dinosaurs -- loveable, cuddly, beautiful materials as well as great-looking clothing and themes around dinosaur days and prehistoric. But there's a dinosaur cheerleader, and there's lots of fun things, too, that make it very contemporary.

So we are very excited about it, and we can't wait to have the first store open. And working with Schussler and Landry's has been a very exciting opportunity, as has been working with the ballparks and working with Disneyland with our store inside of Disneyland. So it's very similar to that kind of operation. It just happens to be a different brand and, I think, something that while people typically think of dinosaurs for boys, that is certainly an attraction of this, that they're so cute and cuddly I think you'll have a much broader acceptance.

Well, I think it's a good way to tap the boy, though. I think it's a great test.

We are very excited about that, and I think it will, for sure. And it certainly will fit inside of our stores very easily as well.

And, Tina, if you can help me on the preopening expenses -- they were down in the first quarter because of the New York accrual last year at this time. But I think you made a comment that they might be up in the second and third? Can you help me with that?

Well, the majority of our stores will open in the second and third quarter, no different than last year. But again, in the second quarter, our preopening expense was higher due to the New York City and Mall of America store openings.

Right. So you should get some benefits to preopening expense in the second quarter, right? In the upcoming second quarter?

Slightly.

And then in the third quarter, should it be back to apples-to-apples?

It should be close to apples-to-apples. It might be slightly lower, because we opened the Cafe in the New York City store.

(OPERATOR INSTRUCTIONS). Brian Tunick, JPMorgan.

I guess, first, maybe update us on the Friends 2B Made, your thoughts there. And also, maybe along those lines, maybe talk a little about the profitability on the zoo stores, the stadiums and the other ventures, how those kind of margins compare to the Build-A-Bear stores?

Friends 2B Made is on plan. As we said, we were opening up the five stores this year, and we are continuing to refine the product and bring in new product and have special events. This past weekend, we had a very successful princess event. And it's very much in line with our expectations at this point. So we're moving along. And again, a key part of this, the growth of this, will depend on our -- we need the new DC to be able to house the merchandise and expand the concept more rapidly.

The other concept, the zoo and the baseball parks, are of course more in line with the stuffed animal existing product that what we have -- a lot of it is the same product, in terms of the baseball items are the same baseball items, some of the same items that sell in our stores. And they are as profitable as the traditional store at Build-A-Bear Workshop. They are run by -- since those are only open -- the zoo is open every single day, but the other stores are run by members of our team that also work in other stores. So we have a great business model there, going there. Again, remember it's 81 days, five hours a day, highly productive small square footage stores. The store is a small square footage store also. And I would encourage you to come to St. Louis and see it.

St. Louis Zoo is the top-attended zoo in the country, by the way. I don't know that anybody knows that. It's the number one. Over 3 million people visit that zoo a year. It's a free zoo. And so it should be very, very successful based on a normal conversion rate that you would get of those visiting guests. And it just is a continuation of our strategy to bring Build-A-Bear Workshop to wherever families go to have fun.

And a question, I guess, for Barry or for Tina, I guess, combined. The first part would be maybe the productivity of the Bear Factory stores compared to the Build-A-Bear stores? And then on the New York City flagship, maybe can you talk about what kind of comps for the second half you have modeled in the guidance you have provided for the year?

Well, as far as the New York City store, we're not going to give specific guidance on individual stores.

And your question on Bear Factory? I couldn't hear it all.

What kind of sales per square foot do those stores do? I was over there looking at one of the ones in Hamley's. And I'm just curious what kind of productivity compared to the Build-A-Bear stores here, and how much opportunity do you think there is to --?

Well, we think there's opportunity, else we would not have made the investment in it. Rather than me give specificity to the sales per square foot, I would tell you their sizes are generally smaller than us, although they do have some stores that are similar to our stores, but for the most part smaller. They have excellent productivity, and again, there are a lot of common characteristics to the North American business with some modifications relative to rent and other things. But we think, in totality, this is a huge strategic investment for us.

Pauline Reader, Thomas Weisel Partners.

Just a follow-up to the Friends 2B Made question. You may not know this right in front of you, but do you know what percentage of the Friends 2B Made customers were previously Build-A-Bear customers versus completely new customers to you guys?

About 50%.

Paul Lejuez, Credit Suisse.

Hi, it's Tracy Kogan, filling in for Paul. I have two questions, I guess, for Barry or Tina. First, the acquisition integration expenses -- how should we think about that, I guess, the split between second quarter and third quarter? It sounds like most of them will be in those two quarters and not in the fourth. And then, secondly, on the DC, what's the total capital expenditure associated with it? And I think you are running an overlap there with your existing DC. But if you could just remind me of that?

I'll comment on the DC. In totality, the monies we spent last year and this year, it's approximately $22 to $24 million. And that is not including, as we have talked about from an earnings standpoint, some of the overlap of running our existing third-party for a couple of months while we're in a transition mode with the new DC.

And as we said, on the UK acquisition, our impacts are estimated to be $0.10 to $0.13 for the full year. Really, with just one month behind us, we are really not able to provide you yet with a detailed breakdown between quarters.

So there is no -- we shouldn't think of it like you are opening most of them or you are converting most of them in the second quarter or most in the third. It's sort of -- that's still uncertain at this point?

We are still not for certain when those will be done. We know they will be done by holiday of 2006, but we're just finishing our first store in the next ten days.

And also, remember a lot of the $0.10 to $0.13 was lost interest income in franchise, which would be sort of on a normal pro rata basis. So that's sort of the constant, and the actual opening and some of the operational expense relative to the conversions may not be as ratable over the remaining part of the year. But as I said, we are only -- as Tina said, we're only in this a month right now.

We are also -- what I think is really great, if this one goes -- it has gone very smoothly. If we can move more of them into the second quarter, that would be to our advantage. So right now, our goal is to get as many of them converted and open as soon as possible, and that is whether they fall in the second quarter, which is what we would prefer -- we don't know that for a fact. So giving you those numbers by second or third quarter right now is a little soon. But I think we will -- our goal is to get them opened and running and converted to Build-A-Bear as soon as we possibly can.

Bill Sims.

Maxine, can you give us update on Sweetheart dolls? Have they rolled out to all the stores? Are they still in test? I just haven't heard a lot about them.

The Sweethearts are part of the Friends 2B Made line of dolls, and they're in every Friends 2B Made store. So they are just one of the -- they are part of the assortment in Friends 2B Made.

And they are also in the Build-A-Bear stores as part of the Friends 2B Made kiosk? Is that correct?

No, they are not.

And then a second follow-up question, just so I'm clear. The Happy Meal promotion -- is there any cost to Build-A-Bear, or is it all just net win-win for you?

No cost to Build-A-Bear Workshop.

Evelyn Greenwald, SIG.

It's Tom Filandro again. What is happening with the inventory? You may have answered this earlier; I apologize if I missed it. The Bear Factory inventory -- are you guys liquidating that inventory as we speak? And how are you liquidating it, if you are?

We don't have any plans for a major liquidation. Fortunately, in this particular case, the inventories were fairly lean. And so we are managing the inventories from the orient to what's in the pipeline. And we were able to stop a lot of merchandise in production overseas, so that was a big help. And then, also this -- you remember, they have a few franchise operators that will be getting the merchandise. We don't want to flood the market with low-end merchandise, and we don't seem to appear to need to do that. So we close down a store, we remodel it, we move that merchandise to other stores to liquidate. And we seem to be on the right targets of our out dates, and we will have very little inventory at the end to dispose of.

Remember, before the stores undergo a conversion, they are open for business. So we are selling the existing product.

Right. And we still have -- this is April -- May, June, July, August. Assuming that we won't be totally converted until the end of October, there's lots of months still left to liquidate this inventory. But it's really -- actually, we were able to manage a lot of it with the vendors.

One follow-up, Tina or Barry. The comp decline of 3.8 in the quarter -- is that all a function of transactions as a result of the Easter shift? Or was there any variances on average transaction value, average unit retail or UPTs?

Yes. I think, as Maxine said in her comments earlier, our metrics are good.

(OPERATOR INSTRUCTIONS). Sean McGowan, Harris Nesbitt.

My question is again regarding the McDonald's promotion. Typically, these sales to customers like this occur at much lower than normal gross margins. Would you expect that to have an impact? Will it be big enough to show up in your second quarter?

Why would it have any impact on our gross margins? It's not sold in our stores. It's in the Happy Meal at McDonald's.

But aren't you selling them the bear, or not?

No, no. They make them and produce them themselves, just like they do every Disney product, every Barbie product. Every other Happy Meal that they do, they produce themselves with their own manufacturing agents.

Well, some of the other restaurants do it differently, and I think McDonald's occasionally does buy stuff from some other vendors. So that's why I was asking.

No, no. In this case -- to my knowledge, they don't do that. And even on the promotion that we worked with them last year, in just their Texas region, they produced all of it. We designed it, but they produced it. In this case, one of their marketing firms that they use -- they use two major firms -- produced this that produces all the other kinds of things that they do as well. So we have no -- we did not touch this merchandise, other than to approve it from an art perspective and a likeness perspective to our -- they are little, small mini bears. And so they are very excited about it, and we are, too. So it really has been one of those wonderful partnerships. Hopefully, it will be great exposure for Build-A-Bear Workshop and great exposure for our little animals and fun for the kids, importantly.

Should be good. I know when Hasbro did a Monopoly thing years ago, they actually sold the little trinkets to McDonald's. So it sounds like you got a much cleaner arrangement. That's good.

Operator Rob Wilson, Tiburon Research.

Maxine, you have not plugged your book yet.

No need to.

I saw it in the bookstore. Congratulations.

Thank you.

I have a question -- can you give us some better guidance on the UK sales for the year and how they may breakout? I know there's a lot of moving parts as far as remodels, but if you can give us a better clue how to model that, it would be helpful.

Other than what we have already said, that it will have a $0.10 to $0.13 dilutive result this year, and the aim is to have all the stores converted and open by the beginning of the fourth quarter.

No revenue guidance?

No.

And this concludes the question-and-answer portion of the conference call. I will turn it back to Molly Salky for the closing remarks.

In closing, let me mention several upcoming investor communications events that we have on our calendar. We will be visiting with investors in New York City next week. We'll host our annual meeting of shareholders here in St. Louis, at the St. Louis Zoo, on May 11th. We're presenting at the GARP Research conference in Baltimore on May 17th, and also at the Credit Suisse First Boston consumer conference in New York on June 13th. So if you have any interest in meeting with us on any of these dates, please give me a call. Thank you and have a great day.

Thank you for your participation in today's conference. This concludes the call. You may now disconnect. Good day.