Build-A-Bear Workshop Inc (BBW) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Build-A-Bear Workshop Incorporated earnings conference call. My name is Jackie, and I will be your operator for today's conference. (Operator Instructions) I would now like to turn the call over to the host of today's conference, Ms. Molly Salky, director of investor relations. You may proceed, ma'am.

Good morning, everyone, and thank you for joining us for a review of our results for our 2007 fiscal first quarter, ended March 31st. With me this morning are Maxine Clark, chairman and chief executive bear, Scott Seay, president and chief operating officer bear, and Tina Klocke, chief financial bear.

In a moment I'll turn the call over to Maxine to provide her perspective on our first quarter performance and outlook. Scott will then update you on our store operations and international franchising, 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. We ask that members of the media who may be on our call today contact us after this conference for 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. Feel free to requeue if you have further questions.

Please know that our call's being recorded and broadcast live via the Internet. The earnings release is available on our corporate website in our investor relationships section. 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 factor section in our 2006 annual report on form 10-K, filed with the SEC. And we undertake no obligation to update or revise any forward-looking statement.

Now I'd like to turn the call over to Maxine Clark for her comments.

Thank you, Molly. Good morning, everyone, and thank you for joining us to review our first quarter performance. First, a brief introductory overview Our performance in the quarter was in line with our plans and keeps us on track with the guidance we previously gave for both the quarter and the year.

Our full year guidance reflects our response to lessons learned from the 2006 fourth quarter relating to maximizing product opportunities as we saw with Mumble, which could not be fully effected until the end of March, in time for Easter. Hopefully, you will see more evidence of how quickly we learn from experience in future periods.

That said, I'm pleased that we saw an improvement in sales trends and believe that our business is on track to deliver strong growth and improvement in 2007 compared to 2006 with the strategies we put in place.

We continue to see our guests respond to product newness and collectibilty. We saw this with all limited edition products introduced in the first quarter. Our Spring Bear, the first in a series of four seasonal bears we will introduce this year, performed well, exceeding our expectations. The Groundhog sold out very quickly, and the return of Mumble in limited quantities in late March with a Happy Feet movie DVD performed well. We intended to sell through by mid-April, and we did. With many exciting new product introductions planned for this year, several that are partnerships with entertainment-based companies, we remain positive about our business outlook and the opportunities we have. Let me go into some specifics.

Total revenue growth in the first quarter was driven by our new stores; UK stores which added $10.8 million, nontraditional store sales, and sales over the Internet, which increased 24% to $3 million.

Net income in the quarter of $8.1 million included an operating loss of $2.2 million from the UK business. We expected the loss this quarter, as well as in the second and third quarters, with a profitable fourth quarter. The current UK business reflects a yet-to-be-developed party business, and the higher weight of the fourth quarter to overall full year sales in the UK. All of this is factored into our 2007 guidance.

Within the financial results, was continued strong and steady merchandise margin while overall retail gross margin declined as expected due to higher occupancy costs in the UK and the lack of leverage on fixed-occupancy costs in North America, our consolidated merchandise margin showed year over year improvement.

We held our SG&A costs as a percent of total revenues essentially flat with year-ago levels, even with the addition of the UK business. We achieved this through continued store payroll management in North America and leverage on our central office costs.

If we look behind-the-GAAP results, excluding the UK operations impact, our core business operating income showed growth and improvement, even in a negative comp store sales environment, pointing again to our strong store economic model.

Our cash position at the end of the quarter was $42 million, and during the quarter we used excess cash flow with our share repurchase authorization. We repurchased 176,500 shares using $4.7 million. We remain confident in our outlook for cash generation of approximately $30 million this year after capital spending of $35 to $40 million, excluding share repurchase activity.

As we announced today, during the quarter, we converted our French franchise to a company-owned operation. This change will ensure an improved brand experience. The one store that closed in France was operated by our franchisee at the concession in the Galleries Lafayette in Paris.

Our plan is to leverage our management team and staff in the UK to grow and develop the French market. We believe there is potential for approximately 50 stores in France. As we said in our press release, we have three stores planned to open this fall. This opportunity, coupled with our store potential in the UK of 70 to 75 stores provides us with a store base of approximately 120 company-owned stores within our European operation.

With a French operation now company-owned and our UK operation no longer just providing services, we anticipate we can improve and grow our brand significantly in France. This change in France should not be construed as a change in franchising strategy. We remain committed to growing our brand outside of North America, the UK, and France via franchising. We simply saw an opportunity in France to succeed via a company-owned strategy.

Also new and exciting for our brand is our expanded partnership with Landry's to open stores inside the Rainforest Cafe locations. Last summer, we first teamed up with Landry's to place our Build-A-Dino products inside the T-REX Cafe in Kansas City. This summer we'll open inside three Rainforest Cafes in Galveston Island, Mall of America, and Grapevine Mills.

Our stores, Build-A-Bear Workshop at the Rainforest Cafe, feature 10 jungle-themed animals, outfits, and accessories. The same merchandise that we developed for our successful St. Louis Zoo store. We've also personalized by location a select group of merchandise as well as created a make-your-own Rainforest Cafe mascot, Cha-Cha, the red-eyed tree frog.

The flexibility of the Build-A-Bear brand gives us opportunities to open stores in a number of places that others cannot. This leads me to our marketing programs. Our first quarter marketing programs included national children's and national women's TV advertising. Our TV ads rotated between brand advertising and product-specific ads featuring our Valentine's Bear, Spring Bear, and Cuddly Lamb, which was our Easter holiday special product.

Our Valentine's catalogue arrived in home in early January, followed by our spring catalogue, which arrived in mid-March. Through the first quarter, we continued to use radio advertising, as we have in the past, primarily via kid's National Radio Disney to support general brand-building and special events.

In print advertising, we again partnered with National Geographic Kids. In the February issue, our brand was featured in the cover wrap with messaging about our Huggable Heroes program.

Our second quarter national TV advertising began last week and features new brand advertising spots. This new 'Dream It, Create it' campaign features tween girls and their mothers encountering live animals during their daily activities. Through the girls' imaginations, the animals then appear in the outfits and accessories available at our stores. In a very fun and creative way, these spots communicate several of our brand promises: the promise to give kids the tools to be creative, the freedom to make choices, and encouragement to have a lively and entertaining imagination.

The campaign elements include TV, radio, in-theater, online, and social media placements as well as a specialized, interactive website accessible via BuildABear.com and BuildABearville.com.

During the second quarter, our national TV advertising will again rotate between brand advertising and product-specific ads. This week, you will also see on TV and on our website our special Mother's Day spot, which encourages guests to come in for a special gift with purchase only this weekend, May 4th through 6th. The product-specific ads, which can change throughout the quarter, include our Shrek product.

I hope everyone is aware that Shrek arrived in our stores last Friday, and we're using all the tools in our marketing 'toolbox' to support Shrek and the products associated with DreamWorks Animation new movie, Shrek the Third, which opens in movie theatres May the 18th.

In addition to national TV advertising, marketing elements include Radio Disney, National Geographic Kids, online media, in-theater advertising, email, and a feature in our summer catalogue, which arrives in homes in early June. Importantly, we believe we've purchased sufficient Shrek inventory to meet the demand this popular character is expected to have with our guests.

By the way, on May 11th, we will launch Shrek babies in our store, a unique component of the movie, just in time for Mother's Day, adding fun to the Shrek launch.

Also coming this summer is Cody, the star of Sony Pictures' new movie Surf's Up, scheduled for release on June 8th. Cody is a surfing penguin who wants to be a surfing champion. You may not know this, but penguins are believed to have created surfing. The movie, Cody, and the surf theme work well with our tropical-themed summer clothing and accessory floor sets, and leverage the continued strong popularity of penguins. Cody will also be featured in second quarter, brand-specific national TV advertising, the summer catalogue, and in print advertising as well.

You may recall that in the second quarter last year we partnered with McDonald's and their Happy Meal program. This year, we'll partner with McDonald's again on a program that will begin in early August. This year the program will include a collection of eight girl-focused Build-A-Bear Workshop mini-animals in Happy Meals, available at any of the participating 15,000 McDonald's in the United States and Canada.

When you purchase a Happy Meal, your child will receive a Build-A-Bear Workshop mini stuffed animal, themed in a Happy Meal box featuring Build-A-Bear Workshop design. Through this partnership with McDonald's, we are further celebrating our company's 10th birthday as mini-friends replicate some of our past, most popular furry friends, and also includes our 2007 Spring Bear, a friend for all seasons.

McDonald's will feature the Build-A-Bear Workshop Happy Meals in TV advertising, radio, in-restaurant and drive-thru signage and on their HappyMeal.com website. There will also be a bounce-back offer to visit our stores for a free gift to go along with their mini-bears and outfits.

As we did last year, we see this partnership with McDonald's as a long-term brand-building opportunity. Let me quickly up-to-date you on Stuff Fur Stuff loyalty program. We now have over 3.3 million members since starting this program in the United States last July. We are encouraged by the continuing and consistently high enrollment rates for new guests. The program is giving us additional insights into the repeat visit patterns for our guests.

We see opportunities with these best guests to create an incremental visit to our stores. We look to maximize the value of our communications and to become more efficient in our overall marketing through the use of the loyalty program. We are encouraged by the result so far and believe the Stuff Fur Stuff Club loyalty program will continue to gain in value.

I'd like to spend a minute on our interactive web strategy. Our strategy is to be as relevant in the virtual world as we are in the mall-based world. One of the primary attractions of interactive websites for children in our demographic are games. While we've always had games on our site, and they've always been popular, since enhancing our website with the addition of BuildABearville.com in January and the expanded marketing of it in March, we have seen a 50% increase in the amount of time spent on games by our guests.

You'll continue to see further enhancements throughout the year. Today at BuildABearville you can play games, visit our virtual store where you can create your own avatar stuffed animal, dress your furry friend, decorate your own den, help plant a Friendship Forest, which is a virtual version of a company-wide environmental effort we have underway this year, access to our new advertising campaign website and a whole lot more.

By the way, since launching just one week ago, our guests have engaged in our Friendship Forest and planted over 65,000 trees. The Friendship Forest is one of the ways we're celebrating our 10th birthday and supporting the environment. In a tree-planting partnership with the National Arbor Day Foundation, guests can purchase tree certificates. The program includes all of our stores in the United States, Canada, and the UK, and the trees will be planted in the country where the money is raised.

Unlike many virtual world companies, we are uniquely positioned in the real world, with nearly 50 million serialized registrations for stuffed animals created in our stores over the past 10 years that can be leveraged in the virtual world. We are adapting our business to the changing multimedia business environment. We'll continue to make enhancements to our BuildA-Bearville.com, and we'll maximize the use of the Internet in all aspects of our marketing and guest communications.

Let me make a few comments about Ridemakerz. As you know from our prior disclosures, we have an agreement with Retail Entertainment Concepts, LLC, also known as Ridemakerz, with a Z. We announced today that we've increased our investment in Ridemakerz to approximately $3 million and our agreement includes operating, advisory, and infrastructure services that will provide an exchange for additional equity ownership.

Under this arrangement, and assuming no additional cash funding, our ownership could grow to approximately 34% by early 2008. We are very excited to help incubate this new retail entertainment concept, which allows children and families to build and customize their own personalized cars, and we're optimistic about the success of the brand.

As many of you know, the Ridemakerz website is now available with information about the store profit, concept, and product. The first store at Broadway at the Beach in Myrtle Beach, South Carolina, will host its grand opening on June 1st. The second store will open at Mall of America on July 20th. Further store and product updates will be hosted to the website at Ridemakerz.com.

With the Build-A-Bear Workshop core competency in experiential retailing, our business and technology infrastructure and know-how, we've strategically allocated resources to this new venture. In general, we are allocating staff time to RZ at an appropriate level of expertise, including marketing personnel, distribution and logistic services, store operations expertise, etcetera.

Importantly, the Ridemakerz concept has an entirely separate product development team which has created an outstanding lineup of rides, including officially licensed Ford and Dodge products. Rides start at $12 and go to $55 fully tricked out, including remote control. This agreement with Ridemakerz allows us to make a strategic investment in a new concept that we believe can add long-term benefit to our shareholders.

Let me now recap our outlook for 2007. Today we reaffirmed our previous guidance for fiscal 2007 earnings per share to be in the range of $1.65 to $1.75. This guidance includes anticipated stock-based compensation expense of $0.10. We continue to anticipate North American comparable stores to be in the flat to negative mid-single digit range. As I mentioned earlier, our full year guidance assumes no impacts from Ridemakerz.

Our guidance assumes that earnings for the second quarter will be between $0.15 and $0.19 per share. Second quarter revenue growth is anticipated to be approximately 18% and North American comp store sales are expected to be flat to down low single digits.

Our second quarter outlook anticipates several costs that will be higher this year compared to the 2006 second quarter. First, our marketing and advertising spend is expected to be higher in support of both Shrek and Cody versus the spend last year. On a full year basis, we continue the plan to invest approximately 7% of total revenues on the marketing program in fiscal 2007, a level similar to our spending rate in 2006.

Second is higher costs related to performance-based bonus compensation. We expect to accrue for bonus payments in the second quarter. Last year, we did not accrue a bonus, and reversed a previous accrual in the second quarter. Third, our costs associated with translating our store signage, product labels, storybooks, and employee manuals to both Canadian French and Spanish in anticipation of new store openings this year in Montreal and Puerto Rico. In each case, we expect these near-term costs to have long-term benefits for our sales and brand awareness.

And now I'd like to have Scott take you more details on our store operations, new store program, and international franchising.

Thanks, Maxine, and good morning, everyone. I'll start with an update on our new store openings in the first quarter. We opened four new Build-A-Bear Workshop stores, one in Wisconsin Dells, Huntsville, Alabama, and Bonita Springs, Florida, and our first store in a science center at the St. Louis Science Center.

In the United Kingdom, we opened two stores: one in Exeter, England, and Edinburgh, Scotland. We've reopened our five baseball stadium stores in St. Louis, San Francisco, Philadelphia, Cincinnati, and Cleveland, and completed remodels of four stores. These remodels typically take one to two weeks with the work completed overnight to avoid any store disruption. The remodeling includes such things as updating fixtures, painting, and floor repairs.

We are on track to open 15 new Build-A-Bear Workshop stores in the second quarter, three Build-A-Bear Workshop at Rainforest Cafes stores, complete one additional standard store remodel, in addition to remodeling our Myrtle Beach and New York City stores to incorporate Build-A-Dino product. The Myrtle Beach remodel was complete last week and provides a separate Dino entrance, and the store looks fantastic.

We also have one UK store opening in the second quarter in the Golden Square Mall in Warrington, England. The balance of the new stores in the UK and France will open in late summer-early fall.

We have a well-tuned process in place to execute our new store openings and remodels. We use a critical path methodology in our store strategy and store-opening initiatives. The process has worked exceptionally well, and over the past year we've learned that it doesn't matter if the store is in the UK, Canada, or in St. Louis; the process is well understood in our organization and works, keeping our projects on time and on budget.

In terms of store operations, we continue to be pleased with our efforts to manage store payroll costs in our North American stores while still maintaining our high guest satisfaction scores. New stores are opening strong, and we continue to receive many more applicants for store manager positions than we can fill.

In the UK, our mission is to grow sales -- everyday sales and party sales -- improve our real estate cost structure through better negotiations with landlords, and to reduce our distribution costs. Relative to our distribution center operations, we completed the move of our Internet sales fulfillment operations to the Ohio distribution center last week. This move will reduce inventory handling and transportation cost and the fulfillment process can now be completed with fewer staff members. This move was another way we are maximizing the benefits of our new DC.

Another new distribution initiative that is still in test mode is a new partnership using FedEx. The distribution model provides just in time store inventory fulfillment using FedEx ground daily deliveries to our stores. The stores receive smaller deliveries, fewer boxes, more frequently, thus reducing their handling, stocking, and back room tasks. We look for this new initiative to provide potential transportation savings and improve our store operations.

On the international franchise front, our franchisee have opened four stores and closed one store in Japan. Franchisees anticipate opening 20 to 25 new stores this year. German -- Germany, India, and South Africa plan to open as many as five stores each in their countries.

Now I'll turn it over to Tina for her comments.

Thanks, Scott. I'll add some additional details regarding our first quarter performance. As we've said, our net retail sales increase in the quarter of 19% was driven by sales from new stores opened during the last 12 months, UK store sales, sales from nontraditional stores such as our Zoo Store, combined with corporate sales activity and higher sales over the Internet.

Our revenues from franchise fees and licensing revenues were flattish in the quarter. First quarter net income reflects the operating loss of $2.2 million from the UK operation, which includes some costs associated with the closing of one store owned by our French franchisee. These non-cash costs primarily relate to services rendered by our UK operations totaled approximately $300,000 in the quarter.

With regard to store preopening, these expenses came in slightly higher in the current quarter versus last year. For the full year, preopening expenses are estimated to be about $4.5 million, an increase versus 2006, reflecting the increase in the store openings this year in both North America and Europe.

Interest income decreased versus last year reflecting the impact of the UK acquisition and distribution center project on our cash. Our effective tax rate in the quarter of about 38% tracked with our full year expectations for a similar rate, and our outlook for more smooth recognition of taxes across the year.

Our reported diluted earnings per share of $0.39 reflects both the impact of the UK operating loss of $0.11 and the lost interest income and lost franchise fee income of an additional $0.03 per share for a total UK impact of $0.14 per diluted share. Diluted share count decreased slightly from fourth quarter as our share repurchase program more than offset additional share grants and option exercises in the first quarter.

I'd like to make a few additional comments concerning our earnings outlook. As Maxine outlined, there are higher costs assumed in our second quarter earnings guidance, specifically higher advertising spending of approximately $1.6 million to support Shrek and our increased online marketing emphasis in the important summer quarter, higher performance-based bonus costs of about $1 million, and costs associated with language translation costs of our French Canadian stores and Puerto Rico store of approximately $250,000.

These incrementally higher costs will impact our SG&A expenses in the second quarter and in total account for about $0.07 per diluted share. The fiscal 2006 second quarter consolidated earnings per share were $0.15, and included a $0.15 dilution from the UK business, a loss of $2.7 million or $0.13 per share associated with the UK operation, and $0.02 per share associated with lost interest income and franchise revenue.

With regard to North American comp store sales, our outlook for the second quarter of flat to negative low single digit comps reflects our confidence in the continued improvement in our sales trend.

Just a few comments on the accounting treatment of our Rainforest Cafe partnership. Through this partnership, which includes the T-REX Cafe, we receive licensing revenues based upon a percentage of sales in the store. We do not staff or operate these stores, but do provide product, store furnishing, and fixtures and marketing materials. The anticipated financial impact of the three store openings announced is included in our earnings guidance range for 2007.

Also to comment further on the accounting treatment of Ridemakerz, first, our 2007 earnings guidance assumes no impacts from Ridemakerz. Specifically, our 2007 outlook excludes any losses from Ridemakerz, which will go to the primary shareholders using the equity method of accounting for a minority equity position. At the end of the first quarter, our balance sheet reflects our investment in Ridemakerz in 'Other Assets'.

With regard to our loyalty program accounting, we continue to review redemption rates and assess the adequacy of our deferred revenue account at the end of each fiscal quarter. As the usage of the paper card program continues to wind down and customers convert to our new automated Stuff Fur Stuff cards, we have better data and visibility upon which to base our deferral rates and reserves. We will continue to make adjustments as appropriate.

This concludes our prepared remarks. Now I'll turn the call back to Molly.

Thank you, Tina. And now we'll open the call up to your questions. Maxine, Scott, and Tina are available to answer your questions.

Thank you, ladies. (Operator Instructions) Once again, ladies and gentlemen, please just refrain to asking one question. If you have a second question, you may enter the queue another time. Thank you. And your first question will come from the line of Paul Lejeuz from Credit Suisse. You may proceed, Paul.

Hey, guys; Paul Lejeuz.

Hi, Paul.

Morning.

Can you maybe put the Shrek launch in perspective for us, perhaps comparing it to the size of the Mumble launch, or maybe any others that you've done in the past? And I don't know if you can quantify for us maybe what percent of shop did Mumble represent while it was in stores versus what you think or what you might expect for Shrek?

Well, this is probably -- we've, you know, obviously learned from our lessons, and we always make our launches every time, whether it's for a non-licensed product, a regular Build-A-Bear product, a limited edition, as big as we can within the scheme of things. But this -- I would say that Shrek is more comparable to what we normally do in the fourth quarter from a purchase perspective, a spend perspective, a presentation and store perspective.

We have the advantage of our summer mailer, which we'll use similarly to the way we did Mumble in the Christmas mailer, and we appropriate the inventory based on, you know, the seasonality. So this is summer, which is very strong for us, and Mumble and Rudolph and Frosty were Christmas, which are, you know, the fourth quarter. So while they're comparable, they're -- you know, it's the summer. It's not quite Christmas.

There are a few more products with Shrek, because we have the costumes of the characters. Instead of having the small friends like we normally do with some of these products, these are -- you can buy a regular Build-A-Bear Workshop animal and dress it in a costume for Donkey and Puss In Boots. We have the sound from Mike Myer's recorded voice, who is in the Shrek movie. That is a very, very popular add-on.

And Shrek comes modestly dressed, let me say, and then you buy his outfit, which is additional, for $12. So there are quite a few more, and then we'll be launching the babies, as I said, on May 7th, along with a costume for Fiona, which is the mother.

So we're pretty excited about how this lays out for summer, and I'd say it's more comparable to in the summertime, our last big launch we had for Hello Kitty was also very strong. This should be stronger than that, with all of the media behind it.

Thank you. And your next question will come from the line of Brian Tunick from J.P. Morgan. You may proceed, Brian.

Hi, yes, good morning. I guess --

Good morning.

Following up on Paul's question, I guess, you know, given all that and given the inventory, the guidance for the same-store sales for the second quarter seems a little below what we were modeling in before you gave guidance. And, you know, while some of the companies obviously today are coming out and talking about the traffic issues for April, is that the reason you're being conservative, given what's happened over the past couple of quarters? Just trying to understand why such conservatism, given this big launch.

Well, I think we've just learned to be, you know, practical, and we are -- this is the first time we've done this kind of promotion in the summer. It is the summer; it's not the fourth quarter. We feel confident it's going to be successful and we're very positive about this, but we just don't know how the whole summer is exactly going to lay out.

So, we are I think being realistic, but we're also optimistic. And we have the room here to exceed our plans, and we hope that we will. But, you know, we also are paying attention to what others are saying, and what the climate might be like, and so we're just being very, I think, realistic.

Thank you, and your next question will come from the line of John Zolidis from Buckingham Research. You may proceed, John.

Hi, good morning.

Morning.

Morning, John.

I was wondering if you could quantify the sales contribution from the UK in the second quarter -- I'm sorry, in the first quarter, and looking into the second quarter, is the dilution from the UK going to be higher or lower than the prior period? Thank you.

The sales from the UK for the first quarter were $10.8 million. And as we look forward to the second quarter, we have said that there would be dilution, and that we anticipate that the dilution would be less than last year.

Thank you. And your next question will come from the line of Leah Vermulen from Tiburon Research Group. You may proceed, Leah.

Yes, good morning. My question is also regarding the UK stores. When do you plan to make money in these stores, and how much is this a reflection, I guess, of launching birthday parties in the stores?

The UK has several factors involved, and a lot of it still has to do with we still believe there is a large market for parties that we haven't penetrated. We are still just beginning some of our marketing campaigns, so we don't have the market share in the UK, certainly, that we have here in the U.S. There are also some expense challenges there that we haven't faced before. As we've taken on these leases from both Bear Factory and our Amsbra Partners, they have rent reviews every five years on our leases and they're not preset.

So it's a negotiation every time those come up, and so we've continued to try to negotiate those down, as well as working on the transportation costs. We do feel like we've got a decent handle on the store operations, we'll continue to work on the payroll piece, but our intent is to -- you know, we realize the first three quarters will be a negative contributor, but certainly in the fourth quarter, we'll have these positive.

Great.

Thank you, and your next question will come from the line of Sean McGowan from Wedbush Morgan. You may proceed, Sean.

Thank you. Just wanted to know if you could put some color on the performance of the stores by age. You know, in the age classes, as you have in the past. Thank you.

Again, Sean, the performance of the age classes are consistent with what they have been in the past. The earlier -- the older stores are performing the best.

Operator. Thank you. (Operator Instructions) We'll give that a moment to let everybody queue up here. Arthuros Mangriotis your line is open. You may ask your question.

Hi. You mentioned that you making more adjustments to the transfer to the Stuff and Stuff program? Could you give us a bit of detail of what that adjustment was in Q1?

What I said was that we will continue to review and make adjustments as appropriate on a go-forward basis. I did not talk about any adjustments in Q1.

Thank you very much, and you have a follow-up question with Paul (unintelligible) from Credit Suisse. You may proceed, sir.

(Laughs) Paul Lejeuz again.

I do apologize, sir.

Maxine, what was behind the quote with sales trends improving? Is that just speaking to the less negative comp, or was there some sort of improvement that you saw throughout the quarter or perhaps in April?

(unintelligible)

Thank you very much. And your next question is a follow-up question with Sean McGowan. You may proceed, Sean.

Thank you. What I wanted to talk about before on the sales by age, is there anything that comes out of that that is changing, you know, the timing of some of your promotional spending? Do you want to spend more in the early ages of the store, or hold back, or could you talk about that a little bit?

Sean, our spending -- our marketing spend is really across all stores fairly evenly, because the majority of it is national TV advertising, so it's going to apply to all of our stores.

Okay.

So we're not doing anything special for the older stores as opposed to the more recent stores.

We continue to, you know, promote our new store openings as they occur through email, and if they occur around the time of a direct mailing, then they have some notification about the new store opening there. But we aren't doing anything any different to hype new stores or as Tina said, over-fund older stores. It really depends more on the market that they're in, and what some opportunities -- if there are any local opportunities, what the local opportunities are, not necessarily what the age of the store is.

Thank you. And your next question is a follow-up question with Leah Vermulen. You may proceed, Leah.

Yes, thank you. I'm curious, did you have any issues with the new DC that was opened in September of 2006? Has the transition been smooth there?

Yes, we're right on track with our continued expansion of that. As I said, we just completed at the end of April our move of our web fulfillment to our DC in Columbus from here in St. Louis, so we're right on track with what we had planned for that.

Thank you very much, and your next question is a follow-up question with John Zolidis from Buckingham Research. You may proceed, John.

Hi, this is more of a big picture question. Was wondering if you can talk about your attitude towards investing in new and kind of tangential growth concepts relative to focusing on the core Build-A-Bear business, when it seems like we really need, from an investment standpoint, some demonstration that Build-A-Bear is a long-term, viable concept.

And in conjunction with that, can you talk about Friends to be Made and give us an update on the performance of Friends to be Made and what you think your plans for growth there are, or how long you would continue that test before making a kind of more permanent decision about whether to expand it or to cease the test. Thank you.

Well, first of all I think it's incumbent upon all of us in the retail business to continue to develop new products and new ways of approaching those products, and I think Build-A-Bear Workshop has gone about those in very scientific ways. I mean, whether it's a stuffed animal or a doll, and in the case of Ridemakerz, a car. It's not made out of plush; it's plastic. Trying to appeal to the interests of the consuming public and how that may change or evolve over time.

We're 10 years old, we're a highly profitable company, and I think we've proved so far that we have significant staying power. And we will, as we add these new product categories within our own assortment, such as Shrek or the decision that we make on dinosaurs, to put dinosaurs -- whether we put them in our stores or develop some separate concepts, those are the things that I think we -- it's very important for us to do in our organization. It has not meant us taking our eye off the ball at all. They're all related, and they're all for the same customer target, and we monitor those.

Friends to be Made is improving. I think the issue is one of tweaking the products as we go, but we've also put -- you know, this year we're going to -- we haven't found a location; we wanted to open up in a mall that Build-A-Bear wasn't in, and to see how that did. We last fall started with a store that's in the same mall, but far away from a Build-A-Bear.

And we will -- but we didn't find a location yet, and we decided that we would put the energy into the Build-A-Bear Workshop stores at the moment for the new store. The real estate part of it, anyway. So we continue to tweak it, and we haven't made any decisions about whether it -- you know, what its future is other than we're playing with it. And I think so far, you know, so good.

Just there's no need for us to go out and say we're going to open up a, you know, 300 Friends to be Made stores now, or X amount of dino stores. I think the two major projects that we have on our plate are really Build-A-Bear Workshop and then the launch right now of Ridemakerz and seeing if that is a customer that is underserved and how we can better serve the male customer in the experiential marketplace.

Thank you. And your next question comes from the line of [Hal Goetch] from [Alyadar Capital]. You may proceed, Hal.

Could you comment on some of the processes you're putting in place to leverage the SG&A on your current sales pace? And two, the second question would be what are the processes you're putting in place to kind of return your, you know, gross margins to a more historical level? Thank you.

Certainly from an operations standpoint, we continue to work on our largest expense, which is payroll, while maintaining a high guest satisfaction number, and that's always a balancing act. But we continue to push on that one.

The second one is as we come to our first full year with the DC, we're continuing to work on how we fulfill our stores and how we get that transportation cost as low as we possibly can. Those are big avenues for us today that we continue to work on.

We also continue to look at our -- as we build out new stores and how we can continue to get that cost down to leverage our existing systems. Those are the things we work on both here in North America, and it translates into our UK business, as well.

Thank you very much, and you have a follow-up question from Arthuros Mangiotis from FoxPointCapital You may proceed, sir.

Hi, I just wanted to follow-up. Did you make an adjustment for the gift cards in Q1, and if so, how much?

We did not.

Thank you. And your next question comes from the line of Bill Sims from Citigroup. You may proceed, Bill.

Thank you, good morning. Can you comment any thoughts on the impact Webkinz might be having on your business? In other words, how significant of a competitive threat is it? And then second question tied to that is are you planning on rolling out your own web-based strategy similar to Webkinz? Thank you.

Well, as I said in my comments -- morning, Bill. As I said in my comments, yes, we are, and we have been, you know, modifying and enhancing our website since we started Build-A-Bear Workshop. But last year, we put in place sort of a major remodel and most of that was launched -- a lot of that was launched in January. And so you can see it on our website at BuildABearville.com, which is our own little town where you can do all of the things from make your own bear in our little virtual Build-A-Bear Workshop store.

You can decorate your own room, you can play endless games, you can make a tree -- plant a tree in the virtual Friendship Forest, you can go to the movie theater and interact with our television commercials. And so all of these things are enhancing our web experience for our guests, which is an extension of our retail world.

We believe that we are uniquely positioned to maximize the 50 million -- nearly 50 million stuffed animals that have been made at Build-A-Bear Workshop stores and ultimately allow them to interact in the virtual world, as well. And I think you'll be seeing those kinds of enhancements throughout this year and into the future, because the web -- interactivity and gaming on the web for boys has always been popular, and now it's growing in popularity for girls.

My personal opinion is anything that encourages stuffed animal play and stuffed animal excitability like, you know, people going to look for something that they can't find, is a good thing for the stuffed animal business, and a good thing for Build-A-Bear Workshop. If the stores happen to be in the malls that sell them, it brings more traffic to the malls, it brings more customers interested in stuffed animals.

And so we're not threatened by that; we're actually encouraged and energized by it, because I think there's a lot of exciting things that a lot of people are doing. Remember, the first website that was like this was Neopets, which started right around the same time that Build-A-Bear started.

So, Webkinz isn't a new idea. I think they have a good twist on it. An article I read yesterday, I think it was in the Wall Street Journal, said they've only sold 1.5 million in two years. That's not very many, although I believe that most of those probably were sold -- you know, 75% of those were probably sold since the fourth quarter of last year.

And it's certainly growing in importance with the customer, which I think makes us even have greater opportunity to leverage our 50 million registrations which have been made over the years into interactivity on the website. So we're looking forward to expansion of our website, and more and more customers coming to our website every single day, as they are now.

Thank you very much, and your next question is a follow-up question with Brian Tunick from J.P. Morgan. You may proceed, Brian.

Hi, yes, thanks. Maybe just two quick ones. Were there any regional differences in performance in the first quarter, and then I guess secondly, Maxine, maybe have you thought about the U.S. store potential for the core Build-A-Bear concept? Has that changed at all versus the trend you've been seeing in your four wall returns in those stores? If you can just talk about how in flux those might be.

Well, I believe that our potential is the 300 to 350 stores. But this year, we have quite a few stores in the queue that are in smaller markets. The economics on those stores -- at least the return that we're planning for them, based on the terms that we've negotiated to -- I'm sorry, it's 350 to 400 stores, excuse me. And I don't -- be sure that you correct that; 350 to 400 stores.

But the smaller stores that we're planning this year are planned to have similar returns to the stores that we've opened in the past that are larger volume stores. So with those success, we'll be able to tell you whether there's going to be more stores than 400 in the future, because there's a lot of small markets that are very exciting and growing and have opportunity.

So we feel very confident that we'll learn about that. In fact, we've been opening up small markets that some people would call small, like Evansville, Indiana, but those stores have continued to be -- exceed our expectations. So they don't come into the below a million five level volume. The biggest difference we've seen in stores, Brian, is not in so much what market it's in, it's what type of mall is it.

So when it's an enclosed mall and a million square feet or more, a regional mall, we do much better than we do in the lifestyle center malls; significantly better. So that has more of an impact on us than what size town, at the present time, anyway, that we've been in.

On the regional differences, Tina, you want to?

Well actually, on the regional differences, because of the weather factor in the first quarter, it's kind of hard to tell. We could kind of follow the weather pattern across the United States, but the northeast still struggled more so than the other regions, although its trend has continued to get better. And we think that will continue, so they were pretty equal, other than the northeast was a little worse.

Thank you very much, and at this time you have no further questions, so I'd like to turn the call back over to management for closing remarks.

Thank you, operator, and thanks to everyone for your participation today. Feel free to give me a call if you have any follow-up questions. Thanks and have a great day.

Thank you, ladies and gentlemen. You may now disconnect, and have a wonderful day.