Build-A-Bear Workshop Inc (BBW) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 Build-A-Bear Workshop Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Molly Salky, Director, Investor Relations. Please proceed, ma'am.

Thank you, Operator, and good morning, everyone, and thank you for joining us for a review of our results for this 2007 fiscal second quarter ended June 30th. On June 28th, Build-A-Bear Workshop announced that it had retained Lehman Brothers as financial advisor to assist management and the board of directors in an analysis in consideration of a broad range of potential strategic alternatives.

There's no assurance that this process will result in any changes to the Company's current business plans, or lead to any specific action or transaction. Also, as previously announced during the process, the Company will not provide new earnings guidance nor will the Company update or comment further upon the earnings guidance previously provided. Therefore, we'll not be able to answer questions today pertaining to the strategic alternative process or earnings guidance.

With me this morning are Maxine Clark, Chairman and Chief Executive Bear, Scott Seay, President and Chief Operating Bear, and Tina Klocke, Chief Financial Bear. In a moment, I'll turn the call over to Maxine to provide her comments on our second quarter results. Scott will update you on our store operations and international franchising.

Tina will follow with additional details on the second quarter 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 conference call with their questions.

We ask that you limit your questions to one question and one follow-up. This way, we can get to everyone's question during this one hour call. Feel free to re-queue if you have further questions. Please know that our call is being recorded and broadcast live via the Internet. The earnings release is available on our corporate website in the investor relations section at www.buildabear.com and the replay of both our call and webcast will be available later today.

I'll remind you that 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 second quarter results. Our growth in revenues during the second quarter of 7% was primarily due to our new store openings. We opened on schedule and on budget 16 new stores in North America and the United Kingdom, including our first stores in Alaska, Montana and Puerto Rico, all new markets that we believe have strong long term growth characteristics.

Our earnings in the quarter were impacted by our comparable store sales results in North America, which, as we indicated in our prior announcement, were weaker than expected. The benefits we gained through continued strength in merchandise margin and efficiencies in store payroll expenses were not enough to offset the comp store sales decline.

We reminded you on our last call that the quarter also included increased advertising expenses and language translation costs associated with store openings in Montreal and Puerto Rico, as well as anticipated higher performance based bonus compensation. Ultimately, the higher bonus compensation was not expensed in the quarter.

What began as a fairly strong quarter ended differently than it started and was a disappointment to us all. However, as I said in our release this morning, our brand outlook remains positive with the plan to become a billion-dollar revenue company through our company-owned store expansion in North America and Europe, franchise partnerships in other international locations and other growth initiatives.

As we've analyzed our second quarter results, we have some key learnings and we continue to concentrate on ways to reverse the current trend as we move into the second half. Plain and simple, the Shrek product did not perform as we expected. While many purchasers were new guests, ultimately Shrek did not drive the traffic to our stores that we had expected.

Shrek 'Q Scores', an entertainment brand popularity measuring method, rated the brand as very positive with boys, girls and moms but when guests had the opportunity to purchase Shrek in our stores, while cute and loveable in the movie, he did not translate into the warm and cuddly characteristic of their favorite stuffed animal.

This, combined with the relatively broad-based availability of Shrek products in other retail outlets, resulted in the product's performance in our stores being far different from what the research indicated it would be.

Coming on the heels of a sellout performance of Mumble in the fourth quarter and again at Easter, we positioned Shrek similarly with aggressive integrative marketing, strong in-store presentation and inventory investment. We gave it our best shot. Ultimately, it's about having the right product, whether it's licensed or not.

During the second quarter, we continued to see the success with the introduction of new collectible plush products. In April, we introduced the second in the series of Friends Fur All Seasons Bears, the Summer Bear.

This product, along with the Spring Bear and other limited edition products introduced so far this year have performed consistently better than planned and many products benefited from movie-related excitement. Official Spiderman costumes, our new Trekkin' Turtle, along with pirate and wizard outfits all were positive in our product mix and provided our guests the opportunity to create a favorite character.

Our analysis also shows that while transaction count was down in the quarter, the value of our transactions was up modestly, and our guest satisfaction score showed the highest rating so far this year, near all-time highs. These positive metrics all point to our brand's continued strong guest appeal and entertainment value.

Important too, our database analysis shows that over 60% of our transactions continue to be with the returning guests, a consistent rate over the past several years. We know that these returning guests, many of whom have built a sizeable collection of Build-A-Bear Workshop products, are focused on product newness and collectibility more than ever. This interest in product newness and collectibility is true for both our new and repeat guests.

Armed with this experience, we continue to concentrate on ways to reverse the current trend, and have a plan in place for the second half of the year to incorporate our learnings by maximizing product newness, leveraging our Stuff Fur Stuff frequent shopper program communications, and expanding our experience and brand via the Internet. Before discussing these plans in more detail, I'd like to first discuss the second quarter results for the UK operations.

We opened one new store in the UK and ended the quarter with 41 stores. UK sales were $11 million, up 46% from $7.5 million in the 2006 second quarter. The operating loss in the UK was $1.7 million, compared to a loss of $2.7 million last year. You'll recall that our UK acquisition closed in April 2006 so the year-ago second quarter was our first quarter of owning the operation.

During that period, we began the conversion of Bear Factory Stores to Build-A-Bear Workshop stores and converted seven stores during the 2006 second quarter. Stores were closed on average for 20 days during the conversion and rebranding process. We completed the conversion of all 25 Bear Factory Stores in the fourth quarter of last year.

During the second quarter, our UK stores delivered an increase in the number of transactions, reflecting our full brand conversion completed last year, our strong management team, our consistent inventory flow and our initial marketing efforts. UK results also showed a healthy increase in average transaction value and an increase in party sales.

We see significant opportunity to grow and improve the UK operations and are pleased with the performance so far. We remain optimistic regarding the long term value this acquisition can deliver.

As I said earlier, our guests respond to product newness and collectibility. Our second half product plans incorporate more product newness by new animal introductions and updates to core products such as our new Monkey and new Read Teddy, as well as new clothing and accessories. We will continue to offer a mix of both our own developed products and selected licensed products as appropriate. The holiday season assortment will follow this plan and will include a significant number of new offerings. As we transition -

We have now returned to the main area of the conference.

Good morning. This is Molly Salky. I apologize for that interruption. We lost power and were disconnected to the call. I'd like to turn the call back to Maxine Clark to continue her comments.

Again, we apologize. Sorry, our electricity went off temporarily. We are on a generator right now.

As we transition to fall and back to school, you will see an outstanding assortment of metallic trim apparel and animal patterns that are absolutely on trend. Our fashion focus back to school offering also includes layered T's, shrugs, leggings, tunics, baby doll tops, skirts, ballet flats and lots of sparkle.

Also new in our stores this month is the third of our four limited edition Friends Fur All Seasons Bears, the Autumn Bear. The bear is individually numbered and, like the other bears in the series, comes with a collectible pin that we found to be very popular with our guests. Also the Cheetah, our new World Wildlife Foundation animal, arrives in stores on August 10.

We continue to use national TV advertising as a way to introduce our brand to new guests. During the third quarter, we will run brand advertising on national women's TV for six weeks. We began July 16 and will run through August 5. This will be the first time we have run national women's TV in the third quarter, and the first time our new TV advertising campaign, "Dream it. Create it." has appeared on women's TV. We will also feature product-specific and brand advertising on kids and women's programming.

Our back to school catalog will arrive in guests' homes in early August. We have expanded the number of guests who will receive the catalog this year, and we will mail to our guests in UK and Ireland for the first time. This is our first back to school season with all UK stores converted to our brand.

Also in early August, our partnership with McDonald's and their Happy Meal program will kick off. The offer will include a collection of eight girl-focused Build-A-Bear Workshop mini animals, and inside a specially designed Build-A-Bear Workshop Happy Meal box. McDonald's will feature the Build-A-Bear Workshop Happy Meals in TV advertising, radio, in restaurant and drive-through signage and on their HappyMeal.com website.

An offer to visit our store for a free gift will be included in all Build-A-Bear Workshop Happy Meals in all markets, unlike last year when we included a special offer in only selected markets. This offer will help us better evaluate and track the impact of this program on our stores sales.

Along with increased product newness, national women's TV advertising and our ongoing marketing program, we have an opportunity to leverage our communications to our best guests, guests who return to our stores multiple times in the year as well as those that come less frequently. We now have one year of nationwide experience and data with our Stuff Fur Stuff frequent shopper program and in three test markets, we have three years of data.

At most recent count, we have more than 3.8 million members in the program, over 3.5 million who have joined in the last 12 months and the numbers continue to grow daily. This program is becoming helpful in providing insights into the shopping patterns of our guests, and giving us tools to determine the best timing and frequency of communications to maximize the lifetime value of these guests.

We've learned that it's important to communicate with guests in the first three months after joining the program. This early communication and connection with our brand leads to an increase in the guest retention and additional store visits. Information from our loyalty program allows us to target our best guests as well as new guests to better connect them to our brand.

For example, our back to school catalog this year is going to a higher percentage of recent new guests in an effort to make this early connection with them. We also see benefits and opportunities in fine tuning this type of communication sent in the first three months with a more personalized message.

We've learned that our best guests want the membership rewards savings but also value the soft benefits of membership, for instance, early notification regarding new launches, special in-store events, acknowledgement of membership, parties, gift cards, etc.

Using the data tools from this program over the past year, we've gained confidence in our ability to impact the behavior of our best guests and we believe the program has significant future potential beginning this fall. Our data points to a strong and consistent returning guest, representing over 60% of our transactions.

We also continue initiatives to bring new guests into our stores as well. We know that many of our new guests find our store when they walk past us in the mall. With mall traffic down about 7% in the second quarter, that means of acquiring guests is challenged. This declining traffic may reflect the higher impact of gasoline prices and other economic pressures on consumers. And perhaps a move to fewer trips to the mall and fewer discretionary purchases.

We also believe our business has been impacted by shifts in media, particularly in the Internet and how it's changed kids' media consumption, patterns and play patterns, particularly for girls. We believe many kids today may be coming into the plush category via a virtual experience versus an in-store experience.

According to Nielsen/NetRatings by fall 2006, the time the average kid age two to 11 spent on the Internet had increased 41% over the past three years. We believe this has grown even more in 2007. The virtual world space is an exciting opportunity, and we believe will bring unique competitive advantages in this platform.

As we study the development of socialization networks and the use of Internet to connect kids and build communities, it's clear that this is a trend that's here to stay and one that offers opportunities for the Build-A-Bear Workshop business model. In fact, our brand does best when guests feel like they own it and are empowered to be creative. Our stores and the Internet offer this opportunity for our guests.

In January, we enhanced our website with the addition of Buildabearville.com and the response was very positive. For example, we saw a 50% increase in the amount of time spent on games for our young guests. At Buildabearville today, you can play games, visit our virtual store, create your own animal in an online store, dress your furry friend, decorate your den and plant a tree in the friendship forest.

A comparison of the number of unique users on Buildabearville.com compared to the traffic on other kid-focused interactive sites shows that traffic on all sites is growing. The most explosive growth has occurred in the last six months and the lion's share of the traffic is on sites that offer unique socialization connections.

Our interactive web strategy is to be relevant in the virtual world as we are in the mall-based world. Beginning in the fourth quarter, we'll introduce a social networking community site that will go beyond the current capabilities of Buildabearville and will connect our guests via the virtual world with a unique stuffed animal they have purchased in our store, leverage the store experience and extend the emotional bond between our guests and their furry friends.

The site will reflect the many months of research and work we have put into this platform in our effort to develop a comprehensive community-oriented and brand-appropriate site. The site will offer activities and features that are tied back to in-store events such as purchasing a new animal or outfit, and will introduce new products to guests in advance of their arrival in stores.

The site will feature a virtual store, socializing with others on the site, adventuring and exploring with your furry friend, customizing and dressing your furry friend, as well as tie-ins to store events, contests and new products that we think can drive guests from the store to the web and from the web to the store.

We know this is an exciting and changing space and in 2008 are already planning to add benefits for our Stuff Fur Stuff members and other programs that connect the virtual world experience with our brand DNA. Our development expenses for this project are primarily capital costs which are included in our capital spending budget this year of $35 million to $40 million.

Some expenses related to network usage, call center monitoring and depreciation will flow through the income statement later this year. We consider this effort a part of our overall integrative marketing strategy and are adjusting our marketing plans accordingly. Unlike other web-based plush animal experiences, ours is uniquely positioned to extend the guest experience that begins in our store to the web and back again.

I'll also mention that we entered into a licensing agreement earlier this year with the Game Factory for development of the first Build-A-Bear Workshop game available for the popular Nintendo DS platform. The game will become available in general merchandise and electronics stores in October and includes choosing, naming, dressing and caring for a furry friend and buying clothes and accessories to unlock mini games. 20 different themed mini games can be unlocked as players win virtual money to buy additional accessories and clothes along the way.

Let me spend just a minute on Ridemakerz. The first store opened at Broadway on the Beach in Myrtle Beach, South Carolina on June 1 and the second store opened at Mall of the America last week on July 20. Two additional stores are planned this year in Indianapolis and Fredericksburg, Virginia.

The current outlook for 2008 is to open another eight to ten stores. Based on the guest response from these first two stores, we continue to be very excited with this concept which allows children and families to build and customize their own personalized cars and we're optimistic about the success of this brand.

Our investment in Ridemakerz includes an approximate $3 million cash investment and our agreement includes operating, advisory and infrastructure services that we'll provide in exchange for additional equity ownership. Under this arrangement, and assuming no additional cash funding, our ownership could grow to approximately 34% by early 2008.

And now, I'll turn the call over to Scott for his comments on the quarter.

Thanks, Maxine, and good morning everyone. I'll start with an update on our new store openings in the second quarter. We opened 15 new Build-A-Bear Workshop stores in North America and one store in Warrington, England. Eleven of the 16 stores opened in the quarter are in new markets.

We completed the remodel of the Myrtle Beach and New York City flagship stores to incorporate Build-A-Dino product. In New York, we remodeled the lower level of the store and added an impressive dino signage to the first level stairway, directing people to the new Build-A-Dino store. The Myrtle Beach remodel provides for a separate entrance to the Dino portion of the store.

We also opened three Build-A-Bear Workshops at Rainforest Cafes during the quarter. We are on track to open 12 new stores in North America during the third quarter, along with two stores in the UK and two stores in Paris, France. Later this fall, we will also remodel our downtown Disney store in Anaheim, California.

We timed our work there to avoid the summer season crowds and will work in stages to minimize guest disruption and flow. The store will not close at any time during the remodeling process.

Within our store operations management team, I can report that we filled the Western region managing director position. We now have our full team of three regional managing directors in place, in the North, South and West, all who report to Paul Bundonis, Chief Workshop Bear. You'll recall that when Paul and I took our new roles in January, we modified Paul's position to be more store operations focused. With the added strength of our new regional director in place, Paul and I are now more fully in our new roles.

I would like to update you on our distribution center initiatives. Last quarter, we told you about our new store delivery test using FedEx Ground. This distribution model provides for just-in-time store inventory fulfillment using daily deliveries to our stores via the FedEx Ground delivery system.

Using this method, our stores receive smaller deliveries, or fewer boxes, on a more frequent schedule compared to larger weekly truck deliveries. Daily deliveries reduce store associate time spent in the back room handling, stocking and managing the inventory process. Our test has been successful and we continue to expand the FedEx Ground delivery method to more stores each quarter. Ultimately, we believe that we will use a multi-weight approach to our store delivery process.

For the majority of our stores in North America, the daily FedEx Ground system will be optimal. For other stores, due to volume demands, we use truck shipments or a combination of both, in some cases, depending on the inventory and supply needs. Our centralized inventory and enhanced supply chain visibility gives us the ability to analyze and optimize these options depending on stores needs and the flexibility to move stores from one system to another as sales dictate.

Our DC has also given us real-time capabilities to manage flow of product and provide shipment flexibility during the second quarter sales downturn. I would just add that our web fulfillment process is now in full force of the Columbus DC and that transition has gone very smoothly.

With regard to inventory, our consolidated inventory, including the UK operations at the end of the quarter, stood at $55.7 million, compared to $48 million at the end of the second quarter last year. On a per-square-foot basis, excluding our web store, inventory increased modestly, about 2%, to $66.30 per square foot from $65.10 a year ago. We are comfortable with our current inventory levels.

With the enhanced system integration, we now have via our warehouse management system and the visibility to our full supply chain, we are in a better position to manage and adjust inventories to sales trends on a real-time basis. With regard to Shrek product, we plan to include Shrek in our product assortment through the end of the year.

We expect that both the DVD release in October and a holiday TV special, "Shrek the Halls," can help us manage through our current inventory levels. We continue to monitor and adjust inventory throughout the supply chain, working with our suppliers and managing processes to ensure our inventory levels are appropriate.

On the international franchise front, our franchisees opened five new stores, including our first stores in India and Belgium and additional stores in Denmark and Singapore, bringing the store count to 42 at the end of the quarter. As we said in our release today, we recently entered into a franchise agreement to open stores in the Middle East Gulf states of Qatar, Oman, Kuwait, Bahrain and the United Arab Emirates.

Our franchisee for these countries is highly experienced in retail and service businesses and owns franchises for several other retail, real estate and service companies. Also exciting is the impressive, modern and growing shopping center complexes in these Gulf countries. Also of note, in early July, our franchisee opened the first Build-A-Bear Workshop in Johannesburg, South Africa.

The opening was well attended with opening day sales comparable to many of our larger U.S. store openings. These results bode well for the three additional South Africa stores planned this year, all in malls in the Johannesburg area. Our international franchisees continue to anticipate opening a total of 20 to 25 new stores this year.

Now, I'll turn the call over to Tina for her comments.

Thanks, Scott. I'll add some additional details regarding our second quarter performance. Total revenue growth of $6.7 million in the second quarter was driven by sales from new stores a $3.5 million increase in sales from the UK operations, a $300,000 adjustment to the frequent shopper program, and an increase in sales over the Internet.

Net income in the quarter of $1.6 million included an operating loss of $1.7 million from the UK business. As we've said in the past, we expect the seasonality of the UK business will result in losses in the first, second and third quarters and a profitable fourth quarter, given the higher weight of sales in the fourth quarter to overall full year sales.

Within the second quarter results was a continued strong and slightly improved merchandise margin. Overall retail gross margin declined to 41.8% from 43.9% primarily due to a lack of sales leverage on store occupancy costs. The SG&A margin increased, reflecting higher advertising expenses and language translation costs associated with new store openings in Montreal and Puerto Rico. These higher costs more than offset the continuation of improved efficiencies in our store payroll expenses.

We had anticipated higher year-over-year performance based bonus expenses in the second quarter. Ultimately, these higher bonus expenses were not recognized in the quarter and bonus expenses previously accrued in the first quarter were reversed in the second quarter. Our SG&A expenses this quarter also included approximately $200,000 of initial spending relating to our analysis of strategic alternatives.

With regard to store pre-opening, these expenses are slightly lower in the current quarter versus last year. For the full year, pre-opening expenses are estimated at 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 increased slightly versus last year as we are carrying higher cash balances this year. Last year our cash balances were drawn down by the UK acquisition and the distribution center construction. Our effective tax rate in the quarter of 34.7% was lower than the rate last year, reflecting benefits associated with our company owned distribution center, and an adjustment for our current full year outlook of an effective tax rate of approximately 37.5% to 38%.

Diluted share counts decreased slightly from the first quarter as our share repurchases in the first quarter more than offset additional share grants and option exercises in the second quarter. Also in the 2007 second quarter, the Company made an adjustment to the frequent shopper program, resulting in a reduction in deferred revenue of $300,000 with a corresponding increase in net sales and a $200,000 increase in net income, or about $0.01 a share.

We adjusted the deferred revenue account to reflect the fact that our paper card program continues to wind down with all paper cards expiring in August. With regard to the frequent shopper program accounting, we continue to review redemption rates and assess the adequacy of the deferred revenue account at the end of each quarter. The new automated system provides better data and visibility upon which to base our deferral rates and reserves.

As we have previously stated, due to the estimates involved in these assessments, adjustments to the deferral rate are generally made no more often than biannually in order to allow time for more definite trends to emerge.

Our cash position at the end of the quarter was $17.2 million. During the quarter we did not repurchase stock on our share repurchase program. During the second quarter we used $10.3 million for capital expenditures, compared to $21.4 million in the second quarter last year. We remain on track with our full year spending plan of $35 million to $40 million.

We continue to evaluate the most appropriate timing for including the United Kingdom comp store sales in our business metrics. We expect that these sales metrics will be provided no later than our first quarter 2008 which will be reported in May 2008. This concludes our prepared remarks. I'll turn the call back to Molly.

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

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Tom Filandro with SIG. Please proceed.

Thanks. Listen, I can appreciate you guys focusing on cost controls but you've got to pay your electric bills on time. Just kidding. My first question here is really related, Maxine, to the skin strategy that you kind of alluded to for holiday. I was wondering if you can tell us whether or not you are planning to launch any skins related to movie releases similar to Happy Feet, and go forward what is your view of movie releases and tying into new skins?

And then my second question is on the social networking site. I wanted to know if the kids would be able to bring their skins to life, and that's new skins and old skins that they had previously purchased? Thank you.

Okay. We will not have a movie-related animal this holiday to a movie that's current. There are no movies that we evaluated for this holiday season that had an appropriate animal associated with it. But, going forward, if there is one that we feel is appropriate, we will certainly consider it and add it to our mix if we think it's appropriate.

Again, the Mumble movie was very successful and we did sell out last holiday, and we repeated it again for Easter and sold out again. On the social networking, yes, the animals will come to life, and yes, the animals from the present and the past will be available.

We're going to do -- of course, we have hundreds, so we're starting with those most recent years where they had the most sales because earlier, in the first early years where we had just under ten stores, the units were not as many. And while we still have those customers in our database, we'll get to those fairly soon. But yes, they'll come to life in a very unique and special way.

Your next question comes from the line of Paul Lejuez with Credit Suisse. Please proceed.

Hey, guys, Paul Lejuez.

Hi, Paul.

Hey. Any thoughts of adjusting prices down to drive some traffic? It sounds like your merchandise margin's holding in pretty well while traffic continues to decline. Any thoughts of adjusting that and any update on July performance?

We don't have any plans to adjust prices downward, but we certainly look at all prices on new products and ways that we can encourage our guests. And as you know, our frequent shopper program, our guests, when they spend a certain amount of money -- they spend $100.00, they get 100 points, they get a $10.00 coupon in the mail that they can use and those are very highly redeemed.

And so our best guests are benefiting, in essence, from using those coupons and getting the advantage of good prices. But we've actually done so many surveys of this and price does not appear to be an issue for our customers and nothing that really concerns them, although the best customers certainly do like the use of the coupon. And no, we're not commenting on July sales.

Your next question comes from the line of David Schick with Stifel Nicolaus. Please proceed.

Hi, good morning. Hello?

Hello.

Yes, can you hear me?

Yes, we can. Good morning.

Okay. Two questions. You talked about limited edition working well and if we could characterize Shrek as more mass, not working well, how high do you think you can take that limited edition within the mix? And, what do you think that would do to either margin or the top line if you explore that at a higher level?

Well we have quite a few various limited edition animals. All of our seasonal animals that we come out with, whether it's for Easter, St. Patrick's Day, those always are limited edition, and so those are always meant for a short time frame. This year we added the Bear Fur All Seasons on top of the normal holiday program and we added the Groundhog.

So we'll continue with those kinds of things and we have a new limited edition series that we're planning for 2008 that will replace the Bear Fur All Seasons that's this year. And we look at it, as it relates to specific events or reasons to be, and we grow those quantities all the time. So I think that we want to also develop some special programs that may tie in with our virtual world and enhance the overall store and virtual world experience.

I don't know that I can give you a "how high" the potential is, but we keep pushing the envelope on it, and at the same time managing our inventories because especially in the plush department where we only carry a maximum of 36 animals at a time, we have to keep moving through those inventories and those items.

Your next question comes from the line of John Zolidis with Buckingham Research. Please proceed.

Hi, good morning.

Good morning.

A couple of questions, if I may. First, on the UK business, I estimate that it was $0.10 dilutive utilizing the operating loss of $1.7 million and taking out lost interest income and franchise fees, compared to dilution of $0.15 in the prior period. So it's clearly moving in the right direction. However, would you comment on whether that dilution figure is accurate, and whether that is in line with your plan relative to the previous goal for the UK to be accretive for the full year?

John, this is Molly and I'd like to just say that we are not commenting on earnings guidance, nor are we updating guidance today.

Okay, yes, my question is not about the guidance, it's whether the second quarter performance was in line with your previous goal.

John, it was.

Thank you.

Your next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed.

Good morning, everyone.

Good morning, Janet.

Hi. I just have two questions. The first is, how are you thinking about your boy business? How you might be able to attract boys into the store at a healthier level. And also, if you could just talk a little bit about the inventories.

I know, Tina, you said they were in good shape, but they seem to be up on a comp basis considerably more than the comp trend. And I know that you don't have that much obsolescence, but are you thinking about moving the inventories down or should we continue to see them hover around these levels? Thanks so much.

Janet, actually we have had quite a few boy increases in our assortment this year, and one of the issues that we believe affected the Shrek sales is that it was more boy oriented than even initial research showed us to be. And so, it's really important that we focus on keeping that in the proper balance and not overdoing that, because girls really are the drivers of our business.

While we have boys buying all kinds of products in our stores for the most part, we really find that if we don't keep that in the balance and actually favor the girls, it negatively impacts us, not positively impacts us.

And Janet, your answer to your question about the inventory, you're absolutely correct. We said inventory was up about 2% this quarter over a year ago. We continue, the systems that we have now in place in our DC, continue to help us have greater visibility into our levels and at this point in time we do feel comfortable with our inventory levels going out into the next couple of quarters.

Your next question comes from the line of Brian Tunick with JPMorgan. Please proceed.

Thanks. Good morning. We have two questions. I guess, first, maybe, just talk about how you're thinking about the marketing budget. Are you really getting any payback for spending 7% of sales. Do you think your comps would get any worse if you cut your marketing spend?

And then secondly, Maxine, can you just comment on the comps for the second quarter, how they broke out by oldest store base, versus newer stores in the comp base and just sort of are we still seeing the same trends there? Thank you.

Yes, thank you Brian. Yes, we are still seeing the same trends that the older stores are performing better, if that's the right word to use, in having less of a decrease in this particular quarter than stores that are newer and that continues to be a consistent story.

We do look at the marketing budget all the time and, as I said, we are rethinking the marketing budget, not necessarily the amount that we're spending but how we spend it. I do believe that it is very important. We've tested, over time, lesser advertising in different markets in different places and it has more negatively impacted our sales. It's important at all times to keep our brand top of mind at the place where families go to have fun, as well as to introduce our new products.

And I don't think, I still don't believe that it's actually, it should be less, I believe, that any powerful children's brands including many of the toy brands, are well over 10% of sales. I realize that in specialty retail it might be lower, but we consider ourselves an experienced retail store, more like a theme park and obviously our product has play patterns for children and we compete with those products as well and so we want to stay up as top of mind.

Your next question is a follow up from the line of John Zolidis. Please proceed.

Hi, guys. Just one follow up question. It looks like sales per square foot fell about 10% in the quarter compared to a 9.4% decline in same store sales. That actually suggests that the new store productivity is coming in at lighter volumes on a per square foot basis than your old stores.

So could you just comment on the performance on new stores in the quarter, and also relate it to that whether you think the comp decline has to do with those openings and any cannibalization there? Thank you.

I think that there are some stores, and I'm not exactly sure which ones -- not thinking exactly which ones opened in which months and in which market, specifically. But as we open up new stores in new markets, like we have some stores filling in the Los Angeles, Southern California area, that we definitely knew ahead of time and know today as customers shop there that they do move to the store that's closest to them, and we pick up new customers in place of those customers.

So cannibalization is still a factor, but we also are opening up stores in new markets where we didn't have any stores like Alaska, Montana, Puerto Rico, which were very strong openings. So in the total, our goal is for our market share in those markets to grow where we are opening up stores in existing markets.

Your next question comes from the line of Brad Leonard with BML Capital Management. Please proceed.

Hi. Can you just, on your comment about the store payroll improvement, did you imply that that was down as a percentage of sales?

On the second quarter, it was on plan with what we had planned. We picked it up earlier in the quarter, but it was less than last year.

Okay, it was less than last year. Also, can you --?

As a percent, yes.

As a percent it was down. Okay.

Yes.

I understand the silence on the earnings, but what is the rationale behind the not commenting on any of the previously updated earnings guidance or going forward? How does that affect [any] strategic review?

Brad, this is Molly. I think it's fair to say that our management team, at this juncture, is really focused on our business and on supporting the board of directors in their analysis of strategic alternatives.

We also believe that some of the initiatives that we've put into place are difficult to predict in terms of the timing of the improvement that will have on our business and with really those two factors in mind, in addition there are costs associated with a strategic review of alternatives. With those thoughts in mind, we have made the determination that we would not comment on past guidance or provide updates to guidance.

Your next question comes from the line of Rob Wilson with Tiburon Research Group. Please proceed.

Yes, thank you. Your depreciation expense was higher materially in the quarter. Could you comment on that? And also I noticed a change in goodwill from the end of the year. Could you comment on the increase in goodwill this year, and what transaction did that relate to? Thank you.

The increase in the goodwill resulted from the finalization of the purchase accounting for the transaction of when we purchased the Bear Factory and our franchisee Ambra. And depreciation, again, in this year-over-year, relates primarily to the UK and some distribution center depreciation that we wouldn't have had in the quarter before.

Your next question comes from the line of Sean McGowan with Wedbush. Please proceed.

Hi. I have two questions. And I assume that sales growth figure that you gave, the sum component of that, this is with the UK, the sum component of that reflects the fact that you didn't own it for the whole quarter last year, is that right?

No, we owned it starting the beginning of the second quarter last year.

So it was early April? Okay.

Yes, the beginning of April.

So that's a pure sales increase?

Yes.

Okay. Second question then, regarding the accrual of bonuses and having reversed the accruals taken in the first quarter, is this something that you expect to persist for the rest of the year? I'm sorry to have to ask that question.

Sean, I didn't hear the last part of your question.

Is it going to be a lean year in the executive ranks? Will there be bonus accruals in the second half of the year?

Again, if we achieve the sales plan or the goals of the bonus plan, we'll accrue the bonus at the appropriate time.

At this time there are no further questions in queue.

(OPERATOR INSTRUCTIONS)

At this time there are no further questions appearing in queue, so I will now return the call to Ms. Molly Salky for closing remarks.

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

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