Build-A-Bear Workshop Inc (BBW) 2007 Q4 法說會逐字稿

Good day, Ladies and Gentlemen, welcome to the the fourth quarter, 2007, Build-A-Bear Workshop earnings conference call. My name is Michele and I will be your audio coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host for today's call, Miss Molly Salky, Director of Investor Relations. Please proceed,

Good morning, everyone and thank you for joining us for a review of our results for the 2007 fiscal fourth quarter and full year. With me this morning are Maxine Clark, Chairman and Chief Executive Bear, Scott Seay President, and Chief Operating Bear, Tina Klocke, Chief Financial Bear. In a moment I'm turn the call over to Maxine to provide her comments on our financial results and 2008 Business Plans. Scott will update you on the store operations, distribution center and logistics initiatives, along with international franchising. Tina will follow with additional details on our financial results.

At the end of our remarks, we'll open the call for the questions. Members of the media, who may be on our call today, should contact us after this call with their questions. We ask you limit your questions to one question and one follow-up. This way we'll 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 Investor Relations website. And a replay of both the call and webcast will be available later today at the I.R. website.

I need to remind everyone 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 factors section of our 2006 annual report on Form 10K filed with the SEC, and Filed with the SEC, and we undertake no obligation to update or revise any forward-looking statements. In our earnings announcement this morning, we announced that in June 2007, the Company retained Lehman Brothers to assist it and the Board of Directors in an analysis and consideration of a broad range of strategic alternatives to enhance long term shareholders value. This review of potential strategic alternatives is continuing. While we hoped to have concluded this process by now, the timing is complicated by a significant tightening of the financing markets and the general weakness in the retail environment. We currently expect that the Board will conclude its review by the end of the first quarter. There's no assurance that the conclusion of this process will result in any changes to the Company's current business plans, or lead to any specific action or transaction. And as before, the Company does not expect to disclose further developments regarding its review of potential strategic alternatives, until the review has been completed. Additionally, our policy is not to provide forward-looking guidance until the Board's review of potential strategic alternatives is complete. We will not discuss the strategic alternatives process or earnings guidance further on the call today.

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

Thanks, Molly, and good morning, everyone. Happy Valentine's Day, and thank you for joining us to review our fiscal 2007 fourth quarter and full year results. The 2007 results for Build-A-Bear Workshop and for many retailers illustrates the difficult retail environment we face. The impacts of slowing economic growth, declining mall traffic and slower consumer spending are evident industrywide. These impacts can be more dramatic for Build-A-Bear Workshop given the discretionary nature of our products and experience. Our disappointing comp store sales performance and full year revenue growth of 9% reflect this retail environment. Full year GAAP results also include the impact of $2.4 million in inventory write offs and $1 million in costs associated with the strategic alternatives review. Importantly, the inventory write-off positions us with a very clean and balanced inventory position as we enter 2008. Our plan for 2008 combines new initiatives with our fundamental brand strengths to address our biggest opportunity, attracting new guests to our stores. As we think about the business and priorities for the future, we consider how to maximize our core assets, our exceptional real estate, network of highly-productive stores, our large and loyal customer base that includes our Stuff Fur Stuff members, and our extensive international franchise business. We are optimistic about our plan, which addresses opportunities for growth in each of the areas and we see 2008 as an important rebuilding year. Our 2008 plan includes a slowdown in new store openings. This will help us refocus the business and align all operations around the goals of new guest acquisition and guest retention, aimed at improving comp store sales performance. While we've never believed our concept to be a high comp store model, we know comp store sales are an important metric and we believe we can improve our performance. We plan to open approximately 25 new stores this year, down from opening 50 stores in 2007. Approximately, 20 new stores are planned for North America compared to the 39 stores last year. In Europe, we plan to open approximately, five stores, compared to opening 11 last years year. This plan allows us to invest in building our long term brand value with the addition of our virtual world, buildabearville.com. In addition to leveraging buildabearville.com to bring traffic to our stores, our ongoing marketing and merchandise plans balance initiatives to attract new guest and retain existing guests. We will enhance communication to our loyalty program members, which today includes about 5.6 million guests and places emphasis on our broad product newness and collectability, a fundamental strength of our brand.

Before describing each of these initiatives in detail, I'd like to recap the results from our European operations. We are proud of the performance delivered by European operations in 2007. Our brand building and store operation strategies begun to take hold with the operations delivering significantly improved results compared to 2006. This segment of our business now includes Company owned stores in France, along with our stores in the United Kingdom and Ireland. We opened three new stores in the U.K. and one store in France during the fourth quarter. We ended the year with 49 Company owned stores in Europe. Fourth quarter sales were $23.5 million up 49% from $15.8 million in the 2006 fourth quarter, and our operating performance in the quarter significantly improved. We reported operating income of $5.1 million compared to $3.3 million last year. For the full year, sales from European operations increased to $59 million and delivered operating income of $700,000 compared to $1.5 million loss last year. For the year, European stores show increase in average transaction values, an increase in party sales and strong positive comp performance. In addition, guest satisfaction scores continue to be high in Europe, as high in some stores, even higher than our North America average. Party sales as a percent of revenue, while still lower than the North America stores have showed steady increased this year and we have place more marketing emphasis on the party opportunity in the U.K. Just a reminder that out-of-home parties in retail stores are a U.S. phenomena, that Build-A-Bear Workshop has pioneered. We believe we'll have several years of growth in this area as the trend continues to grow in the U.K. and France. We see continued opportunity for growth in 2008. Our strategy includes driving top line growth, through raising brand awareness and communications with guests as well as a plan to launch our Stuff Fur Stuff club loyalty program in the second half of year in the U.K. We also expect to improve gross margin through lowering occupancy cost on new stores, which we made progress during 2007, via better negotiation of new store locations.

Let me now discuss three key initiatives included in our 2008 plan. The first is investing in our virtual world, buildabearvilleville.com. Our strategy has always been to put our brand wherever families and kids go to have fun. Our investment in buildabearville.com recognizes the powerful emerging trend of kids interaction and play in the online space. Our goal with BuildABearville is to leverage the brand equity we have built in the real world by creating a complementary brand experience in the virtual world. We also aim to create synergy between our real world stores and our virtual world web site to attract new guests and returning guests to the stores. In the real world we have created a safe place for children to play, express their creativity and use their imagination. We have brought our concept to many locations around the world and now we're bringing those same qualities parents value and trust, and kids love about Build-A-Bear Workshop in the real world into the Virtual World. We've designed BuildABearville to be a place where kids can grow friendships with their furry friends as well as their real life friends too. Citizens will be challenged with educational quests and adventures, learn lessons about being responsible citizens of the world and have good real world behavior reinforced all in a fun way. We believe we have a unique competitive advantage in this new virtual world market because we are the only company with both real world stores and a virtual world. With over 60 million stuffed animals sold and our impressive database, we have a large number of guests already familiar with our brand, ready to attract to our virtual world. Having both also allows us to control the in-store experience and incorporate traffic driving and therefore revenue driving features into the overall process to drive in store and online sales. BuildABearville surpassed the one million online character milestone just six weeks after live on December 11. We're pleased with the initial adoption phase progress which is better than expected and continues to accelerate each day. You may be familiar with internet play, but what's different about BuildABearville? Our site offers more than playing games and collecting points. It offers a level of personalization we think is different than any other site. BuildABearville charges no fees and imposes no expiration dates. The site offers many special features including the ability to create a unique online character or avatar, choose hair and skin color along with personalizing the style and color of clothing. By participating in games and quests guests can earn Bear Bills, the BuildABearville currency. This virtual money used to customize and purchase from a vast array of clothes, furniture for their, Cub condo homes and other items. Citizens can trade items they've purchased with others in the world. And several measures are in place to help protect the privacy and safety of guests visiting BuildABearville, including a safe chat system that allows parent to control chat options for the children. In addition the site is monitored for safe socialization.

The emerging trend of internet and virtual world play is powerful. In 2006, kids age two to 11 spent an average of nine hours and 24 minutes per week online,an increase of over 40% from the prior year, excuse me, from 2003. By kindergarten 32% of kids have used the Internet. The largest group of new users of the Internet are kids two to five. Market researcher NPD Group found in a recent study, approximately 39% of children's game time is spent connected to the net. Kids sitting at home, playing on the computers, does not help us unless they are playing with our animals in our virtual world, and that is our objective.

If you have been to one of our stores lately, you have no doubt noticed the store signage supporting the virtual world, throughout the store, from the front window to the stuffer to the name me station to the cash wrap, we've integrated virtual world messaging to raise awareness. The integration of virtual world into all marketing tools continues and will include TV advertising as well. Our 2008 marketing programs will leverage BuildABearville as a platform for communicating with guests. The virtual world is real news and a highly relevant new offering to tell our guests about. The unique characteristics of BuildABearville, combined with our loyalty club Stuff Fur Stuff gives us additional leverage to reward and communicate with our best guests.

Our Stuff Fur Stuff loyalty program rolled out nationwide in June 2006 and today, membership in the program has grown to 5.6 million members, with 4.2 million members having at least one transaction within the last 12 months. Our latest data shows that in January 2008, approximately 74% of our transactions were made by a Stuff Fur Stuff member; either a first time visitor to the store, who signed up at that purchase, or a returning guest. This is evidence of how appealing the program is to our guests and how important the loyalty program members are to our business. We want to make sure our returning guests receive special attention particularly in today's environment where getting customers to the mall is not easy. This month we began to offer the special guests another added benefit. For every dollar spent in Build-A-Bear Workshop stores, Stuff Fur Stuff Club members will receive 100 Bear Bills, the BuildABearville virtual currency used to purchase clothes, decor and other accessories in the world. So, if Mom spends $35 in our store, her child gets 3, 500 Bear Bills to spend in the virtual world. This is just one example of the ways we can offer our guests special benefits and drive visits from the store to the virtual world and from the virtual world back to the store. With meaningful Stuff Fur Stuff Club program experience under our belt we have new initiatives planned for 2008 to further enhance communications and benefits for these important guests. Through our detailed analysis of guest shopping behavior we know a guest that returns to the store within 90 days of their first visit is five time more likely to become a best guest. We define a best guest as one who visits the store four times or more for a year. Leveraging this learning we have instituted for 2008, a welcome kit message to all members within the first 30 days of their first visit. Moving more members into the best guest category is a key growth strategy.

We launched the Stuff Fur Stuff Club program, in Puerto Rico in October 2007 and expanded throughout Canada, including Montreal in November. Our plan is to launch the program in the United Kingdom in the second half of 2008.

A fundamental strength of our business is our strong merchandising expertise. We know that the consistent introduction of new seasonal and collectible products drives newness and excitement with guests. Our product assortment in 2008 continues to emphasize newness and collectability. During 2007, our limited edition collectable series, the Bears For All Seasons was so successful, that we have introduced another special series this year. The Gem Of A Friend series began in January with Precious Pink Teddy. It is important to note all new products introduced in 2008 have a unique tie-in with BuildABearville. In addition to extra Bear Bills each comes with a unique condo room and virtual world bonus. In the case of Precious Pink Teddy, her bonus is a princess crown.

In February, the Groundhog reappeared in our stores. You may recall that last year the Groundhog sold out over a single weekend. This year we planned for the product to be available in our stores until late February. Our spring assortment includes our first ever pink bunny and yellow happy chick; our limited edition product for Easter. Staying relevant with our customers is a key success factor. Our assortment of Hannah Montana, High School Musical and Cheetah Girls, clothing and accessories continue to be very strong performers. We'll build on it throughout the year and you may see other celebrity tie ins. And this summer the will be focused on the Summer Olympics games in China and we will have great merchandise, as well as a strong focus on exercise and sports in our stores. We are optimistic that our product and merchandise assortment can help us attract new guests as well as always offering something new for our returning guests.

For a quick update on Ridemakerz. Ridemakerz is a new interactive retail concept to allows children and families to build and customize their own personal cars. Our partnership with Ridemakerz includes a capital of investment of approximately, $3 million, along with operational and advisory services in exchange for additional equity ownership. Ridemakerz completed its first holiday season with four stores located in Myrtle Beach South Carolina, Minneapolis, Minnesota, Fredericksburg, Virginia, Indianapolis, Indiana. The outlook 2008 is to open eight new stores, locations include Detroit, Chicago, Houston, Baltimore, Haggerstown, Maryland, Appleton, Wisconsin, and Branson, Missouri. The stores are highly interactive and early results show that the concept appeals particularly to boys age six and older. Guest survey data is very positive. Approximately 95% of respondents indicate they're likely or highly likely to return to the store, and over 90% of responds rated level of satisfaction as satisfied or highly satisfied. In January, Ridemakerz was awarded the 2007 Chain Store Age, Store of the Year in attraction retailing for stores size 5,000 square foot and under. Our operational partnership with Ridemakerz has given them the ability to focus on refining their product offering and store operations, rather than building their infrastructure, a distinct advantage for the concept.

I'll conclude my portion of the call with final comments. Last year was a very difficult year for our Company and the environment continues to be tough so far this year. We're going to work harder and smarter. Our plan to slow down new store growth will allow us to focus on our existing stores and our comp performance. A fundamental brand strategy for our Company is to add value to the product and brand by investing in marketing rather than mark downs. And while our marketing spend as percent of revenues will be similar in 2008 compared to 2007, we're challenging ourselves to get more from our marketing dollars. Our aim is to both attract new guests to the concept and support our growing base of returning guests with our marketing programs. With this in mind, reallocated marketing dollars in 2008 to test how shifting our investment can better achieve the goal and using BuildABearville as a new platform for marketing messages. Finally, in good times and challenging times, a fundamental strength of our Company remains the very strong economic model. Our store model delivered net income growth in difficult economic climates. Our stores are highly productive, generating strong sales per square foot and positive cash flow. Our stores have typically paid for themselves in the first year of operation. This store model and our unique store experience have placed us in a position to weather continued tough times and maximize and grow the business when the retail environment improves. Now I'll turn the call over to Scott for his comments.

Thanks, Maxine. Good morning, everyone.

Let me start with the store update. During the fourth quarter we opened eight new Build-A-Bear Workshop stores in North America, three new stores in the United Kingdom, one additional store, our third, in France. As Maxine discussed, our plan in 2008 is to slow the store opening pace. Opening fewer stores will allow the store operation team to focus on comp store performance, spending more time in the field visiting existing stores. The plan also minimizes sales cannibalization, and most of these new stores are smaller format stores. From our U.K. experience we learned to set successfully operate stores in smaller footprint without sacrificing the brand experience. We have engineered our store design and developed a format that works in about 2,200 square feet compared to about 2,800 square feet in the past. A couple of important points--first, these stores incorporate all elements of the Build-A-Bear Workshop concept, so we are not limiting our product or experience in any way, second; the store economics are in line with our regular mall stores, so we've lowered the capital required while still maintaining a large tenant allowance, third; we can operate the store keeping payroll costs in line with the corporate goals. The result is a strong model that continues to be the backbone of our business. One additional comment with regard to our 2008 store growth plan. With this lower store growth, we also see an opportunity to integrate international franchise team with our domestic team to better provide overall consistent training and support for our franchisees. Last year, we strengthened our international focus by aligning the U.S. based functional departments with the respective contacts within the international franchise organizations. This more fluid organization allows us to provide resources to the international franchisees to assist in growing the business and at the same time protect our brand. We ended the year with 21 countries under franchise agreement and 53 stores in 15 countries. By aligning more of our internal resources, including store operations, marketing, and assortment planning and allocation, we see an opportunity to solidify and strengthen this business as a growth platform. During 2008, our international franchising will focus on existing stores and countries rather than expanding our base of countries. Although there are a few key countries where we'd continue our efforts to find qualified franchisees. Franchisees anticipate opening 15 to 20 new stores this is year, including three additional new stores in South Africa, which is proven to be a successful country for our brand. The plan is to open in one new country through our Gulf States franchisee in the United Arab Emirates. Our ability to expand in overseas markets is highly dependent on our ability to find suitable locations. The right size location, the right mall, the right location in the mall; these elements are much more difficult in oversea markets than in North America.

We found that in India our concept was a bit early. Our franchisee in India will be closing their three concession stores next month. We had difficulty identifying cost effective retail space in the right locations, and the impact of high import tariffs and other costs, unique to that country, inflated the price of our products. Overall, while we wish they could have been more successful, it has been a positive learning experience for us. International franchising is another groundbreaking hallmark of the Build-A-Bear Workshop brand and a business model and while we are encouraged with our overall international performance, we are still learning and adjusting the international strategies with each country. While our experience in North America is a powerful base, we know from the experience in the U.K. and Canada, that there are differences in operating in various economies and cultures. We balance leveraging the expertise that our franchisees bring with our company owned store history. We feel the brand is extremely relevant but timing our entry into the emerging markets in particular and unique economic considerations of those markets is very important. We clearly view our extensive international franchise business as a core asset of the Company a growth platform for the future.

In 2008 look to find savings through our logistic and distribution system. We have now had our company owned distribution system fully operational for about 18 months. We've realized initial benefits of having our inventory centralized with systems in place that help us manage our supply chain and provide us greater visibility to inventory movement. One of the early benefits has been our ability to test and alternate our distribution methods. We now use a variety of distribution methods from moving product from the warehouse to our stores and alternate the method depending on store and seasonal inventory demand. The headwinds we have faced relative to realizing cost savings have been rising fuel cost. In 2007, fuel surcharges continue to increase, making it difficult to gain overall cost savings from our distribution process. Finding ways to mitigate continuing fuel price escalation is a high priority this year.

Another cost savings opportunity in 2008, is our inbound distribution systems. As you know, the majority of our merchandise is produced in China, and comes to the United States, and the U.K., via over the water container transport. And then is trucked or railed to our distribution centers and our third party distribution centers in Toronto, and Middlesex, England. We are evaluating ways to consolidate our inbound shipments to gain efficiencies, consolidating containers and shipments and ways to get increased visibility to this inbound inventory movement. We expect changes in place by midyear that will benefit our overall distribution cost.

Moving now to inventory. Our consolidated inventory at the end of 2007 stood $48.6 million compared to $50.9 million at the end of 2006. However on a per square foot basis excluding inventory in our web store, inventory declined about 18% to $53 per square foot down from $65 a year ago. We have entered the first quarter with a clean and lean inventory and are comfortable with the levels. We'll continue to monitor and adjust inventory on a realtime basis to ensure that the inventory levels remain appropriate. In closing, I will add that we continue to closely monitor all expenses and strike a balance between our store payroll and providing a WOW guess experience in the difficult economic environment. Now, I'll turn the call over to Tina.

Thanks, Scott. I'll add additional details regarding the fourth quarter and full year performance. Our fourth quarter total revenue increase of $4.1 million dollars was fueled by new North American stores opened in the last 12 months. An increase in European sales of $7.7 million and higher combined revenues from franchise fees and licensing. These increases were partially offset by decline in North American comp store sales. Also our 2006 fourth quarter revenues included a loyalty program adjustment which benefited sales by $5.2 million. Consolidated net income in the quarter of $9.9 million included operating income from European operations of $5.1 million, compared to $3.3 million a year ago quarter. Our GAAP gross margin rate in the fourth quarter 46.2%. Within the gross margin rate, was continued strong and improved merchandise margin driven by the stronger margin we received on our European sales. Cost of goods sold in the fourth quarter includes $2.4 million pretax, $1.6 million net of tax inventory write offs. This write off inventory included excess Shrek inventory.

You'll recall that the 2006 fourth quarter gross margin benefited from two adjustments. The first was an adjustment to the loyalty program deferred revenue totaling $5.2 million. Second, was an inventory cost adjustment that reduced cost of goods sold in the U.K. by $1.2 million. Adjusting for these special items the decline in gross margin was primarily attributable to the lack of leverage on fixed occupancy cost in the North American operations. During the fourth quarter, the SG&A expense margin increased 36.8% compared to 35.2% last year. The margin reflects higher costs associated with the review of strategic alternatives totaling $400,000 pretax or $300,000 net of tax, increased store payroll as a percent of revenue and higher stock-based expenses.

Moving down the incomes statement, the effective tax rate lower than last year 33.3% fourth quarter versus 38.4% last year as we benefited from an increase in product contributions made in 2007. In the fourth quarter, we partnered with the Marine, Toys For Tots program, which was struggling to achieve their goals. We donated a stuffed animal, a toy with every product sold in the stores over the weekend of December 22 to December 24th. In 2008, we looked for a tax rate of about 37%.

Looking now at the full year results, I think it is helpful to talk through the items impacting the GAAP results. Full year 2007 operating income was $33.5 million, versus $46.9 million last year. The 2007 GAAP operating income includes the $2.4 million pretax inventory write off, costs related to strategic alternative review of $1 million pretax and higher stock-based compensation expense of $800,000. The 2006 GAAP operating income included distribution center costs $1.7 million pretax, the benefit of the frequent shopper program adjustment, totaling $3.6 million pretax and a U.K. inventory adjustment, $1.2 million.

Now, for a couple comments on the balance sheet. Capital spending in the fourth quarter was $8 million, up from $6 million in the 2006 fourth quarter. For the full year, our total spending was $34 million in line with the plans. We ended the year with a cash balance $66 million. During the year, we did not utilize our line of credit. Our policy is to not provide forward-looking guidance until the Board's review of potential strategic alternatives is complete; however, I'd like to note several assumptions in the 2008 business plan. We expect to maintain marketing spend in the range of 7 to 7.5% of total revenues. Separate from this spending is investment in the development and ongoing support of the virtual world. Capital expenditures will decline reflecting slower, new store growth and we expect CapEx in the range $25 million to $30 million and depreciation and amortization to approximately $30 million. With regard of quarterly flow of our earnings in 2008, there are a couple of things to note. First, 2008 is a 53-week year and 53rd week falls into the fourth quarter. Also, Easter shifts to the first quarter 2008 versus the second quarter in 2007.

Our gift card business in the fourth quarter grew as a percent of our total sales, however, the gift card results still reflect our decline in traffic, which impacts the first quarter sales, that are driven in part by gift card redemptions.

Our business in the U.K. has improved significantly; however, our outlook for 2008 is for the seasonality of the business to remain fourth quarter heavy. In 2007, the European operations generated losses in the first, second, and third quarters and delivered a profit in the fourth quarter and the full year. We expect that seasonality to be similar in 2008.

And finally, outlook for 2008, assumes challenging economic environment with modest improvement expected in the second half of the year. This concludes prepared remarks. I'll turn the call back to Molly.

Thank you, Tina. Before we open the call for your questions, I'll repeat that our review of strategic alternatives is continuing and that we currently expect that the board will conclude its review by the end of the first quarter. During the review we're not providing forward-looking guidance. We do not intend to discuss these matters further on the conference call today. Please focus your questions on the financial results and business initiatives that we have reviewed on the call today. Now, I'll open up the call for your questions. Operator? We're ready to take your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Tom Filandro of SIG. Please proceed.

Thanks. My question is related to the strategic review, it's not specific. I have to understand this. You noted you wanted to conclude the review by year end and then you highlighted credit marketing tightening and environment were the two reasons unable to do that that. So sort of a two part question. First part is, given the credit market tightening remains a factor, in here, and you clearly identified the market is challenging, why would we now, conclude that by first quarter, you would be able to complete this strategic review? And, then, second part of this question is, it sounds the credit markets are tightening, it seems to me that you guys are suggesting there was some sort of a deal on the table, either private equity or strategic. And then the final piece here, why not buying back stock? The stock is down 15% today. What are you guys doing with your cash? Thank you.

Tom, it's Molly. Thanks for the question, but we really are not able to respond to questions relating to strategic alternatives review. Could we have the next question, please, operator.

Next from the line of Paul Lejuez of Credit Suisse. Please proceed.

Can you provide the comp break down between traffic and ticket? Not sure did you that.

Paul, it's Tina, all transaction-based.

Okay. Can you talk about the $25 to $30 million dollars of CapEx, how do break down new stores versus maintenance versus whatever IT projects or anything else you have going on.

The majority is in the new stores, and, then, there will be some investment in IT and then just some, you know, general capital.

Our next question from the line of Michael Coreli of Barry Vogel and Associates. Please proceed.

Good morning.

Good morning.

I've got two questions for you. One about the store growth. Considering the economic environment, and the fact you had pretty materially negative comp store sales here, obviously we would like the Company to focus on getting the maximum return and maximum improvement out of the existing stores. Although I'm encouraged to see you pulling back on the store growth. Why not pull back even further?

Well, we look at every store location appropriately and some of these have been in the plans quite sometime, and are important to our location and to our customer strategy. And the majority of them, I believe, like 75%, are in markets where we don't have a Build-A-Bear store and we have been working toward building a store there. So, I think that this is an important -- this is a minimal amount of stores for us. The last time we opened up around the same number, 2004, and that was, a really major water shed year for us. It allowed us to balance the store growth with, also, a whole change in the marketing strategy and think similarly this is very manageable for us and an opportunity to expend the reach in the important market for the guests and not cannibalizing existing stores.

Okay, and then I just had a question on the inventory. Obviously it was a pretty dramatic reduction, which was good to see in the environment. Did you do it because of economic environment? Did you up selling out of certain products? Or, what was the reason for such a substantial decline in the inventory?

This is Scott. We really have been watching it throughout the year. We've taken a look at our core product by store and made adjustments each month based on what we saw in the forecast of our sales and in the current trends. We've pretty much been doing it all year, and a very systematic method. We, you know, feel like this is the right place to be given the current economic situation and where our store sales are.

Our next question from the line Evan Wilson of Pacific Crest.

Good morning, and thanks for taking the question. I was wondering if you are prepared at this time to provide any other metrics on buildabearville.com other than the one million registrants you disclosed a couple weeks ago? Particularly would be interested in number of repeat users, stickiness of site, average current users, or anything else you can provide, thanks?

We haven't really -- we look at those internally we'll eventually put that together as we see comparability between months, because such a zero base. We're really encouraged. There are a lot of repeat visits and people with multiple animals and high point scores and condos decorated, as you would see if you went on there. Very, very positive about it. The goal as I said, the really, important part, it looks great, it is great. Kids are having a lot of fun. Now how do we use it to drive sales and traffic back and forth to our real world stores, and that is our main focus.

Let me jump in with a follow-up, then. You said in the prepared remarks that the site is aimed at driving both in store and in game revenue. Right now it appears right now mostly in store. Do you think in game revenue something a possibility in calendar year 2008?

I don't think I mentioned that we were -- meaning revenue in the -- on the website? Children really can't buy online. So we don't expect that meaning in BuildABearville--we expect that people excited about products and want to buy them, and their parent's will go to buildabear.com to buy animals and things, as they always have, that is an important part the business. There probably are some revenue opportunities in co-branding and co-marketing, things that we are working on that you might see down the road in late 2008, but probably more likely in 2009 as the technology allows us to do that. We have a lot of developmental things that are about Build-A-Bear that we want to make sure are there, functioning, and there's constantly every week, new things coming out. So we don't see that they're going to actually buy online in buildabearville.com but go to buildabear.com and make purchases as well as go back to the store. Because everything is about the animal. And there are other things that you will be getting in our store, like this past Valentine's Day, we had Valentines cards and included in the Valentine's card for everyone you give a valentine to is an online gift. So when you go online and if have a registered avatar online, you can in fact pick up the gift and have one for you and one for all of your Valentines. You will see that happening, also, as we expand the license products, products sold with the Build-A-Bear Workshop name on them; like the Nintendo DS and other products and feature an attribute to take you back to buildabearville.com and then hopefully drive to sales to buy thing in the stores and online.

Our next question from the line of Brad Leonard of the BML Capital Management. Please proceed.

Hi, thanks for taking my call. I got a question and a follow-up. How much do you think it hurt you guys in Q4 to run out of Rudolph and Clarice so early?

Well, we had it into the second week of early part of the second week of December and we bought, more than double what we bought of Mumble the prior year, well over double. I don't know that we could have much more aggressive in light of the economic situation. I think what the good news for us, what really was happened, people were early on. I think, bought enough quantity, but what we didn't anticipate was that people were going to be buying both of them. So our average transaction in the early weeks of November when it launched, into the December, were double there normal level because people were buying Rudolph and Clarice. And actually, because we have the data on the existing customers from 2004 when we had Rudolph before and we figured a certain amount them that were still customers, a lot, wouldn't buy it again. Surprisingly, they also bought it again. And that was a good thing, but it didn't help us in the projections toward the unit transaction. So, I think that we're -- the opportunity was, in this case, that we can sell two animals to a customer in the right timeframe that go together as a key holiday story. And we're working on some of that as we go into 2008 holiday. That was really the miss there. We sold very well our Polar Bear and Winter Bear and all of those things online. Launched the Valentine's bear Hearts For You Puppy, 12/26 as we always do, and it was a huge success. It hurts you, because it is what people wanted it, and it was really cute and successful. If we had it, we would have sold more. I don't know anybody would suggest we buy more than 50% of what we sold of Mumble, and it was significantly more of course of what we sold of Rudolph the first time we had it out a few years ago.

My other question. We didn't talk about this. I didn't hear about the sales per square foot. It looks like stores younger than three years had the biggest percentage decline in sales per square foot. Is there something I'm missing in there? Is that just the new stores are opening weaker? Does it have to do with the fact that they are smaller? You help me out ?

It actually has to do with the fact there's two really large stores in there. And those are the New York City store and the Faneuil Hall store, which are both significantly larger New York is about 20,000 square feet and Faneuil Hall is almost 7,000 square feet. Those are in there, and not necessarily performing at the Build-A-Bear $600 a foot that we've done in the past. Some smaller stores are--there's a real big cross section in there, because we have stores at $1,000 a foot and more, too, but it did weigh us down.

The next question comes from the line of Brian Tunic of J.P. Morgan.

Hi,it's Evren Kopelman for Brian. A couple of questions. First, can you give us your thoughts on the competitive positioning online, given the success of some of the already-established players like Webkinz?

Okay. Obviously, they've been very successful at this project of creating a brand that sells online, sells in stores and then kids take it to online, no doubt about it. Along with Club Penguin which has also been successful but doesn't really sell products yet. I think they opened the door for lots of us to be-- have a new platform and I think that our 60 million animals that have about sold to customers, not that we can awaken all customers, because many are older and have kids of their own, after ten years of business, but there's a stronghold there with the customers. They like the Build-A-Bear stuffed animals and still have them. But the play pattern with the Webkinz or the play pattern online at club Penguin is different and we think we have combined the best of those. Our first month out, very, very significant growth rate and took them much longer to one million than it took us. I think we'll really see that ramping up as we do everyday and especially as we drive marketing around it, you'll start to see every single piece of marketing Build-A-Bear, adding the buildabearville.com marquis as well and kids getting more and more and more familiar with it. And also the idea of the Stuff Fur Stuff. So, I think we have opportunities because we control our four walls in the real world to drive this differently than competition. We've done a lot of survey work on this, we know what kids think about BuildABearville, visa vie the others and we're doing well in all those metrics.

Great. And then a follow up to that is, you said making changes to marketing plans. Can you give us any details, I guess, you can, especially on what kinds of things may be to drive traffic to the stores, And drive the relationship of buildabearville and your stores

Yes. Few things at any rate, as they are unfolding. We realize we spend significant dollars in marketing and we like to remind everybody that's our version of mark downs, we don't offer mark downs to our customers, so that you can put a big signs in that window that says, 25% off, buy one get one free, all though those are techniques we could employ in the future and so our marketing really has to build our brand. We conducted quite a bit of research, ongoing research, but new research at the end of the year, found that our customers really do--people know Build-A-Bear love it and still lots of people that haven't yet to come. We have to make sure we're really driving the brand. So we're going to continue to refresh our commercials and you'll see a new series in the first quarter that reflect a much more modern approach, kind of the way kids are. They are changing rapidly and thinking today and the way they're playing today. And instead of having product 15 seconds in the first half of the year, like last year, there will be less of those and focusing on part of those will be dedicated to BuildABearville and also to some events that we have that drive traffic. Next weekend we have our Leap Day weekend, comes one every four years. Last time we had it a huge success. We'll have a special gift with purchase. It will be the first time we ever promoted a gift with purchase on television, and so we're excited about that. Will start on Monday of next week, build in power so that it drives the weekend traffic. I think that's the first time we've done it and our way of, maybe, getting some -- what we use here, mom will drop the dish towel and get the kids in the car and come to the mall. We think that will be a good opportunity for us. We'll see how it does, we have other gifts with purchases as we always have, made them bigger and better than the past I think we can if a successful tactic use the 15 seconds like that. The other is we're doing online advertising because the customer is online. Moms are spending time reading and visiting information websites and we are in front of them for that. Wherever we can be to be where they are today. We also use magazine advertising, selectively. So, we're spending a significant portion on television advertising, we're changing the mix and maybe not so much in first half as we would have had before, working on the second quarter, second half of what we learned in the first half. There is a lot of to that, too, we did run a lot of advertising last year and we may not be running same levels, up to the same audience this year. There is some risk. We think it is worth while, taking a risk and switching emphasis to driving traffic, specifically, on a weekend and getting customers to come in for something special that they'd not get otherwise and not lowering price of merchandise to do it.

Our next question is a follow-up from the line of Paul Lejuez

Thanks. I just wanted to go through what it cost to build a store from the CapEx perspective.

It cost between 450 and 500. Net of tenant allowance.

Got you, more than half of CapEx going to things other than new stores?

As we said on the call, we're going to have investment in the virtual world. We're also going to invest in some additional IT systems, such as our time and attendance system with Work Brain to go in later this year, midyear this year. And other just initiatives that from a maintenance perspective on the IT, such as new planning abilities in the merchandising systems.

Got you. One clarification on the inventory write down, what happened to those units? Did you sell those units? Did you get rid of them? Still in stores? You just took a write down on them? Where are the units?

A sizeable portion of them were donated to the Marine Toys for Tots and the remaining portion was destroyed.

Our next question a follow-up question from the line of Tom Filandro Please proceed. Mr. Filandro, your line is open, sir. Our next question a follow-up question from the line of Brad Leonard. Please proceed.

Hi. Could you tell me, did you say merchandise margin was stronger and that the Q4 gross margin looks like it really came down. Is that just all of deleveraging on the occupancy?

It is deleveraging on the occupancy on the North American stores plus it includes the $2.4 million write off and so the initial merchandise markup remains strong.

Merchandise margin the same? Is it higher?

It was slightly higher.

Okay. Thanks.

And our next question a follow-up from the line of Michael Corelli. Please proceed.

I have a question, follow-up to the question. Are you allowed to buy stock at all during the strategic alternative review?

No.

Okay. Has the Company considered, you talked about economic environment and credit environment, but you haven't commented on if the sale of the Company is the focus, obviously it is one of the options. The Company is not able to accomplish that, I would hope they're considering maybe a major share repurchase program, because you could probably take out 25% of the current shares outstanding with the cash balance, and I think that's something that should be considered with the stock down at the levels. If you can't accomplish something else.

Thank you, Michael. It is a broad, a broad review of strategic alternatives.

Okay. Thank you.

Ladies and Gentlemen, this does conclude the question and answer portion of today's Conference Call. I'd like to turn the presentation back over to Miss Molly Salky for any closing remarks.

Just, just to say thank you, everyone, for your participation today. Thank you for your participation today. Feel free to give me a call for follow-up questions.

Ladies and Gentlemen, thank for your participation in today's Conference Call. This does conclude your presentation. You may now disconnect.