Build-A-Bear Workshop Inc (BBW) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Build-A-Bear Workshop earnings conference call, my name is Michelle and I'll be your coordinator for today. At this time all participants are on a listen only mode. We will be facilitating a question and answer session towards the end of today's conference. I would now like to turn the presentation over to your host for today's call, Molly Salky Director of Investor Relations.

Thank you, operator, good morning everyone. Thank you for joining us for a review of our results for the 2008 fiscal first quarter. With me 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 will turn the call over the Maxine Clark to provide her comments on our first quarter results. Scott will update you on our store operations including our distribution center and logistics initiative and our international franchising, Tina will follow with additional details on our financial results. At the end of the remarks we will open the call up for questions.

Members of the media who may be on our call today should contact us after this call with their questions. We ask that you limit your question to one question and one follow up. This way we can get to everyone's question during this one hour call. Do feel free to re-queue if you have further questions. Please know our call is being recorded and broadcast live via the internet. The earnings release is availible on our investor relations website

And a replay of the call and web cast will be available later today on the investor relations portion of our corporate web site. I will remind everyone that forward looking statements are inherently subject to risks and uncertainty, results can differ materially from those currently anticipated due a number of factors including those set forth in the risk factor section of our 2007 annual report on form 10k filed with the FCC, and we undertake no obligation to update or revise any forward looking statements. I will turn the call to Maxine Clark for her

Thank you for joining us to review our fiscal 2008 first quarter results. On balance we think given the difficult economic environment in which we are operating our performance in the first quarter was satisfactory. That does not mean we are pleased. As you can see from our results and what we will saying in the call we our balancing efforts to invest in building our long-term brand value while managing through the near term challenges in the retail environment.

Maintaining that balance and managing through the environment has never been more difficult. Our number one challenge remains attracting guest traffic to our North American stores, weak mall traffic across the U.S. and a myriad of pressures on the consumers discretionary dollar are strong headwinds facing our business and all retailers. We believe that 2008 will be a challenging year industry wide but especially for companies that offer highly discretionary products like our own. Strong negative pressures may mask the positive impact of new initiatives but we remain confident that our long-term brand building initiatives will drive value and our near term strategies for managing through the environment are on track and will position us for a strong recovery when the economic conditions improve. Despite the difficulty environment we see several clear positives in our first quarter results. First our European operations continue to deliver significantly improved results posting a total sales increase of 52%. Comp stores sales increase of 14.5% and an improvement in operating income of $2.1 million.

Second, we continue to improve our inventory management. During our first quarter we lowered inventory per square foot by 9% and are comfortable with our inventory levels as we move into the second quarter. Third we continue to generate strong cash flows and have a debt free balance sheet. Thus remain highly liquid and that enviable position allows us to buy back our stock under our increased share repurchase authorization. Specifically we repurchased $8.6 million or 19% of the total authorized under the program during March through open market buying and by putting a 10b5-1 trading plan in place and ended the quarter with $41 million in cash. Also even in a significantly more difficult retail environment our business model showed its resilience and underlying strength delivering meaningful net income to the bottom line.

A final note regarding the first quarter, Remember the Easter fell in the first quarter of this year versus the second quarter in 2007, this is an important Holiday for our business along with many of the associated spring break vacations that coincide in timing. We expect this shift to impact the second quarter, historically one of our more challenging business quarters. As we outlined for you last month our business plan for the year includes moderating our new store growth plan -- slowing growth to about 25 stores this year compared to opening 50 new stores last year. This slow down allows us to focus on existing markets and stores and focus on expense saving initiatives.

We know that product newness is key to bringing traffic to the stores and we have focused on having consistent newness and collectible products such as our Gem of a Friend Collectibear Series throughout the year and our new on line world, buildabearville.com is breaking new ground. We are the first company with real world stores to launch an on-line community. And we are focused on understanding the full business potential of this initiative and integrating in to the brand experience. Despite the cut back in over all store openings we continue to be offered prime real estate locations demonstrating that a unique strong consumer franchise married to a strong balance sheet is valued at all times. Our landlords recognize that we bring a valued family oriented consumer to the mall, increase the time they spend in the mall and deliver above average store productivity. While families are feeling pressure on discretionary spending our landlords recognize that we will continue to be a important traffic driver when consumer spending starts to accelerate.

Our selectivity in the stores we open this year has refocused our negotiations on achieving extremely attractive lease terms. Having a strong brand and cash on hand will serve us and shareholders well in the future. The strategic alternative process was a learning experience for me and management team. We carefully evaluated all aspects of our business and the opportunities for growth. Having that behind us has removed the distraction and allows additional focus on operating our business and managing through the current economic environment. And while the formal strategic process is complete, you should know that our management and Board continue to evaluate all aspects of our business, prioritize initiatives and take steps that are geared toward enhancing shareholder value. The Boards decision to increase the share repurchase program reflects the confidence and optimism we share in the strength of our business model and our commitment to increase shareholder value. That said we have updates to the strategies and initiatives to discuss with you today. I will first provide additional details on the performance of our European operations in the first quarter. We are pleased with the performance from Europe in the first quarter. Our brand building and store operations strategies are taking hold and delivered significantly improved results compared to the 2007 first quarter. We began reporting comparable store sales for the European operations this quarter. 39 of our 51 stores are included in the calculation. Each of the stores has been under our ownership and/or converted to more than 13 months, in future new stores will enter the comp calculation beginning in their thirteenth full month of operation.

We opened two new stores in Europe during the quarter. The first in Northern Ireland in Belfast and a store in High Wycombe, England. Both stores have very strong openings, the opening in Belfast coincides with the strong growth and renewal that is happening in the city, and the store in High Wycombe is a new shopping center that is revitalizing an existing downtown shopping area. I visited stores in the U.K. this past weekend and continue to be very happy with what our teams have accomplished and the high standards they set. They have truly embraced the Build-A-Bear Workshop brand and are redefining entertainment retail in the United Kingdom just as we have done in North America. We ended the quarter with 51 stores in Europe.

First quarter sales from the European operations grew 52% to $16.4 million our operating loss was $100,000 compared to a loss of $2.2 million in the 2007 first quarter. This improved performance comes as we continue to fully integrate and put our best practices in place in our European operations, when we acquired the Bear factory business in April 2006, we described the long-term growth opportunity as positioning our brand in strong real estate locations in the U.K. leveraging our North American infrastructure via our purchasing, marketing, merchandising, logistics and store operations functions over a growing store base and establishing a single national brand with significant expansion potential in the U.K. market. We are seeing progress on all fronts as evidenced by the financial results. Underlining these positive trends are improving average transaction value, growth and in-store party business and world class guest satisfaction scores and feedback. We are pleased with how the business is performing and expect growth to continue this year and beyond as we build out the market. This year will continue to put our most successful U.S. strategies into place in Europe. We still have opportunities to raise brand awareness and introduce guests to our stores for the first time.

We also see a real opportunity to build value to the retention programs and having existing guest return for more frequent visits, we expect to benefit from targeted communication programs including the introduction of our Stuff Fur Stuff loyalty club in the second half of the year. Operationally we continue to focus on store payroll expense and occupancy costs to improve overall profitability in our European operations. A cornerstone of our long term growth strategy is the investment we are making in our new on line virtual world web site buildabearville.com. Our goal with buildabearville.com is to leverage the brand equity we built in the real world by creating a complimentary brand experience in the virtual world. We know that kids are using the Internet for play in increasing numbers and younger ages. The concept of virtual worlds, on line communities that immerse in a brand centric environment is still very early in the adoption curve. As we create synergies between our real stores and our new website we will be able to attract new and returning guests to our stores, we believe buildabearville.com gives us strong platform for growth in other entertainment oriented areas for our brand. We launch build a bearville this past December and pleased with the initial guest response. There have been over 3 million avatars, on-line characters created in the new world in four months. A strong endorsement for our brand franchise. buildabearville.com has no fees and imposes no expiration. The site offers special features including the ability to create a unique on-line character by choosing hair and skin color along with personalized style and clothing options. Guests can earn Bear Bills, the on-line currency by playing on-line games and guests, they can purchase from a vast array of clothes, furniture for their Cub Condo Homes and other items to have a customized in-world experience. Citizens can trade items they've purchased with others in the world and even send mail and leave messages for other citizens, several measures are in place to help protect the privacy and safety of our guest that visit buildabearville.com including a safe chat system that allows parents to control the chat options for their children.

In addition the site is continuously monitored for safe socialization. Our unique competitive advantage in this space is that we are the only company with both real world stores and an on-line world. Having both allows us to control the instore experience and incorporate traffic driving, and ultimately revenue driving features into the overall process. We are still in the test and learn mode with regard to what programs and features work best to create synergies between the online world and our real world stores. While we believe the ultimate measure of BuildABearville success will be in our in-store sales we are focused on three very important metrics, achieving critical mass by raising brand awareness and converting our store guests to BuildABearville citizens, maximizing the engage online engagement by increasing the frequency of visit and time spent per visit and growing the economy in the world measured in the Bear Bills earned and spent online indicating the emotional investment that citizens have made in customizing their characters and adding furry friends to their homes.

Let me outline a few of the programs we have in place so far in BuildABearville. First, our brand experience that happens in our stores is still the heart of who we are and what we do. But now it is also the starting point for the in home play experience that will include registering on buildabearville.com. We have significant touch points in the stores to help associates communicate the added value to our guests. In February we began offered our Stuff Fur Stuff Club members a special benefit in the online world. For every dollar spent in the store our Stuff Fur Stuff member gets 100 bear bills making this club membership a benefit for both mom and kid keeping out best guests engaged in the brand and encouraging a visit to BuildABearville. Additionally every animal made in our store comes with an initial Bear Bill's gift of 2000 Bear Bills and newly introduced animals come with an extra 1000 Bear Bill's bonus as well as other animal specific guests and condo decor items. Our new Bear Boutique opens for business today and gives our store guests to make clothing accessory purchase exclusive aspect to the Bear Boutique virtual store online. The Bear Boutique offers exclusive clothing for your on line furry friend and you can only get the items if you have shopped in a store.

We also have programs in place to drive return visits to our stores. In March, with a purchase in the stores, guests could get exclusive access to an online beach party with Lucas Grabeel from High School Musical in BuildABearville, this month we are featuring exclusive access to behind the scenes footage of the Hannah Montana best of both worlds concert and a virtual guitar. This virtual guitar and video footage is only available to our on line visitors with a purchase of $15 or more or store. Partnering with Hannah Montana hits the bulls eye of what is cool and relevant to our core guests. Hannah Montana is still the hottest ticket in town and we believe this exclusive concert video footage is a highly attractive offer. Again we are still learning and evaluating programs and tactic to create synergy between the real world and online world and have many future plans in the works. We view the online world as a long term strategy for enhancing the brand, expanding the entertainment value of our brand and growing revenue. Our 2008 marketing programs will leverage BuildABearville as a new platform for communicating with guests. The virtual world is real news and a highly relevant new offering to tell our guests about.

In fact our new T.V. advertising campaign which began airing this week on national kids TV incorporates both the real world store experience and the online world experience. This commercial takes you into our store and in a clever way introduces you to the virtual world. The message packages are dual brand experience in to one coherent brand message. This ad will run until early June and is available on our website at buildabearville.com for viewing. Top rated kids and tween shows like Hannah Montana and the Secret Life of Zack and Cody to name a few are targeted for our TV ads.

New this month we added the Disney channel to our TV mix and have developed a customized spot to highlight our year long sponsorship. You can view this spot on the corporate web site as well. As we've engaged our guests in the development of buildabearville.com. From the early development stages they helped choose a name and give us ideas to develop, to expanding offering and events.They provide feedback on the new developments they want to see in the world. Vote in online polls and improve the usability and navigation in the world. Our goal is for the guests to own the world and provide user generated content as the product expands and the emotional connection deepens. As I mentioned earlier a fundamental strength of the business model is our strong merchandising expertise.

While there are many pressures on price and margins due to change in the Chinese manufacturing system, the weak U.S. dollar and much more expensive petroleum products and fuel charges. We are working with closely with our manufacturers to maintain the value that we have always offered guests. We know the consistent introduction of new seasonal and collectible products drive newness and excitement with the guests. We started this year with a product assortment that continues to emphasize newness and collectability, our spring product assortment included several successful new product launches beginning with a Hearts Fur You Puppy in late December and the Gem of a Friend PreciousPink Teddy in January. The first of our Gem of a Friend series of four collectible teddy bears. In February, Happy Chick and Pawsome Pink Bunny with Rainbow Striped Ears all enjoyed strong sales. Moving into April we are launching our Black Lab Two as part of our Bearemy's Kennel Pals collection. Original Black Lab was introduced in November 2001 when we had just 72 stores and was our first Bearemy's Kennel Pals dog. The Lab was retired in March 2004 when we had 151 stores, since then we opened 175 stores in many new markets and our guests have been clamering for a new Black Lab.

Our new Lab which has been updated with new material and a new facial expression, he's actually smiling, also comes with a virtual gift to access in the online world. Importantly the purchase of the Black Lab provides a donation to Canine Companions for Independence to help kids who need extra assistance from a guide dog. Our partnership with Canine Companions came to us from one of our guests Shea Megale, a special guest who has a rare disease, spinal muscular atrophy. Shea who is now 12 years old, has worked hard to raise awareness about her disease and work towards a cure, and she wanted to work with Build-A-Bear Workshop to make a difference for kids with her disability and for working dogs like her dog, Mercer. Shea is the author of a recently published series of books about Mercer who she was matched with by an organization called Canine Companions for Independence. Her books highlight the friendship between Shea and Mercer as he tucks her into bed and heads off for exciting adventures.. We are pleased to support Shea in her efforts and help this cause. Our new Black Lab is available in stores beginning tomorrow and we will be selling an assistance dog backpack that can be worn by any furry friend.

On the fashion front our Hannah Montana skirt set and top sets and high school musical products continue to be best sellers, we will build on this assortment throughout the year with other celebrity tie-in's. Equally strong has been the skinny leg look, skinny jeans, skinny leggings and skinny capris combined with baby doll tops, dresses and anything with gems and sparkle, paired with ballet flats of course. We are optimistic that our product and merchandise assortment can help us attract new guests as well as offering something new for our returning guests. Now just a quick update on Ridemakerz. During the first quarter, Ridemakerz opened one new store in Baltimore at THE AVENUE at White Marsh, an outdoor lifestyle center. This year they plan to add 7 additional stores, locations include two in Detroit, Chicago, Houston, Appleton Wisconsin, Branson Missouri and Hagerstown Maryland where the store will be located in a power center. As you know Ridemakerz in an interactive retail concept that allows children, especially boys and families, to build and customize their own personalized cars. Our partnership with Ridemakerz includes an capital investment of approximately of $3 million, along with operational and advisory services in exchange for additional equity ownership. Our operational partnership with Ridemakerz has given them the ability to focus on refining their product offering and store operations rather than building an infrastructure, a distinct advantage for their brand.

I will include my portion of the call with a final few comments. As I said earlier with the moderation of the growth this year we are focusing on expense savings, driving product newness and collectibility, and raising awareness of buildabearville.com and merging this new component of the brand experience in to everything we do. The fundamental strengths remain intact are as relevant in today's challenging retail environment as ever. Our superior store economic model, strong cash flow and flexible capital structure position us for long-term growth. We remain optimistic yet realistic that the strategic initiatives we are putting place this year for the long-term will increase the value of our brand franchise. I will turn the call over to Scott for his comments.

Thanks Maxine and good morning everyone, Let me start with a store update. During the first quarter we opened two new Build-A-Bear workshop stores in North America. Both in Canada. In Saskatoon, Saskatchewan which is a mall location and Niagara Falls, Ontario. Niagara Fall store is a free standing store in Clifton Hill which is a main tourist venue for Niagara Falls. These are two of three Canadian stores we have planned for this year. The third store in Canada will be opened in August in Sudbury, Ontario. As Maxine mentioned we also opened two new stores in the United Kingdom.

The end of March also brings baseball. We opened our ballpark stores in Philadelphia, St. Louis, Cincinnati and San Francisco, and added a new store in the Washington National's New stadium. They five baseball towns not only have GREAT teams, but they also have family friendly stadiums, amazing fans and become GREAT partners and locations for our brand. We are looking forward to another GREAT baseball season. Maxine mentioned the importance of slowing our new store growth, focusing on existing stores and driving expense savings. I'd like to review our initiatives in these areas. With a decline in sales that we have experiences, operationally we are working hard to manage our store payroll. This has required us to streamline every we do to maintain the level of customer service that Build-A-Bear Workshop in known for. We have reviewed all aspects of our organization, our communications and our processes to remove any obstacles that get in the way of the primary focus, guest service and selling. We call our approach simple excellence.

In essence we have stepped back and eliminated organizational barriers, nonessential communications and process that don't add value in the current environment. This effort has extended to the store staff where we simplified our store associate communications, we focus on introducing our guests to buildabearville.com and to the Stuff Fur Stuff Club . We consider these two messages to be the core strategies for building our brand over the long term, we are trying to keep it simple for associates and guests. In March we announced a formation of a operations position. Managing Director of Workshop Experience. Primarily the position is focused on the guest experience, including the experience itself and looking at ways to keep the experience fresh. The store design and environment including the addition of Build-A-Bearville and merchandise and pricing opportunities. Essentially nothing is sacred as we focus on short-term expense savings and long-term brand positioning. From this simple excellence approach we expect expense savings from reduced travel expense and eliminating nonessential expenses throughout our operations and Bear Quarter organization. These reductions will help us mitigate cost pressures such as increasing product cost, and rising fuel coast that are being felt by all retailers. Let me add a few comments on the logistics and distribution efforts.

We have now had our company-owned distribution center operational since September 2006. We realize initial benefits of having our inventory centralized with systems in place that help us manage our supply chain and provide us greater visability 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 methods for moving product from the warehouse to our stores and alternate the method depending on store and seasonal inventory demand. In the logistics areas the external pressures we faced relative to realizing cost savings have been rising fuel costs. In 2007, fuel surcharges made it difficult to gain cost savings from the distribution process. Further increases in fuel surcharge continue to impact us this year. Nearly doubling so far this year. During the first quarter we managed to keep the North American distribution and warehouse expenses essentially flat on percent of revenue basis. A big accomplishment in the current fuel cost environment. During the forth quarter and into the first we converted all 18 Canadian stores from direct truck deliveries to LTL or less than truckload service. LTL allows us to share distribution cost versus utilizing a dedicated truck delivery. A test of 25 U.S. stores was implemented in the first quarter

converting from direct truck to LTL service. These changes helped drive down our outbound freight cost and helped us partially offset the high fuel charges. Last quarter we discussed a cost savings opportunity related to the inbound distributions systems. The majority of our merchandise is produced in China and comes to the United States and U.K. via over the water container transport and trucked or railed to the distribution centers. Our company owned distribution center in Ohio and our third party distribution centers located in Toronto and in Middlesex, England. We have begun the conversion of all inbound freight to one carrier, UPS. This conversion will not only provide us with lower negotiated rates per container but will also give us the opportunity to better maximize container usage through utilization of their consolidation facilities.

We will be leveraging more full containers and reducing our usage of smaller containers, in summary we look to the distribution system changes, related to both our inbound inventory shipments and our out bound distribution to the stores to partially mitigate the overall cost increases we are experiencing from fuel. Unfortunately, in the current environment we don't expect to achieve lower overall distribution costs. Moving now to inventory, our consolidated inventory at the end of the first quarter stood at $50 million compared to $48 million at the first quarter. On a per square foot basis, excluding inventory on the web store and non traditional locations, inventory declined about 9% to $55.80 per square foot down from the $61.30 a year ago. We have entered the first quarter with a clean and lean inventory and are very comfortable with these levels. We will monitor and adjust on a realtime basis to ensure levels remain appropriate. In closing I will add, we continue to closely monitor all expenses as Maxine Clark mentioned we are realistic about the challenging environment and working to scale back and eliminate nonessential processes and expenses. In order to successfully manage our way in these times. It is essential that we focus all resources in our organization on the initiatives that will bring us the biggest return. Either driving top line sales or improving the bottom line profits.

We identified the areas of focus so all teams are utilizing the simple excellence process that has delivered the results we seen in the operations area. We are also looking at specific goals around these initiatives, so we are driving towards measurable results and holding our teams accountable for achieving those results. Now I will turn the call over to

I will add additional details regarding our first quarter and financial performance. Our first quarter total revenue increase of $7 million was fueled by new North America stores opened in the last 12 months. An increase in European sales of $5.6 million and higher combined revenues from fees and licensing, these increases were partially offset by a decline in North American comp store sales. Consolidated net income in the quarter of $6.4 million included in operating loss from European operations of $100,000 compared to the $2.2 million operates loss in a year ago quarter. Our gross margin rate in the first quarter was 43.6%. The decline in gross margin was primarily attributable to a lack of leverage on fixed occupancy costs in the North American operations and partially offset by improved occupancy cost leverage in Europe. Also within a gross margin rate our consolidated merchandise margin was slightly down. A decline in the North American merchandise margin reflecting supplier cost pressures was partially offset by a margin we received on European sales. And finally, as Scott mentioned earlier, we managed to hold distribution and warehousing cost as a percent of revenue flat as a slight increase in North America was offset by positive cost trends in Europe.

During the first quarter the SG&A expense margin increased to 36.2% compared to 35.5% last year. The margin reflects higher stock-based comp expenses and costs associated with the review of strategic alternatives which were not included in the year ago quarter. The SG&A margin increase also reflects higher North American store payroll as percent of revenue and on going cost of maintaining the multiple web sites which include buildabearville.com. Moving down the income statement, the effective of tax rate was lower than last year at 37% in the first quarter versus 37.9% last year. For the full year we expect a tax rate of about 37%, but as always we will continue to refine the rate as we move through the year. For a couple of comments on the balance sheet. Cash spending on capital items in first quarter was $5.7 million up from $5.4 million in the 2007 first quarter due to the timing of invoices and cash payment associated with capital items. For the full year capital expenditures will decline reflecting our slower new store growth. We expect CapEx to be in the range of $25 to $30 million and depreciation amortization to total $30 million. During the quarter we repurchased $1 million shares for $8.6 million.

We ended the quarter with a cash balance of $41 million and did not utilize a line of credit during the quarter. With regards to providing earnings guidance aside from what Maxine Clark discussed about how we see the year developing from a calender shift point of view, we have concluded that, for the near term we will now provide comp store sales or EPS guidance. Our business is being affected like most retailers by macroeconomic issues by a decline in consumer spending.

The environment lacks predictability and visibility and makes providing earnings guidance very difficult, I might add this is a year in which we believe our results may not be representative of the value we are adding to the company which is aimed at growing our brand over the long-term. That said, I can provide you with some insight as to how out 2008 business plan developing, in line with our store growth plan we expect our square footage growth to be 6%. We have moderated our marketing spend to reflect the current pace of business. We expect to maintain a marketing spending in the range of 7 to 7.5% of total revenues, margins will be affect by the rising prices of product coming in from China and shipping is affected by increases in surcharges on fuel. With regard to the quarterly flow of earnings in 2008. There are a couple things to note. First 2008 a 53 week year and the 53rd week falls in the fourth quarter.

As Maxine mentioned earlier, Easter shifted into the first quarter this year, thus our second quarter will be negatively impacted by the shift. Business in the U.K. has improved significantly and the outlook for 2008 is for the seasonality of the business to remain fourth quarter heavy, you will recall in 2007, the European operations generated losses in the first, second and third quarters and delivered profit in the fourth quarter and for the full year. We expect that pattern to be similar in 2008. This concludes our prepared remarks.

(OPERATOR INSTRUCTIONS) Our first comes from the line of David Shick of Stifel Nicolaus.

Two questions, first, comps are still obviously negative, we all read about others and mall traffic in general, relative to others in the mall, I guess the traffic has slowed. Is that fair to say? Business over all is worsening faster over the past six or nine months albeit under the negative umbrella.

Can you point us to things BuildABearville is obviously there, but email openings in general an open rate or something you're doing targeted, talk to us about why that might be happening is it a natural level of the business than just core customers just your thoughts on that metric, numbers relative to the mall and aggregate. The second piece from both Tina and Scott, you talked about your warehousing and transportation costs flat as a percentage of sales and not driving deleverage there, if the comp were to get better, obviously comps are negative still, if the comp's were to get better, should we see leverage off of that line or is it going to flex up and down?

I will take the first question on what we think is happening. I think mostly the number one thing is we don't play with our prices. We have a steady business. We are focused on getting new guests, we have a retention plan, in our Stuff Fur Stuff program which is very strong. As of yesterday 6.2 million members in the program. And they come back to our stores at a significant rate. We can motivate them easily. Meaning we can communicate with them because we have all their data on what they buy. We can keep the communications with them focused, we are using Build-A-Bearville to drive higher engagement. We think that that is starting to click in now as having the 3 million active characters on line. That's the significant number.

This is Scott on the second part of your question, the comps relative to our leverage on distribution costs, there are some leverage if our comps were to turn positive but the main items that we have to deal with on our distribution costs and margin is the cost in China and what we are facing with the manufacturers there. But more so the fuel, we have seen it double from first quarter this year to first quarter last year. If we see that decline we would see a much better leverage on that.

Our Next question comes from the line of Michael Corelli of Barry Vogel & Associates.

Just a question regarding your stores in North America. If I do kind of the analysis of looking at what I consider operating profit, basically the retail sales minus the cost of merchandise sold, SG&A and store preopening, add I back the losses in Europe, your domestic business is down north of 40%. Operating profit wise including the benefit of the spring break and Easter shift. Can you give us color on your stores domestically.

How can there be cash flow negative and how many might be loosing money on a four wall basis, and how come the company isn't choosing at this time to exercise the option of the majority of their leases where they get to the third or fourth leases and there sales don't meet a certain level that they could terminate the lease and get out of the location. You must have locations that the performance at this point is dragging down the returns in margins of the company. If you could answer those couple of questions.

We do not have any mall stores that are not making a profit. So I'm not sure where you would assume that. because of our lease terms and our rent negotiation and our significant volume in the margins on our business, and our control of payroll we are able to make a profit in our stores and we evaluate that on an on going basis. If you see that you have a kick opportunity and your business would be declining or you see an opportunity for a rent reduction, that's what we negotiate for. We are so desired by our landlords that we almost get just everything, when we need something we get it. We had a lot of cooperation from the landlords, over the years, this isn't something we just started to do, we watch it on a by store basis every year, every quarter. When an opportunity like that arises we take it. We are very focused on that and if a store deserves to be closed and we look at this all the time, then we will close it. So far we have not had that reason to react to it.

Our next question comes from the line of Paul Lejuez of Credit Suisse

Thanks it's actually Tracy kogan filling in for Paul, I was hoping you could talk about your franchise and licensing revenue. It was higher than expected this quarter. What is driving that, specifically on the license side and how you think about both businesses as far as the long-term revenue potential. Thanks a lot.

From the licensing revenue, Tracy, we have more stores in the mix than last year. So it's increasing from that perspective. Scott can tell you more about our strategy in the international.

On the international side, we really spent a lot of time this year bringing in to the fold of the domestic stores, we helped them a lot with the operations side, we have reviewed their P&L's, helped them with some distribution costs, we looked at the product mix.

We want to make them -- the more successful we make them, the more we will see on our side of the revenue. We spent a lot more time in the last year bringing them in to what we do domestically in the U.S. We completed a meeting with all of them last week again on product mix and on operational excellence to help them drive their profitability which adds to their sales model. We really spent a lot of time, we slowed down adding countries and focused on our existing countries and making their sources profitable as we can. That's going to be our goal is to drive our portion of that franchise business back to us.

Any forecast on how big those businesses can be. On the licensing side can you tell us describe the new license agreements you have out there.

Like product licensing or like franchise licensing?

Licensing as in product licensing like you had to deal with Target with the Build-A-Bear kits.

There are not that many new ones, the most significant new one clicked in last fourth quarter from game factory with the Nintendo DS game and that has been successful. We have a furniture line launched last year, a high ticket line of furniture that's been successful that wasn't in the numbers this time last year. So that's been in the first quarter. That's been strong. And then all of the other ones in place are growing because they are targeted and focused and we also have coming forward in place tie in's to buildabearville.com.

Product you buy in a bookstore or somebody else's store and a Nintendo DS and soon the Wii game will have a Build-A-Bearville tie in. We are integrating all these things and new things that will hopefully be able to talk about more in the second quarter as they unfold that are also tied to engaging our guests in Build-A-Bearville as well as in products available in the regular marketplace.

Our Next question comes from Sean McGowan from Needham & Company

Two questions, one might be for Scott. Can you give us a sense of the timing of store openings this year, how that will flow throughout the year. I know slippage from one quart to another. Just an idea as to how it compare to last years?

For the most part the second and third quarter will be the biggest number of store openings, we try to have all the store openings completed before the Christmas season kicks in, so we should have most all of the new stores open by the end of October and First of November, But a vast majority will be in the second and third quarter.

Secondly, in terms of the economic model for Build-A-Bearville, is this something that the company is looking to be a direct source of revenue and if not how tolerant would you be of losses at some point would you consider changing the economic model.

We absolutely do see this as an opportunity for revenue on its own. Through several programs that were developing as we speak. Also in some of the product offerings that will be coming out by Christmas that are tied to BuildABearville and connect you further which will have a revenue base to it. I think there really are opportunities that are unfolding as we speak.

There is lots of possibilities here; I do believe that absolutely that the further engagement of your customer in Build-A-Bearville.com will enhance our store business, I believe that this is a revenue building model and we can drive revenue like we drive licensing revenue. I don't know if we put it on a different line or call it at that point. We are focused growing it on it every level we possibly can and we see a tremendous potential. Based on the early success and also the research we are doing, and talking to our guests and getting feed back and the outside resources that are helping put us in to the 21st century of this kind of concept.

Out next Question comes from the line of Mike Smith with Kansas City Capital.

Good morning, I'm wondering if you can go into a little bit more about your affiliation with Ridemakerz. And how much of that you owe and what kind of options you might have for increasing your ownership.

As we said on the call we have an initial investment of about $3 million plus we have added equity over the last year based upon our services agreement. So as we said before we own about or own about 30%. We have the option to increase that as new capital is required in that investment.

Do you have any long-term plans with that?

Like everything looking at it on a on going basis. It's in its infancy. We are absolutely encouraged by the opportunities that it presents and the strong customer following that it has. It is very segmented to boys and men and so the biggest opportunity is really evaluating the right shopping locations for that. And the distribution model. And ultimately I think you will see the potential for the on line virtual world aspects of a brand like Ridemakerz as well to have a financial opportunities.

We have our licensing propositions of product licensing that is actually called, we refer to as in licensing versus out licensing, we carry brand name cars that are a successful part of the mix. How that produces revenue is different than you might expect. There are great opportunities here. It's just really in looking at this brand as it's built for the 21st century not just as you might think about it in the past. In May will hit our first store that's been open a year. We have a long way to go in the learning -- we are encouraged by the opportunities and I would say the strong customer connection to the brand. So far.

Our next question comes from the line of Garrick Johnson, BMO Capital Markets.

I was hoping you can talk about your birthday party business. And how that comp is doing, whether the number of parties of revenue from then.

Our party business, some people believe it's larger than it is. It's always been less than 10% of our business. As we open up new stores and markets we don't look at the comp at the store, that is there, we look at the market comp. So our party business has been reasonably consistent. As it performs across our stores. It is growing quite rapidly in the United Kingdom because the base was much lower. We do that this has been a good business, I think one of things we are noticing is that the consumer spending they might have brought ten kids, a year ago or 18 months ago to a party, they might be bringing eight kids. The party count might be similar. They might be most hosting as more as you always did but maybe bringing less customers or guests to their party. It has always been less than 10% of the overall business the the United States.

So the number of parties though, is pretty consistent year over year in the U.S.? It's just the number of kids coming to the party is lower?

Varies by store and market. You have a big mix. Some markets it's down. In more mature markets and other markets where it's up.

We haven't focused on the marketing of parties, we really let it be a constant because we also don't want too many parties to negatively impact our guest experience and build the stores smaller today. There are only so many you can host at a given time. In a store that's 2200 to 2500 square feet you can't have more than one party going on at one given time. We consciously done. That I would say that it varies. We have not been making it a major focus because we want to make sure we attract a broad range of customers and all ages ages of customers, a average target is a 10.5 year old girl and 20% of the customers that are over 14 years old. That's not a nonparty customer.

We have a some smaller children too, where we don't encourage parties before three years old at the earliest. Maybe even five. It just depends. Like all traffic and all business it's not up. It would be certainly, it's consistent.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Brad Leonard of BML Capital.

The gross margin deteriorate more than it had the last few quarters and the SG&A was about 7% year over year. Are those trends we should expect to continue throughout the year?

I think as you look at from a gross margin perspective. The fixed cost in the rent and that -- as long as the comps are in a declining mode, we cannot get leverage on that. If the business turns and we start to get leverage you will see an improvement in the gross margin. Same way with SG&A, there is a portion that is fixed. Is the question, what would be more as you know the gross margin deteriorated more this quarter than 2004 on a similar comp trend. What is the cause of that primarily? The extra 70 basis points or whatever it was. Some of it is product mix.

From a perspective of how many bears people might be buying which goes back to the cost of our initial products coming out of China we are trying to maintain the cost with pressures in the China manufacturing environment. I think also, it's a balance, because the U.K. has come out strong, that's helped the overall margin from our -- Scott talked about the distribution, being able to be basically flat because of the benefit we received in the U.K.. I think we just have to be careful the fuel surcharges are that everybody is facing today. Our products are petroleum based products. We have to see turn in the fuel environment. Also I think our merchandise mark up if you're looking at merchandise mark up has been reasonable, considering all of the changes that are going on in China.

We don't find that because of China it is an appropriate time to be significantly raising prices. There is some things we decided we would rather sell it than mark it up and not sell it. There is a little bit of that in there, we are monitoring that as we go and taking appropriate new products where we see the value can be the product can be raised and be higher mark up then we would go there. Now we are discretionary product and want to make sure that the value for the consumer is evident and clearly apparent every time they walk in to our store.

On the SG&A, is this year over year level around 7% increase is something we are going to be -- ballparkish for the year?

I think one of the things that when you look at it year over year, as I stated before we had increased cost of stock options expense for SG&A, that's going to continue to increase, we talked about cost of maintaining all of our web sites. That's in SG&A also. There will be some increase but again you get leverage if you get a better comp store return.

Our next question in a follow up question from the line of Michael Corelli.

It's good to see the company continues to produce profits considering in the recent deterioration in mall traffic and comps. My comment was basically that sometimes if stores are earning a very low return versus others it might make sense to close them and focus resources on other stores that have better potential. As far as share repurchase program. I had a question, you were aggressive in the first week or so -buying about 954,000 shares and then slowed down a lot. I want to know what the thought process was behind that.

We do look at that, that's part of one of the things we do with looking at by a market basis and so saying if we close this door, if we have an opportunity to close it and we closed it could we do more business in another store. We do look at that. That's a important part of our real estate. But also we are at a time period where customers are not wanting to travel very far to go to a store. That is one of the challenges I think. They want you to be closer because of the gasoline.

Not that we wouldn't close a store that was a significant challenge but as we look at it and look at the map and each market, this week we examined quite a few markets very closely, based on the profitability of those stores, the contribution of those stores and the closeness they have, the party business they have, frequency of customers they have. We don't want to force the customer to have to drive further. Would that make it more discretionary of a product. There is a few places that may come down the road there will be opportunities. We only have -- we are still a young company. We have some stores in the third and fourth year coming in to the fourth year that we will evaluate. We have two kicks built in to many leases, as the market changes, but also a lot of our stores passed their first kick because, they have been very profitable and now we are looking towards the next one which might come up in the future.

I don't want you to think we think that, that's why we built them in there to give us flexibility. We are a unique concept in the mall. You can bet pretty surely that the landlords are going to work hard for us. It works to our advantage which ever way you want to look at it.

From the perspective of the share we purchased our share repurchase was in line with our agreement that we set out that we would purchase on the open market. When we went in to a closed period, we purchased under our 10b51 plan.

Our next question in a follow up question from the line of Sean McGowan of Needham and Company.

I'm wondering if you had a sense for what you think the ultimate opportunity is in North America in terms of number of stores? Has that evolved recently?

We haven't changed from our original I think we have been saying 350ish stores to 400 probably is the Max. That's the number we've always been talking about. Some of those stores would be in smaller markets. Some multiple markets. Existing stores, weve been focusing in the last few years on building opening up new markets trying to make sure we are entering a place that there isn't a Build-A-Bear store. I believe 17 of the 20 stores are in brand new markets that Build-A-Bear -- in North America that wouldn't have been Build-A-Bear stores there before.

The next question comes from the line on Brad Leonard, BML Capital Management

I have two questions for you. On the European stores, they seem to have been doing really well. On year over year comparison. One is a possible those guys could, your almost profitable this quarter, and I don't know what the charge was for closing the store that you mentioned. That you get to profitability in Q2 or Q3 if the trends continues? And two, any comment on comp trends through April and either U.K. or North America, are they similar? Would you like to comment at all about that?

We are not going to comment on interquarter comp trends. As I had said on the conference call that, while our business improved significantly our out look for 2008 is still, in the European operations, to have a loss in first, second and third quarter and deliver a profit in the fourth quarter and for the full year.

Our next question in a follow up question from the line of Tracy Kogan.

Can you tell was the cash flow from Ops was this quarter, thanks?

We haven't disclosed that yet. We haven't finished our 10-Q and that will be as part of our disclosure on the 10-Q.

Thanks. Ladies and gentlemen this does conclude the question answer session of today's conference call. I would like to turn the presentation over to Molly Salky for any closing remarks.

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