Build-A-Bear Workshop Inc (BBW) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first quarter 2009 Build-A-Bear Workshop, Inc. earnings conference call. My name is Christa, and I'll be your conference operator for today's call. At this time, all participants' lines are muted, but we will conduct a question-and-answer session at the end of this conference. (Operator Instructions) I would now like to turn the call over to your host for today's call, Molly Salky, Managing Director of Investor Relations. Please proceed.

Thank you, Operator. And good morning everyone, and thank you for joining us. With us this morning are Maxine Clark, Chairman and Chief Executive Bear, and Tina Klocke, Chief of Operations and Financial Bear.

In a moment, I'll turn the call over to Maxine to provide her comments on the first quarter. Tina will follow with additional comments on our financial results. And at the end of our remarks, we'll open the call up for your questions.

Members of the media who may be on our call today should contact us after this conference call with their questions. We ask that you limit your questions to one question at a time. This way, we can get to everyone's question during this one-hour call. Do feel free to re-queue if you have further questions.

Please know that our call is being recorded and broadcast live via the internet. The earnings release is available on our Investor Relations portion of our corporate website. And a replay of both our call and webcast will be available later today on our IR website.

Before we get started, I'll 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 in our annual report on Form 10-K. And we undertake no obligation to update or revise any forward-looking statements.

Now I'd like to turn the call over to Maxine Clark. Maxine?

Thanks, Molly. And good morning, everyone, and thank you for joining us to review our first quarter of 2009 results. During the first quarter, we managed to our dual goals of maximizing cash flow while continuing to develop our brand and position our Company for improved long-term profitability and growth.

We consider our brand to be the cornerstone of our successful and profitable business model. And we will continue to preserve and build upon its long-term value by emphasizing our affordable and entertaining store experience and unique product offerings. We know better than anyone the power of our business model and what it can deliver when revenues are growing. We believe our focus on cutting $15 million out of expenses was appropriate. And now our singular focus is on driving sales, getting back on track to where we know our brand can perform.

Mall traffic continues to decline in North America versus the first quarter last year as families reduced spending and avoided trips to the mall. While our business was impacted by these factors, we also saw bright spots in our sales trends when mall traffic increased during Spring Break when kids were out of school and when occasions called for gift giving, like Valentine's Day and Easter, particularly. These bright spots helped validate for us that our brand is still top of mind when families are enjoying time together, celebrating special occasions and selecting a gift.

With the inclusion of Easter, our year-to-date comparable store sales in North America are showing a slight improvement from our first quarter trend. And while the economic environment remains uncertain, we have identified initiatives, which I will expand upon in a moment, that we believe position us to improve the performance of our business.

Our first quarter results include solid progress towards achieving our cost savings goals, and we remain on track to generate our targeted annual savings of $15 million this year. We have successfully reduced capital spending and maintained our strong balance sheet. In this difficult economy, all of our resources are focused on improving the trend in our business, as we know we can't expense-cut our way to prosperity. By taking advantage of our more appointment-driven consumer shopping patterns and knowing how, when and what prompts our guests to shop in this reduced consumer spending environment, we believe we have a plan to effect a positive change in our sales performance, with initial improvements expected by the end of this quarter and through the balance of the year.

We are pleased to have increased leadership helping us achieve these goals. Just six weeks ago, John Haugh joined us as President and Chief Marketing and Merchandising Bear. John has a tremendous track record of building successful brands. His background spans the retail, hospitality, entertainment and consumer products industries. And he has already made positive contributions to our Company in the short time that he's been with us.

As I mentioned, we're 100% focused on improving our business trend. And with John on board, we have the benefit of new perspectives and very objective insight and more power behind our merchandising and marketing efforts to improve top-line performance and bottom-line results. We are thrilled to have John on board.

I'd like to focus my discussion today on several key initiatives that we expect will make a positive change in our sales and profitability this year. We believe we have appropriately identified and are in the position to capitalize on the controllable aspects of our business, namely through initiatives and product and marketing, through maximizing our Loyalty program and Virtual World and through cost-containment moves we have previously identified.

Beginning with product, we are very excited about our upcoming product line-up. And we believed we have identified strong assortments for summer, back to school and holidays. Importantly, we have rebalanced our inventory within our key classifications of value, core and new plush animals, and are well positioned to match demand for products across a range of price points. Having the right balance of merchandise across our classifications is both a sales opportunity and, importantly, a margin opportunity.

In North America, our emphasis on value continues to prove successful, allowing us to increase new guest visits. Through guest research, we found that people who had never visited our stores had the mistaken impression that our brand was expensive, despite our bears always starting at just $10.

In the fourth quarter of last year, we expanded our animal product offerings at our $10 and $12 opening price points. While this strategy's been successful in getting new guests to visit our stores, our average transaction has declined. And we are working diligently to increase that metric. We have strategies in place to increase the appeal for our core products and our price in the middle price range of our offerings, $14 to $16 price products, to entice that trade-up sale. And we are working on the clothing and accessory add-ons with each animal.

Our North America merchandise market was impacted negatively in the first quarter due to the higher-than-anticipated demand for these value-priced items. This was a successful strategy, as it allowed us to introduce new guests to our brand and broaden our customer base. As we begin the second quarter, we expect merchandise margins to improve as our inventory, product costs and price points are now aligned to deliver our traditional product mark-up and improve merchandising margin beginning in the second quarter.

The trend in overall transactions has shown some level of stabilization in our business. And while we continue to focus on getting transaction growth, we also see opportunity and are working on building up our average transaction to maximize the business from guests that are in our stores.

Our upcoming product tie-ins include an incremental third-party promotion in mid October. And we also expect to follow up last year's Hannah Montana product with a hot talent this year that should add even more excitement.

Gifting and gift cards have always been an important part of our merchandise offering. About 20% of our animals are also registered as a gift in our database. And while people may be making less visits to the mall, they still want to celebrate and make memories on special occasions. We believe we have a greater opportunity to attract more traffic to both our dot-com sites and our Virtual World site through expanded gifting options, personalization and product bundles, particularly during the holiday season.

This year our plans include website enhancements that will improve our guests' ability to choose and personalize a gift online, as well as a stronger message for our Say it With Sound add-on, Record a Sound. We are building a better gift machine, so to speak, on our website that is convenient, easy to use and will have added customization options for our very affordable personalized gifts.

Our second initiative is marketing, which we are looking at very differently. Although we are spending significantly less, a planned 22% less than last year, we have focused our spending when the consumer is within reach. In this economy, we can't rely on our advertising to drive mall traffic. We know we must take advantage of every customer who visits the mall and every guest who walks into our store. So we are working intently on converting our guests, once in our stores, through more impactful product presentation, product promotions and communications.

With John's input, we have already put in place marketing programs we believe will be more impactful during targeted times when our guests are in the mall, such as during summer when kids are out of school and holidays. While we plan to reduce marketing spend this year by approximately $8 million as compared to 2008, primarily through reduced spending on TV advertising and direct mail programs. We believe the marketing dollars we do have could go further to drive sales as we allocate our marketing investment to key time periods when we know our guests will be in the mall, strengthen our promotions and negotiate even harder on our marketing services.

To this end, for example, May marketing includes a Mother's Day gift purchase for this Saturday and Sunday, May 2nd and 3rd, that has proven to be a winner in the past by driving a meaningful improvement in comp trends. We have also expanded our summer promotions to include two weekends in June versus one weekend last year. Holding this promotion over two weekends gives guests more opportunities to visit our stores and take advantage of this offer, which includes a gift with purchase and expanded Virtual World gifts, as well.

Similarly, we are putting plans in place for back to school and holidays that will help us win when guests are in the mall, help us win once they come into our store and help us optimize the use of media and external marketing communications. Our holiday results show that the value messaging was effective in getting new guests to come to our store. Guest surveys showed that these guests had high revisit intent. And our goal is to increase our overall repeat business by leveraging our loyalty program and other retention strategies.

Returning guests account for over 60% of our business. And our Stuff Fur Stuff program now has over 8.5 million members, giving us a powerful database of information on shopping patterns and preferences. Loyalty members receive news and product updates, special offers and incentives and members-only benefits such as bonus points and birthday gifts.

By focusing our marketing efforts on our two-prong approach, attracting new guests and increasing guest retention and visit frequency, we have clear priorities to execute, even in a time when marketing spend has been reduced.

Our third initiative is leveraging our Virtual World. We continue to believe that the unique combination of a physical store base, store brand awareness and a Virtual World gives us opportunities other companies do not have. This unique position gives us a chance to take a holistic approach to institutionalize the Virtual World into our business model, to encourage our store guests to also visit the Virtual World and to maximize our loyal and highly engaged Build-A-Bearville citizens.

As you know, we've created another category of merchandise -- a category of Virtual World merchandise that generates real revenues and real margin contribution. We first began selling Bear Bills game cards during the 2008 holiday season. These game cards provide the player with online currency, Bear Bills, with a choice of virtual rides like a hover board or scooter. We've sold over 61,000 game cards online and in our stores since the initial launch. That is over $450,000. Build-A-Bearville remains a free site, but offers enhanced play opportunities when you make a purchase in our store.

In March, we began offering an expanded support of Build-A-Bearville game cards online, including $1, $5, $10 and $15 price denominations, plus a card offering enhanced virtual rides and one with virtual vacation home options. In May, these will be added to our in-store assortments, along with a VIB -- a Very Important Bear -- three, six or 12-month Bear Credit Subscription Card. Through these game cards, our Virtual World citizens are able to purchase virtual products, customize their virtual world environment and experience, making their engagement with our brand even deeper.

Moving forward, it is our goal to increase the conversion of our store visitors to Virtual World citizens using impactful store events to introduce more guests to our online experience. We know that the store guest who also becomes a Build-A-Bearville citizen is more engaged in our brand, which leads to increased visits and a higher spend in our stores.

Our final initiative is maintaining our positive sales performance outside the US, in particular in Europe. In the first quarter, Europe delivered another quarter of solid, positive comp performance. And year-to-date comparable store sales have shown an accelerating positive trend from the 6.7% increase in the fourth quarter.

In Canada, our sales are down, but well ahead of our US performance, and also trending positive on a year-to-date basis versus the fourth quarter.

As we look ahead, our priorities remain unchanged and our focus on maximizing our cash flow, achieving our cost savings plan, tightly managing inventory and providing a compelling and unique experience for our guests in-store and online.

As the trend grows for families to have vacations, Build-A-Bear Workshop is a great close-to-home, theme-park-in-the-mall, affordable family experience. Our stores are focused on greeting customers and engaging them in the store experience as soon as they approach the store. We know that highly satisfied guests spend more per visit and visit more frequently. So we are reinforcing our core store experience with renewed energy so that every guest that comes in leaves completely satisfied.

We remain confident in our future success, and believe our strategies have us poised to improve the trend in our sales and, importantly, increase value for all Build-A-Bear Workshop stakeholders.

Before I turn the call over to Tina, I'd like to mention that Tina was recently named our Chief Operations and Financial Bear. In March, Tina assumed formal responsibility for store operations, in addition to her continuing role as Chief Financial Bear.

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

Thanks, Maxine. And good morning, everyone. I will provide additional details related to our first quarter fiscal 2009 financial performance.

Let me start with a few comments on the effect of currency and calendar shifts on our quarter. Starting with currency exchange rates, there was a significant strengthening of the US dollar versus the British Pound in 2009 first quarter compared to first quarter 2008. The impact of the foreign currency exchange during the quarter caused a reduction in our reported European revenues. The currency exchange rate also reduced our SG&A costs in the first quarter. Our merchandise margin, however, continues to be negatively impacted in Europe, because we purchase our inventory in US dollars.

Our sales performance during the quarter was also impacted by the calendar shift of the Easter holiday and associate school -- associated school vacations from March last year into April this year. In addition, our 2008 fiscal year included 53 weeks. Thus, the financial reporting quarters this year will begin and end a week later than last year, creating some quarter-over-quarter comparison differences throughout the year on reported revenues.

Now to the income statement. Net retail sales were $96.3 million in the first quarter, a decline of 19% excluding the impact of foreign currency. This decline was driven by a 20.5% decrease in North American comp store sales. The comp decline comprises both a decline in transactions as a result of the challenging consumer environment, and a decline in average transaction value. Our transaction value decline resulted from lower average product price versus last year as our value-focused merchandising strategy gained traction and these products became a larger component of overall product mix compared to a year ago first quarter. Transaction declines represented about 15% of the comp change, and the drop in transaction value about 5%.

Sales from new stores opened in the last 12 months and the 5.6% increase in comparable store sales in Europe partially offsets the decline in net retail sales. Just a reminder, we state our comparable store sales on a constant currency basis.

In Europe, our positive business results have continued. First quarter revenues were $14.1 million, up 18% excluding the impact of currency translation. The pretax loss from European operations totaled a $900,000 loss in the quarter. The profitability in Europe was impacted primarily by a decline in merchandise margins resulting from currency translation, and also, higher SG&A costs resulting from transactional currency impact. As Maxine discussed earlier, our results in Europe continue to outpace the economic and retail sales trends there. The sales increase during the quarter was driven by a higher number of transactions, a higher average transaction value and an increase in the number of in-store parties.

We see further opportunities to grow brand awareness, and continue to bring new guests into our stores while building frequency of visits from returning guests as we continue to aggressively manage our SG&A costs.

Total revenues included international franchise fees of $600,000, was down from $1.2 million in the 2008 first quarter. The franchise fee decline is due primarily to the decline in franchisee store sales, reflecting the global economic slowdown. Also in the year ago first quarter, we had a positive adjustment to fees that did not recur this year related to the discontinuation of our India franchise. During the first quarter, franchisees opened one store and closed three stores. We ended the period with 60 stores in 13 countries.

The pace of store expansion in international locations continues to be opportunistic and highly influenced by the economic health and stability of the franchisee's country, the franchisee's capital resources and the ability of the right real estate location for stores.

We continue to believe this will be a tough year for several of our franchisees. But we are partnering with them and working hard to improve their performance. We currently anticipate franchisees will open five to ten new stores this year, with the majority opening in the second half, including the first store in the United Arab Emirates.

Licensing revenues in the first quarter were $400,000 compared to $700,000 last year. This decline in revenue is due primarily to a change in the mix of the licensed products versus last year. We continue to anticipate licensing revenues of approximately $2.4 million for the year, down slightly from 2008 as our mix of licensed products continues to change.

Gross margin -- gross profit margin in the first quarter was 36.6% compared to 43.6% last year. The 700 basis point decline in gross margin was predominantly due to the de-leverage on occupancy costs in North America. We also experienced a decline in merchandise margins, which reflects the positive consumer response to our new value pricing strategy implemented in the fourth quarter and the impact of currency on merchandise margins. Partially offsetting these declines was improved occupancy leverage in Europe, a reduction in fuel surcharges and efficiencies in our distribution and warehousing operations.

Total SG&A expenses declined nearly 18% to $36.9 million versus $44.8 million in the year ago quarter. The SG&A decline reflects the aggressive cost reduction efforts we put into place to align our cost structure with the downturn we are experiencing in consumer spending. We realized significant dollar cost reduction in central office management costs, store payroll, store supplies and marketing costs in the first quarter versus the year ago quarter.

On the payroll front, we have completed the majority of the modifications to our North America store management staff. The new structure better aligns store management resources with store sales volume and reduces the fixed cost components of store payroll.

While SG&A expense was down, our SG&A as a percent of sales in the first quarter increased to 37.9% from 36.2% due to the decline in sales, certain components of SG&A cost de-leverage, including store payroll and depression.

Store closing expense in the quarter was $500,000 or $0.02 per share related to the closure of Friends 2B Made location. The charge is predominantly lease termination fees. At quarter end, we had eight Friends 2B Made locations in operation. All locations are slated for closure by the end of the third quarter.

Interest income decreased from the prior year period as we experienced lower interest rates and lower cash balances as compared to last year.

The effective tax rate for the first quarter was 25.4%, down from 37% in the first quarter last year, and reflects the impact of combining domestic losses with losses in foreign operations where we are not able to recognize tax benefits. We continue to expect our effective tax rate for the full year 2009 to be consistent with the rate in 2008, or approximately 36%.

The net loss in the first quarter was $800,000 or $0.04 per diluted share, compared to income of $6.4 million or $0.32 per diluted share in the first quarter last year. The lower diluted share count in the quarter reflects the impact of our share repurchase program activity in 2008. We took a conservative approach to the use of cash during the first quarter, and did not repurchase shares. Approximately $31 million remains available to purchase under our $50 million authorization.

Regarding cash flow, capital expenditures in the first quarter declined to $2.2 million from $5.7 million in the first quarter last year, primarily due to no new store openings during the period. Our capital spending in the first quarter included enhancements to our Virtual World, capitalized intangibles and information technology infrastructure. Depreciation and amortization for the quarter was $7 million, flat as compared to 2008 first quarter.

We continue to plan capital expenditures for 2009 at approximately $9 million, compared to $23.2 million in 2008. This includes costs associated with one store opening and one store relocation, in addition to store maintenance costs, investment in the Virtual World and ongoing capitalization of intangibles. The plan also includes approximately $2 million for capital related to converting three of the nine Friends 2B Made locations to expanded Build-A-Bear Workshop locations. We estimated depreciation and amortization to be approximately $30 million for the year.

We ended the quarter with no borrowings on our bank line of credit and a consolidated cash balance of $34 million, compared to $41 million at the end of the first quarter last year. Consolidated inventory at the end of the first quarter was $43 million, down 14% compared to $50 million last year. Inventory per square foot declined 19% and is in line with our net retail sales trends. We're comfortable with the composition and the level of our inventory.

This concludes my remarks. Now I'll turn the call back to Maxine.

Thank you, Tina. I'll conclude the call with just a few final comments. 2009 is going to remain a challenge. And we are putting our focus on what we can impact to maximize cash flow while continuing to develop our brand. We have taken actions to align operating expenses with revenue expectations, slow capital expenditures while at the same time investing in brand-building initiatives and our future growth.

Our initiates to improve our top line are focused, structured to take greater advantage of changing consumer shopping patterns and supported by enhanced leadership within our Company. We believe these initiatives can improve our sales trends over the balance of the year. Our debt-free balance sheet and $40 million bank credit line provide financial flexibility, liquidity and staying power.

We look forward to updating you on our program in the months ahead. Thank you for your participation, and now we can take your questions.

(Operator Instructions) Your first question comes from the line of Paul Lejuez with Credit Suisse. Please proceed.

Thanks. It's Tracy Kogan filling for Paul. First question is, you mentioned the improvement in April around Easter. Can you just quantify how much you think it hurt your comp in the first quarter? And then secondly, I was hoping you could quantify some of those changes in gross margin, the merchandise margin and the buying and occupancy de-leverage. Thanks a lot.

So, Tracy, good morning. It's Tina. With the inclusion of Easter, we talked about our year-to-date comparable store sales showing a slight improvement over the end of the first quarter so that we did see an improvement in the trend from the Easter season, so to speak. And from a perspective of the gross margin, the majority of it was the de-leverage of occupancy costs in North America and some de-leverage in our gross margin on the value-priced animals and some impact of foreign currency translation in Europe. And that was about 100 basis points on the foreign currency translation. Because, as a reminder, we do purchase all of our inventory in US dollars.

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

Hi. Can you hear me okay?

Yeah, speak up, Tom.

Can you guys hear me now?

Yeah.

Okay. I'm sorry. I'm on an outside line. Just two quick questions, if I can.

Sure.

One is, can you -- can you -- Maxine, can you give us a better understanding of your comments about identifying some stronger assortments and rebalancing between value and core? Can you be more specific in terms of how we should look at the assortment go forward in terms of pricing and positioning? And then my second question is, more broadly speaking, in terms of John's impact on the business, can you give us a little insight? You kind of noted he's had some positive impact. Can you give us some insight on exactly what the impact has been and how he is viewing your marketing spend go forward?

Okay, John -- oh, John -- Tom, we always have had our value pricing. But now that since we've actually begun to feature it in our marketing messaging, we've sort of separated out those animals. And we're calling the value price point that $10 and $12 predominantly, and some $14. And then everything that's in the middle of that from above that point is our core line. And then we also bring in our seasonal and fashion items that might be just seasonal. And sometimes they're at $14, sometimes they're at $16. It just depends on what the animal is.

So we're looking at that more critically than we did before, because the customer's gravitating so much to the lower side of the spectrum. So we want to make sure that we don't offer too many things in that price point and that we also have enough inventory behind the items that we do have so that it's balanced and we're not chasing $10 and $12 items. We have to fly them in here if we're out of stock. So the -- that's really what we're looking at from that point.

And I -- the -- but still, it's always been there, so it's not like it's anything -- we used to call it just core. That was just part of our core line, anything that was not seasonal and/or fashion, like Hello Kitty or Hannah Montana. But today, since it's become such a strong segment because of its price importance, we're separating it out and calling it value so that we're constantly measuring how much of a percent of total of our business it is, how many styles it is on the wall and how much inventory we have behind it.

As far as John's concerned, I'm sure you can appreciate that he's only been here for just six weeks. But I've known John for a long time, and we've been talking longer than just the six weeks period that he's here. And he's been very focused on the business. We'll definitely make him available to the investment community in the future.

Right now, his focus is 100% on the business and assisting us in positively impacting our trends. He's obviously very talented and has a lot of experience in merchandising and marketing, particularly in all -- in lots of price points as well and multiple categories. And I think that he believes -- obviously, I think everybody who comes on and has to deal with marketing or being in marketing wishes they had -- always wish they had more money to spend. But I think that John sees the opportunity from a -- forgetting the history, he wasn't here during the history -- of what we can do with what we have and how to use it to feed -- driving customers when they're in the mall. And so that's probably the most significant thing we've addressed really quickly was how could we use our advertising dollars, how many -- how reduced they are just in more key times and how we use it in the messaging, as well, and then also, how we use promotions.

And I use that word loosely, because it doesn't necessarily mean anything's on sale -- it's the way we use Gift with Purchase -- but particularly, how we look at those, especially the few that are coming up, the one in June and then the one in back to school, and how we might use it to drive more significant traffic, since those are -- when we did do those things and do them, we always have positive impact on our consumer. Can we do them over a longer period of time? Not necessarily do more of them, but make the ones that we have larger and more impactful. And I think that that's the biggest part. And then the other time is being spent on the assortment, making sure that the fashion and the balance of the inventory, and looking at it just from a whole different viewpoint.

But the days are quite full, and lots of fun as well, having John here. It's great to have another person who has so much vast experience in merchandising and marketing.

Your next question comes from the line of Mike Smith. Please proceed.

Good morning.

Good morning.

I have kind of a question -- couple of questions, actually. I missed when Tina was talking about the doll -- the Friends 2B Made -- where you stand in terms of closing that out and how many you're going to convert to Build-A-Bears, and so forth. And the other thing I was kind of interested in is that your gross margins are probably going to improve because of better buying for the lower price point. Can you quantify that for me?

Good morning, Mike. The store closing expenses that we talked about in the quarter were about $500,000, relating primarily to lease termination expenses.

Right. Right.

And that we have eight more locations to close, and that we should have them closed by the end of the third quarter. We will convert -- of those eight, we'll convert three of those to expanded Build-A-Bear locations.

And from a perspective of gross margin improvement, we really have not teased that out on a go-forward basis. But our -- as you would anticipate, our goal is to get back in line with the high merchandise margins we have enjoyed over years past.

What does that mean, Tina?

Well, it means that we have enjoyed high initial merchandise markups in years past that we want to get back to. As you can -- as you -- as I detailed in my comments, we did see a decline in merchandise margins that impacted the margins. And I don't -- really at this point in time cannot quantify it for you on a futuristically -- on a futuristic basis. But we feel now that our inventory's in line with -- our pricing of our inventory's in line with now our retail pricing of our products.

Mike, let me just add something to that. Last year, obviously our $10 and $12 animals were always in there and at their price in the margin. What -- we used that opportunity to market to the customer when we decided -- when we tested that in July.

And then by the time we got to the Fall season, we could see that the economy had changed even more dramatically after mid September. We moved some price points of things that had slowed up dramatically that were higher priced, like $18 or $15 or $14 into some of those price points. And so, those are not -- those were sort of just -- we made them happen because we needed to, because of the way business had slowed down.

But going forward, now we have a plan of those -- what we're going to have at those price points, that we've bought to those price points, not planning to -- not that we might not have one or two things that we might include at a lower price. But right now, our plan is that we've bought into these particular price points with new and/or existing core product, that we've negotiated our markup at so that we aren't taking in essence, markdowns, taking them down to a price point. They're going to be at the price point we own them at. And we will feature them as animals at $10 and $12, not animals that used to be at any other price that are now $10 and $12.

Your next question comes from the line of James Lewellis with Needham & Company. Please proceed.

Hi, guys. I have two questions related to comps. The first one is, what's the potential impact of the Easter shift? That being, now that it's come and gone, how much of the comp decrease is attributable to that shift? And the other is about gross margins. What would be the prognosis for comps if gross margin stayed in the negative teens?

So again, Jim, as we talked about on the call, we did say that our -- with the Easter shift that our comps year to date were slightly improved over our comps that we reported for the first quarter of -- in North America of 20.5%. So keep in mind, and we've also had -- in Europe, we've also enjoyed improved comps, also, there after the Easter shift. And from a perspective of margin and comp store sales, I think again we're working hard to increase those margins, along with increasing the top-line revenue of our business. And so to that end, we're going to do, as Maxine talked about, negotiating with our vendors and getting the margins in line with the top-line revenue.

So basically, as we rebalance the assortment and we get higher -- we get some things at $10 and some things at $12, and maybe move more things that were $10 to $12 and $12 to $14, we'll have a higher HPG, which equals more gross margin and also should improve the comps. I mean, definitely selling a large percentage of items at lower price points right now has really -- while it's increased transactions over -- dramatically over what they were before, it's not enough to really drive the comp store sales. You need a lot more traffic, and I don't know that anybody's getting that at this point. But we can see an improvement. And we think that these price points will become more part of our assortment in the near term for a longer time, but at a little bit -- we're going to edge them up higher a little bit at a time and focus on some really strong product at these particular value, core and then fashion price points.

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

Hi. Maxine, can we just get an idea of what these merchandise margins -- how much does that hurt Q1? I mean, was it 100 basis points? I would guess that it was closer to 200 to 300 basis points of the decline in the margin was due to the merchandise margin. Occupancy alone couldn't have done what it -- it wasn't -- I mean, it couldn't have been 700 basis points or whatever it was. Can we get some more color on that? And then also, you've mentioned that you've seen some stabilization in transactions, I think, in your comments.

All right, go ahead, Tina. Tina will talk to the first part. And I'll talk to the second.

So, Brad, I would tell you that the majority of the gross margin decline is on the deleveraging of the fixed costs. And just as a reminder, those fixed costs are rent, utilities and depreciation. And that is added to the gross margin. And I did talk about -- a 100-point basis on foreign currency on the merchandise margin. So take that into account. Then there was a slight decline in the other part of the merchandise margin, which wasn't impacted by currency.

So on the transactions, the transactions are still down over last year, but they're not down as much as they were. But the HPG is down because of the value pricing. So that has impacted our -- the dollar value of each transaction. We would be significantly better if we even achieved the lower transactions that we had this year at last year's average transaction price for the quarter. So if you're comparing first quarter of this year to first quarter of last year -- HPG as we call it -- against this year's transactions, it would've been a significant improvement if we'd had last year's HPG on this year's transactions.

(Operator Instructions) We have a follow-up question from the line of Mike Smith. Please proceed.

Going back to the margins, the cost of goods sold this year was 63.4%. The cost of goods sold in the same period last year was 56.4%, a variation of 690 basis points. Now I know that when you -- when I asked you the question earlier, you said you hope to get back to the old rates, which meant cost of goods sold were in between 53% and 55%. How long do you think it'll take you to get there?

Again I think, Mike, during -- in the economic environment that we're in, it's just -- it's really hard to project that. It's -- again, it's going to be how we are able to grow our top line. And we think -- we're working diligently on those initiatives to grow the top line. And as we grow the top line, we're going to be able to leverage our fixed expenses, which is -- at this point in time is the majority of our decline in our gross margin.

We have a follow-up question from the line of Brad Leonard. Please proceed.

Maxine, on your comments about the year-to-date trends for the comps, I believe -- I just want to quantify. You said year-to-date trends have improved when you're including. So you're including four months or whatever we're in now, versus saying April trends. Because obviously the April trends are going to be a bigger shift with the -- or a bigger jump with the Easter shift, I would imagine.

Right.

Is that what you said? Year-to-date trends are better than what we've seen. So that doesn't really tell us what -- I mean -- and I know, comparing this April to last April is not going to give us an apples-to-apples--

Right. And that's why we're looking at it all together. And I think I said this in last quarter's call, that I think we'll have a much better feeling about business and where the consumer's at after the second quarter. Because unlike other retailers, our Easter shifts between first quarter and second quarter, and just not knowing how travel would be and vacations -- Spring vacations, all those things have a greater impact on us. But I think that we'll have a better understanding.

And I feel, actually, that with the things that we're putting in place for our promotional efforts, again not off price, but still mentioning our value products as well as our Gift with Purchase promotions that we're doing that we will -- and the way we've changed the length of them will help us improve our business. Because it is a promotion to the customer. And it is a reason why you're in the mall to come into Build-A-Bear. So I feel that we will start to see an improvement in that, barring any unforeseen crazy things that might go on in the economy or if this flu situation isn't prolonged. I think we'll get back to what we were starting to feel, a little bit -- much more positive about our business. And certainly, we're seeing that improvement more significantly in the UK and Europe and then in Canada, but not yet as much as we'd like to see it in the United States.

At this time, there are no further questions. I would like to turn the call back over to Ms. Molly Salky.

Thank you, Operator. And thanks to everyone for your participation today. And if you have any follow-up questions, please give me a call or send me an e-mail. Thanks, and have a great day.

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