Build-A-Bear Workshop Inc (BBW) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Build-A-Bear Workshop earnings conference call. My name is Keisha and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Molly Salky, Managing Director of Investor Relations. Please proceed, ma'am.

Good morning, everyone, and thank you for joining us. With me this morning are Maxine Clark, Chairman and Chief Executive Bear; Tina Klocke, Chief of Operations and Financial Bear; and John Haugh, President and Chief Marketing and Merchandising Bear.

In a moment, I'll turn the call over to Maxine to provide her comments on the third 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'll get to everyone's questions 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 Web site, and a replay of both our call and Webcast will be available later today on the IR site.

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 Factor 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?

Thank you, Molly, and good morning, everyone, and thank you for joining us to review our third quarter 2009 results.

Although our third quarter performance continued to reflect the tough economy and reduce the discretionary spending, we did see improvement in our sales trend, which is encouraging. The innovation we delivered in products, marketing, and within our value initiatives resulted in trend improvement in both comparable store sales and average transaction value. We are pleased to see a continuation of this trend improvement in October. In the fourth quarter, we have additional plans in place to build on these initiatives in order to maximize the critical holiday season and we are comfortable with the level of composition of our inventory as we head into the fourth quarter.

During the third quarter, we also achieved better-than-planned cost reductions. So far this year we've realized $18 million in pre-taxed cost savings and are now targeting approximately $20 million in full-year savings.

We also completed the renewal of our bank line of credit with our long-time business partner, US Bank. Our line remains at $40 million with a $50 million seasonal over-line and extends until December 2011. This agreement adds additional flexibility to our solid capital structure and puts our renewal process on a two-year cycle. We remain confident in the strength of our balance sheet and positive cash flow outlook.

Now let me provide a quick review of our marketing and product strategies initiated in the quarter that contributed to our trend improvement.

As we said last quarter, we are aggressively focused on making our marketing programs work harder for us and we have placed more emphasis on promotions and traffic-driving initiatives versus general brand-building messaging. We are focusing our marketing efforts to make it easy for mom to say yes, introduce new guests to our concepts, and to create a sense of urgency to new product introductions.

In the back-to-school season, when mom was focused on value and necessities, and that for the most retailers was relative weak, we successfully improved our sales trend by communicating a clear and focused promotional message featuring our first ever bundle that included any animal, any outfit, and any pair of shoes for $29.99.

The promotion resulted in improvement in our sales trend and an increase in our overall average transaction value, with more items in each transaction. Our store teams found the value and the complicity of the offer easy to communicate and consumer feedback was very positive. Moms found the offer made the store easy to navigate and left her feeling like a hero, as she said yes to a fully outfitted stuffed animal.

Research indicates that future use of this promotion will be popular with the high future visit intent rating from those aware of the promotion. We plan to strategically repeat the promotion in the future with some tweaks. Primarily, now that we have guests' understanding and awareness of the offer, we will heavy up our communication to moms at the onset of the event and communicate more with kids to keep them asking to come to our store.

Another new tool used in the quarter was a freestanding insert, or FSI. A Sunday newspaper insert distributed at the end of August to approximately 55 million households. As many of you know, we have a strong customer loyalty program and over 60% of our transactions are with a returning guest. Our challenge is getting that new guest visit. Traditionally, our methods to reach new guests have been mall traffic and TV advertising. With mall traffic down and TV viewing more fragmented, we've broadened our outreach methods. The FSI proved to be a highly cost effective way to encourage first-time visits. Of all the guests who took advantage of the FSI offers, about 40% were new guests. We're using FSI again in November.

A new experiential venture was our Jonas Brothers sneak-peak event in stores on September 24th. For this event, we created a sense of urgency by hosting a RSVP party to give our best guests the chance to be the first to purchase the Jonas Brothers dog priced at $25 and to receive a special free sound for their dog. During the event, we set a new record by selling more Jonas Brothers dogs in one night than any single animal in a single day in our history.

With the event, we successfully anniversaried the launch of the Hannah Montana bear last year and kick-started our holiday season momentum engaging guests and store associates, heightening awareness and buzz for this new licensed product, and creating a sense of urgency and exclusivity for our products.

Additional product highlights in the quarter included our owl and our Peace and Hugs bear, both exceptionally strong sellers. Based on the environment, we planned our inventory investment in these products conservatively. For holiday, we believe we have appropriately increased our investment in new animal introductions, which will give us greater ability to maximize our new featured products during the fourth quarter.

This month, we were featured as the Happy Meal toy for girls at McDonald's. This marks our third Happy Meal partnership, a strong testament to the strength of our brand. The Happy Meal program enables us to reach a broad demographic, helps drive store visits, and engagement in our virtual world. Our Happy Meal offering includes both a free gift from our store and virtual world gift. Since the program began, about 45% of guests redeeming virtual gifts are new Build-A-Bearville citizens. These new citizens will interact with our brand and learn about new products and events going forward.

Now to the all-important holiday season. As we look to holiday, we believe our stores, product, and promotional strategies will be even more compelling and offer a substantial opportunity to convert store traffic and purchases. Simply said, to win in the fourth quarter we need to drive transactions and average transaction value. We have several key initiatives across all of our channels - in-store, online, and through our virtual world - to maximize both.

On Sunday, November 1st, our stores will undergo a transformational change to become Santa's Workshop, taking on a new look, new interactivity, new product displays, new store signage that reads Santa's Workshop. Santa's elves will take over the store and our TV advertising spot and provide a new interactive experience in the store. Using an elf-access card and a new interactive technology, guests can reveal secret messages from the elves around our store and become honorary elves themselves. Transaction-driving tools will include another FSI placement in November plus couponing and bounce-back offers to our guests throughout the season. Our holiday mailer will be in homes next week and has multiple offers to use during November and December.

On November 24th, we will debut our first-ever TV special, "Holly and Hal Moose, Our Uplifting Christmas Adventure," on ABC Family. This hour-long original holiday classic is based on the books we introduced last year and the Webisodes featured in Build-A-Bearville. The broad reach of ABC Family, which is available in 98 million homes, will help build traffic for Holly and Hal Moose, their new outfits, and the new movie, DVD, all available in our stores this year.

Also in support of our holiday plans, we're using media outreach and guest communications, which includes National Kids and Mom's Television. Our TV spots are humorous and send a message that Build-A-Bear Workshop is fun and the place for the best gifts. This is in contrast to last year's holiday messaging, which focused on our animals starting at $10. You can view our holiday TV spot starting Monday at buildabear.com.

The second part of the win equation for holiday is average transaction value, or HPG. We're supporting HPG with the best product lineup in years. A lineup that puts us back in our sweet spot in terms of products and price mix, with our animal product news in the mid to upper price points, versus last year when the mix was more weighted to the mid to lower price range. The lineup includes Holly and Hal Moose, our polar bear, an all-new Frosty, the Snowman, Alvin and the Chipmunks, and a special collection edition Hello Kitty, who will be celebrating her 35th anniversary with special apparel and accessories too.

Alvin and the Chipmunks will launch December 11th, to take advantage of his pre-movie hype and theater debut on Christmas Day. This holiday will also bring the highly requested launch of Star Wars clothing for bears and the launch of Princess Tiana to coincide with the Disney movie, "The Princess and the Frog," which opens December 11th.

The cadence of product intros is paced throughout the quarter, providing continued units and reasons to come back to our stores. We believe we have the opportunity to generate increased transactions and HPG in the fourth quarter based on the strength of our product and our marketing. Build-A-Bear Workshop has always been the headquarters for plush gifts and this year we're taking a strong approach to focus on the gifting experience in our stores and online, especially for last minute shoppers who are short on time. In many stores, we're offering an array of pre-made and pre-packaged gift animals, gifts-on-the-go, priced in a wide of range of good, better, best price points of $15 to $35-plus. Also, we'll add a new fixture we call Build-A-Gift, which includes an assortment of pre-stuffed animals in a variety of easy add-on clothing and accessory options all in one place for easy gift giving selection.

Our gift card allows guests to give the gift of experience and are an important part of our holiday business. The majority of our gift cards are redeemed in store post holiday with a total purchase well above the gift card amount. This year our plan includes a 20% expansion of our gift cards through additional third-party outlets in the United States, as well as our first third-party offerings in Canada and the UK. These access points strengthen our accessibility and support our efforts to appeal to new guests. Gift card sales also provide strong support to our first quarter results.

Now let me switch gears to our online channel. Build-A-Bearville continues as an integral part of our brand experience and now has over 12 million characters created. Our goal is to engage customers in our total brand experience in store, online, and through our virtual world and we are seeing success. Build-A-Bearville is gaining in popularity and our monetization strategies are working. We are very encouraged with a conversion rate of over 30%. Meaning over 30% of our target age visitors who make a purchase in our stores are registering their animals in Build-A-Bearville.

When you look even closer at just girls 8 to 12, a very large guest segment, we are over a 40% conversion rate. This engagement with our brand, the store-to-site synergy and site-to-store synergy are important benefits we get from having a presence in both the real and virtual worlds. We plan to drive incremental gifting traffic to our buildabear.com e-commerce Web site with increased online advertising that kicks off this quarter, utilizing banner ads and social media tools to more fully communicate how our product can be personalized and the variety of gift giving options we can fulfill with a broad spectrum of price points.

Another plus this year, we now have the capability to be present on other e-commerce sites to drive new traffic to our brand. We'll launch our first third-party Build-A-Bear Workshop storefront on amazon.com in early November.

I'll end my remarks with comments on our real estate. We're making good progress on lease negotiations, renewals, and kick-outs. Our landlords are important partners. They've made significant investments in our company over the years. We're pleased with our progress and have negotiated significant savings this year and over the remaining life of our leases and continue to aggressively focus on driving down our occupancy costs.

Importantly, we're continuing to evolve and improve upon our successful store concepts and business model. This year we spent much time on the innovation of our store design in a disciplined process to create our store of the future. We expect our new design, Project Build-A-Bear Universe, to debut next year and feature new technologies, enhanced product display, and a more interactive store environment. We'll update you on this store in our future calls.

In summary, we continue to develop our brand position as a fun, happy adventure for kids and a "yes" experience for moms. Growing the top line and controlling costs are our priorities. In the fourth quarter, we'll continue to manage to our dual goals of maximizing cash flow while capitalizing on all of the holiday season has to offer with excitement in-store product and value initiatives. We remain confident that our strategies position our company to improve long-term profitability and growth.

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

Thanks, Maxine, and good morning, everyone. I will provide some additional details related to our third quarter financial performance.

Let me start with our recently renewed bank line of credit, which essentially replicates our existing line with a few modest changes. The agreement was extended for 26 months, expiring in December 2011. Our borrowing capacity remains at $40 million, with a seasonal over-line increase to $50 million. Our borrowing interest rate increased modestly from LIBOR plus 130 basis points to LIBOR plus 205 basis points. While we again did not use the credit line in the third quarter, we were pleased to have this renewal complete.

As we outlined in our earnings release today, Ridemakerz has undertaken a major restructuring of its operations. To date, they have closed 7 of 9 mall-based stores and opened one new temporary store in downtown Disney in the Disneyland Resort in Anaheim, California. These moves are consistent with their strategy to operate primarily in tourist venues and to develop products for sale to third-party retail outlets.

We recognized a non-cash net of tax charge of $2.3 million, resulting from the allocation of losses from Ridemakerz. Our investment in the company now stands at approximately $4 million, including receivables. Importantly, our loss allocation cannot exceed the extent of our investment.

With regard to foreign exchange, the strengthening of the US dollar versus the British pound continued in the third quarter, although less significant than earlier in the year, with the translation of foreign currency negatively impacting third quarter retail sales by $2.6 million.

Moving now to the income statement, net retail sales declined 15%, excluding the impact of foreign currency. The decline was primarily driven by the 16% decrease in North American comparable store sales. The comp decline was made up of both a decrease in transactions and a decrease in the average transaction value. While average transaction value was down year over year, the average transaction trend improved in the quarter. The transaction decline represents about 13% of the comp change and the drop in average transaction value represents about 3%.

Partially offsetting the decline in the consolidated retail sales were our sales from stores opened in the last 12 months and the positive comparable store sales in Europe of 2.5%. On a consolidated basis, our comp decline in the third quarter was 12.9%.

During the quarter, our European operations again delivered positive results compared to third quarter 2008, with total retail sales up 7%, excluding currency impacts and positive comparable store sales.

Franchise fees declined modestly in the third quarter, reflecting the general slowdown in global consumer spending.

International franchisees opened two stores and closed two stores in the third quarter. We ended the quarter with 61 international franchise stores. Joining our franchisee family this quarter is Mexico, where we expect to open our first store in Mexico City in mid-2010.

Our full-year outlook for franchise revenues is now approximately $3 million. As store openings have slowed and global economic conditions have worsened, our revenue outlook for the year has declined somewhat.

We are encouraged by recent new store openings in Germany and Dubai that were exceptionally strong. Pacing our growth to ensure that we select the right real estate location for franchise stores remains a key objective.

Licensing fees increased to $1.1 million in the 2009 third quarter, driven by an increase in revenues through our partnership with Landry's restaurants and our third-party licensing arrangements and they continue on pace for full-year revenue of approximately $2.3 million.

Gross profit margin in the third quarter was 36.5%, compared to 40% last year. The decline of 350 basis points was predominantly due to the deleverage of occupancy costs in North America. Occupancy costs, including rent, utilities, and depreciation accounted for approximately 300 basis points of the quarter-over-quarter decline. The remaining 50 basis points decline relates to reduction in merchandise margin, driven primarily by a decline in North American merchandise margin. Promotional initiatives in the quarter resulted in a product mix shift and a slightly lower margin. Again this quarter, we realized improved occupancy leverage in Europe which partially offset the deleveraged in North America.

As we said earlier, our full-year estimate for pretax cost savings is now $20 million, with the majority, or about $18 million, coming from SG&A cost savings, and the balance from field cost savings recognized in cost of goods sold. With SG&A, we've realized better-than-expected cost savings as we have taken a concerted effort to go after any and all cost reduction opportunities.

Total SG&A declined 10% to $39.3 million versus $43.5 million in the 2008 third quarter. We realized significant dollar cost reductions in marketing and store payroll, along with central office expense reductions in salaries, outside services, and travel expenses. Year to date, SG&A is down 13%, or $17 million.

SG&A expense dollars declined, while the SG&A margin in the quarter increased 220 basis points to 42.8%. This was primarily due to the deleverage of store salaries as revenues declined.

We completed the Friends 2B Made concept store closings and recorded a charge of $250,000, pretax, or $0.01 per diluted share. Ultimately, closing costs were slightly more favorable than originally estimated and capital expenditures related to the concept closure were slightly lower.

Now moving to income taxes, our current outlook is for an effective tax rate of approximately 46% for the full year 2009. The higher annual rate compared to 2008 is primarily attributable to the impact of permanent items and results in foreign operations measured against US operations.

Regarding cash flow and the balance sheet, we ended the quarter with consolidated cash of $27 million, flat compared to cash at the third quarter 2008.

Capital expenditures were $2.9 million in the third quarter, down $2.7 million compared to the third quarter 2008, primarily due to fewer new store openings this year.

Depreciation and amortization was $7 million in the quarter, down slightly from $7.4 million in the third quarter 2008.

Full-year capital spending is now planned at about $8 million versus our previous estimate of $9 million, and compared to $23.2 million in 2008. We estimate depreciation and amortization to be approximately $28 million for the year.

At the end of the quarter, inventory per square foot increased approximately 1%. This modest decline in inventory reflects a timing of inventory receipts in the typical seasonal build in inventory as we prepare for the holiday selling season. On a two-year basis, our inventory per square foot is down about 18%. We're comfortable with the composition and the level of our inventory.

For those of you working on your models, just a reminder that the 2008 fourth quarter included 14 weeks versus 13 weeks.

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

Thanks, Tina. We are now ready to open the call up for questions. Maxine, Tina, and John are available to answer your questions. Operator, can we now begin the question-and-answer session?

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

Thanks. It's actually Tracy filling in for Paul. Had a question on -- you mentioned that the fourth quarter sales trends are improving versus third quarter and was wondering if that was related to a specific promotion or initiative like maybe McDonald's or has traffic just generally gotten better?

And then was also wondering, in Europe, are you doing similar things to what you've done in the US in terms of the $29.99 promotion? Thanks.

Hi, Tracy; it's Maxine. The -- we do believe that October, which starts our fourth quarter, did have a positive impact from the McDonald's promotion and that -- it's hard to tell whether overall traffic is improving. I think we -- our merchandise mix is right and we are getting an improved HPG as our inventory balances out better in the mid to higher parts of our price points. The Jonas Brothers, end of September, was the last weekend in September, and also is available now in October. So that also helps. So I think that's all positive.

We didn't -- we run similar marketing promotions in the UK to what we do in the United States, but we did not run the $29.99. We do not run the McDonald's. That's a McDonald's promotion and they don't necessarily run the same things in other parts of the world that they run in the United States. It's all different. So from time to time there are different offers, but, generally speaking, they're usually the same. This month, it happens to be significantly different. Back-to-school and -- their back-to-school timing is slightly different than ours too, but September and October promotions differed pretty dramatically.

Your next question comes from the line of Mike Smith with Kansas City Capital. Please proceed.

I was trying to write down fast today. I wasn't good at that. Ridemakerz, how much are you on the hook for with them? And they're down to it sounds like three stores?

Hey, Mike; it's Tina. They're actually down to two stores that are tourist venues and three other stores that are continuing to operate in mall venues. They -- our net investment after the third quarter write-off is about $4 million, which is inclusive of the receivables.

And we also -- one other -- we did open a temporary store in Disneyland in Anaheim, California.

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

Hi. Maxine, can you -- in your prepared remarks and on the press release it says steady improvement in our comparable trends throughout the third quarter. Does that mean -- I mean did we see improvement sequentially month to month there and then also into October?

Yes.

Can we quantify that a little bit?

We don't give out sales by month. And also, in the case of October, which is -- we still have Halloween, which falls on Saturday this year, to -- we're not sure exactly how much that will impact, but we believe that our marketing promotions and the content of our inventory is -- in October, that's from McDonald's, has helped our business trends pretty positively. That doesn't mean that the sales are positive, but they're much less negative than they have been.

Thank you, and please stand by for further questions. And we have a follow-up from the line of Brad Leonard. Go ahead, Brad.

Maxine, lastly, on the SG&A here, it looks like we've already saved $17 million. So the guidance for the year would be $18 million plus the $2 million that's coming out of the, wherever, the gross margins, which seems like kind of a conservative estimate considering the fourth quarter has got one less week which should at least get you that $1 million in savings. Is there something I'm missing on that or are we just being conservative?

Tina, why don't you [grab] that.

Again, one of the things that in the fourth quarter, again it's our biggest quarter of the year and we'll be using some of our marketing dollars that we may have saved from the prior quarters into that, which, as you recall when we talked about this at the beginning of the year, we said at least $8 million of the original $15 million was going to come from marketing. So there is a bit of some timing in the fourth quarter.

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

Okay, thank you. Can you guys tell us and help us understand the skin mix in terms of pricing for the fourth quarter versus last year? How should we think about the average unit cost? What's been occurring in the business for you and how do we think about IMU? And then I have a follow-up question please.

Sure. Hi, Tom; it's John Haugh. What we are doing, as I think you know, last year we, in response to kind of unprecedented economic conditions, we put a lot of energy at a $10 and $12 price point and that drove our average skin down. And we track, if an item goes out at $12 a skin, also how much apparel and shoes and total transaction that is, and it goes out at $16 and it goes out at $20. So our goal is to get back into our sweet spot of $16, $17, $18. Our historical average has been in about the $16-ish range. So this year we plan, not to get all the way back to a 2008 level, but to -- excuse me, to a 2007 level, but we do plan to be better than 2008. So we're trying to work our way back to our high water mark. So our average skin price, we are targeting to go up in Q4. Now none of us know yet what the promotional environment will be like. We might have to do some things to be competitive out there in the marketplace, but at least, as we're planning right now, we think we will move our skin prices up to then move the entire average transaction up as well.

John, to be clear, so you have an opportunity to move the average skin price in the fourth quarter over time about more than 30%. Is that what I'm hearing?

I don't think we would quantify the 30%. I think what we're trying to look at is look at some of our high water marks and figure out where we have been. 30% I think would be considerably high. We have been again in the -- maybe I was confusing, sorry. We've been in roughly the $16 price range. That's where we like to be. Last year there was a lot of emphasis at $10 and $12. That doesn't mean our average skin came all the way down to $10 or $12. Last year it came down, but it didn't come down that far. So we are trying to get closer back to our average and we think that's where we'll be this Q4. So it is an improvement, but it's not a 30% improvement.

Your next question is a follow-up from the line of Paul Lejuez with Credit Suisse. Go ahead, Paul.

Thanks. I was wondering if you guys could tell us your initial thoughts on CapEx and store growth for next year.

We're really finalizing those plans. Haven't put too much yet behind them. We're really waiting to see on the holiday season how some of the things we're doing happen. And then, as I mentioned, we are working on our new store prototype. And if we -- we are going to test that out in a couple of locations. But also may spend some of our money to retrofit and adapt some of those learnings to our existing stores. That's our goal. But we haven't quantified that yet. We'll keep you updated as that becomes clearer.

And your final question is a follow-up from the line of Tom Filandro with SIG. Go ahead, Tom.

Thank you. Hey, John, I wanted to come back to the IMU question. You gave us sort of the front piece of that in terms of what you're thinking, in terms of AUR. How are you positioned from a cost basis to average unit costs? So how should we think about IMU in the first quarter and into 2010? And then I do have a follow-up question for Maxine.

Sure. You're right; I gave you the front end. From an IMU or our margin, we are also working to improve that. Obviously, when we had to take pricing action last year, items were purchased and pricing was set. So, as we've been able to plan Q4 2009, as well as rolling into 2010, we are more forward looking and we will work to get back to our traditional gross margin levels and an IMU level. Obviously, we need to ultimately drive store business to get our overall gross margin up and to get our leverage back, but from an IMU standpoint, we are working to also get back to historic levels. We'll make some progress this Q4 and it is a target for us to continue to improve going through -- going into 2010.

Okay. And if I could, Maxine, can you give us an understanding of the thought process behind the holiday launches this year in terms of historically, or at least the last few years, you've kind of come up with a new I call it holiday-centric skin that was different from the prior year. I know we did bring back, I think, Rudolph at one time. This year it's something that you've had in the past, Holly and Hal, and also I think you said Frosty, the Snowman, which you've had in the past. Can you just give us the thought process around the merchandising for the holiday season please?

Sure. Last time we had Frosty the Snowman was in 2005, and we have a considerable amount of new guests that actually weren't even born in 2005, so a new wave of customers that this will be new for. It's also different than the one, even though it's a snowman and it's Frosty, it has some new technology that is improving it. So -- but most of that we expect will come from new customers who weren't even in our customer database at that time. And that's exactly what happened with Rudolph when we brought him back. He was in 2004 and we had him in 2007. So that was even closer together.

Holly and Hal are in our inventory with a new edition - their little friend, Hal, and their new clothes. And that comes from the fact that the movie is going to be on ABC Family on the 24th of November and also again in the morning, on the Saturday after Christmas. And we believe very strongly in all the promotion that's going on -- after Thanksgiving, I'm sorry, the Saturday after Thanksgiving, and we believe in all of the promotion that's going on with that, with ABC Family and with ourselves. And we've gotten quite a bit of press about that already. It's absolutely one of the cutest movies. We're a little biased, of course, but it really is -- turned out great. And I think it will be very positive.

And last year, nobody even knew who Hal and Holly were. So with this edition, again we don't have as many of those as we had last year. We bought it within reason, but we think it's still, again, lots of new customers that weren't our customers last year. And we can track that specifically in our database.

And we're very excited about Alvin and the Chipmunks. It's a very cute movie. It comes out Christmas Day. It will be a positive. There's other products out in the marketplace from other licensees. But he's really cute and he's fun and he's -- he has sort of a Christmas feeling to him just in general, but the movie isn't about Christmas. And we're excited about him and think that will be successful.

We also have Hello Kitty, 35th anniversary edition, a special limited edition, very special and very limited, and we think that that will be an exciting edition to our assortment, along with a special outfit that is tied in even with something that's available in the marketplace for girls themselves. It's a quite beautiful outfit. So there's things like that.

We feel very strongly about the Star Wars collection, as I mentioned. And we also feel strongly about the new Disney movie, "Princess and the Frog," which comes out in December and also -- we're always very successful with the Disney princesses. So a new princess and a new romantic story have been long awaited. There hasn't been one in a while. So we feel we represent all the really popular things that are in the culture, as well as the traditional classic things that come out -- that have been around for a long time and have been successful for us even when we've repeated them.

And we do have a question from the line of Brad Leonard with BML Capital Management. Go ahead.

Maxine, I believe on the last call you told me that you thought merchandise margins would be up in the second half in North America. How do you feel about that now going into the fourth quarter?

The merchandise margins, we need the markup. I feel that we're moving in the right direction. Again, other pressures - leverage of the sales, occupancy costs - that affect what you see as margins. But our merchandise markup, as John talked about, is in the right direction and we've been working with our vendors and we have a very strong product lineup for the fourth quarter that I think will add to that greatly. Assuming there's no major changes to what we see and we have to take any unusual markdowns or changes in our retail price points. But assuming that things are as they have been in the last few months and moving into the fourth quarter, I feel that we will be positive in that area in improvement.

There are no further questions in queue. I would now like to turn the call back over to Molly for any closing remarks.

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