Build-A-Bear Workshop Inc (BBW) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Build-A-Bear Workshop Inc. earnings conference call. 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 Ms. Jane Thorn Leeson of ICR. Please proceed, ma'am.

Good morning, and thank you for joining us.

With me this morning are Maxine Clark, Chairman and Chief Executive Bear; John Haugh, President and Chief Marketing and Merchandising Bear; and Tina Klocke, Chief Operations and Financial Bear.

Before I turn the call over to management, I want to remind members of the media who may be on our call today to 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. Feel free to re-queue if you have further questions.

Please know that our call is being recorded and broadcast live via 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 the IR site.

Before we get started, I will 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 that are 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 would like to turn the call over to Maxine Clark. Maxine?

Thank you, Jane, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal 2009 results.

For this morning's call, I will begin with an overview of our fourth quarter and fiscal 2009 performance, and outline our priorities for 2010. John Haugh, President, Chief Marketing and Merchandising Bear, will review our product and marketing strategies. And then Tina Klocke, Chief Operating and Financial Bear, will review our financial results and outlook. Finally, I will make some closing comments, and we'll open the call to take your questions.

Fiscal 2009 represented a year of economic challenge. It was a very tough year, but we showed solid progress. We improved our North American top store sales trends. We continued our strong and profitable results in Europe. We surpassed our cost reduction goals, and we ended the year with positive cash flow and a strengthened balance sheet. While the economy continues to impact overall performance, given the discretionary nature of our product, we are pleased with the progress we made in 2009 and are well positioned to create greater shareholder value in 2010.

Let me give you more details about our fiscal 2009 results. We had a sequential improvement in our North American comparable store sales, with our trends improving every quarter from a low of minus 20.5 in North America in the first quarter, finishing the year at negative 13.3 in the fourth quarter. More importantly, our comp store trend improvement continues into 2010, reaching negative single-digit levels in January; and for February, through yesterday, despite difficult weather in the past few weeks, we are seeing even more significant improvement in trends in both our stores and online. In fact, our sales are flat to last year; but remember, there are still ten days remaining in the month. This gives us further confidence in our strategy; and remember, February is a very large month for Build-A-Bear Workshop.

We attribute beauty these results to our focus on must-win periods, when we know guests will be in the mall; innovation in our core Build-A-Bear Workshop product assortment; fully-integrated marketing across all business channels; and the operational support improving transaction count trends. We also made significant advances in our entertainment initiatives, with our first-ever television special, Holly and Hal Moose, our uplifting Christmas adventure, airing on ABC Family, successfully driving brand awareness and sales of our plush animals.

Turning to Europe, we continued to show strength in our European operations, with total revenues up 9% in fiscal 2009, excluding the impact of foreign exchange, and comps increasing by 5% for the year. We believe we have future growth opportunities in both existing and new stores, particularly in UK and Ireland, and we are focused on continuing the positive trends that our stores have delivered.

On the costs side, we achieved reductions in costs of $25 million in North America, with $22 million in SG&A, including marketing, central office payroll and outside services, and $3 million in transportation expenses; exceeding our initial goal of $15 million set at the start of the year. In addition, we achieved significant reductions on store lease expenses, which will be realized over the life of the leases. While lowering costs, we continued to deliver a great experience in our stores, as measured by our guest satisfaction scores, which we finished the year with nearly 80% of all guests giving us the top score on overall satisfaction. We were pleased to be named in the Fortune 100 best places to work for list for a second year running.

Let me give you more detail about our fiscal 2009 results. We also added key talent, naming John Haugh as President and Chief Marketing and Merchandising Bear in April of last year. John is a great partner, and has made significant contributions to move our business forward. Importantly, we ended the year with a strong balance sheet, reported positive cash flow, and have an extended credit agreement in place with US Bank.

Looking to 2010, the number one objective is to increase shareholder value by profitably growing our sales, and we are focusing all of our energies in that direction. Our plans include accelerating our comp store and online sales by continuing to improve products and the impact of our marketing program, as well as aligning the new innovations across our organization. We will also selectively add new interactive toy products to our stores that we believe will enhance our brand essence, and give guests even more reasons to check out what's new at Build-A-Bear Workshop.

The Build-A-Bear Workshop brand has come to represent fun, creative and imaginative play, with high hands-on value and family interaction. We believe that going beyond our traditional merchandise assortment with complementary toy products will allow us to further drive sales, transaction value and overall profitability. John will expand upon these efforts in more detail, including the highly successful introduction of the Zuzu Pets product; increased membership and engagement in Build-A-Bearville to further engage our guests with the brand and influence additional purchases; and we will be aggressive in making further strategic reductions in operating expenses, on top of the cost reductions of $25 million in 2009.

We have also begun a search for a new Board director to replace Joan Ryan, who announced her decision to retire, effective at our next Annual Meeting. We intend to have this new Board member stand for election at our annual meeting in May, and I would like to thank Joan for her service, expertise and commitment during her tenure on our Board.

Now let me spend a few minutes to discuss our views of capital allocation planning for 2010. We look at many opportunities to use our cash, including investing in our business in terms of opening new stores, remodeling existing stores or improving our infrastructure. We weigh these choices against our needs for working capital, and using cash for other shareholder value-enhancing programs. Over the past year, our primary objective was to use our cash prudently, and stay both unleveraged and liquid in order to position us strongly for the future. We believe this strategy, given the downturn in the economy and the pressure on cash flow, served us well. Our approached enabled us to get through what we believe to be the worst of the economic downturn, retaining a strong financial position. We recognize that the consumer is still tentative, and spending is still weak, so at this time we have planned a modest number of new store openings, and conservative infrastructure improvements in our capital allocations. Together with our Board of Directors, we will continue to closely monitor the results of our 2010 initiatives and our business cash needs, and evaluate additional ways to deploy cash and increase shareholder value on an ongoing basis.

In summary, we made strong progress in 2009, yet we are very focused on delivering significant improvement in 2010. We are confident that the actions we are taking by product, marketing, human and capital allocation, will enable us to further profitably improve sales trends and, most importantly, increase value for all Build-A-Bear Workshop stakeholders.

Now I would like to turn the call over to John to review our merchandising and marketing plans, and fiscal 2010 strategies in more detail.

Thank you, Maxine, and good morning, everyone.

As Maxine noted, in 2009 we made great strides to improve our product, merchandising and marketing, and, based on guest feedback and the performance of our current launches and events, we expect ongoing improvement in sales and profitability in 2010. Our brand continues to be very strong, and positioned very positively in consumers minds.

We know we can perform at a higher level, and we are focused on five key strategies to deliver our 2010 goals. Number one, product innovation. We are improving our product offerings by enhancing the size of our launches, and the design and value of our animals and related products. Number two, full integration of product, marketing and operations, creating a sense of urgency and excitement with new each product launch, with strong promotional and marketing support, including powerful store visuals, to further drive traffic, increase conversion and improve sales and profits. Number three, adding additional products to our assortment. As Maxine mentioned, we've begun to add other categories that are outside of our core plush animals, yet consistent with our interactive toy experience. Number four, we will continue to grow our virtual world engagement, as well as improve our online and e-commerce business. And number five, our sales initiatives also include new opportunities for our products to be sold outside of our current store base.

Let me discuss these five strategies with you. First, to have product launches that are bigger in terms of sales volume, in-store excitement, and with a presentation that changes the store. While we will introduce a similar total number of new animals in 2010 as we did in 2009, we will group the animal introductions into larger statements that will be more noticeable to our guests, giving us powerful news to feature in our marketing, and having more meaningful visual presence in our store. As a result, each launch is expected to have higher impact, as we focus our inventory commitments and improve price points to drive margin and average transaction value.

Our second strategy is to fully align product, marketing and operations, to maximize store traffic and conversion during the key times consumers are in the mall. When we deliver each new product story, which in many cases will only be for a limited time, we will create a sense of urgency for purchase. Each story will be told in a dramatic way with strong visual impact, and we will focus all of our media and marketing efforts around that story. We believe we will engage returning guests, as well as pull new guests into our stores, to check out the news and our merchandise assortments. An ongoing engagement with Build-A-Bearville will allow us to continue the brand relation and play value, and continue to influence future visits to our stores.

While we have made significant reductions in our marketing spend to meet our cost savings goals, we are now re-weighting our programs, using traditional and new media to stimulate kid demand for our products, and to reinforce value with Moms, reminding Mom how affordable and fun Build-a-Bear Workshop is. Our launches in 2010 have included the iCarly Bear, and for Valentine's Day, the Be Mine Dalmatian. Both have had terrific response, driven by a coordinated approach to product marketing and store events. Using Valentine's Day as an example, what this means is that we focused our efforts on one message, Puppy Love, and one product statement, the Be Mine Dalmatian and its outfits, and one promotion, Sounds. This resulted in selling-out of the seasonal animal and related merchandising, driving up our Sound percentage by six points, and moving our overall business in a positive direction. Our results give us confidence as we move to the key Spring season.

On March 5th, our stores will transform into an Easter theme, with guests able to view our merchandise story, featuring Easter animals of Blossom Bunny and an Easter Chick with light-up cheeks. Our marketing, including kids' television, direct and Moms and kids social and digital media, will showcase Build-A-Bear Workshop as The Headquarters for Easter. Furthermore, guests will receive a free Easter basket with candy as a gift with purchase with qualifying transactions.

Additionally during this period, based on our sell-out of Alvin and the Chipmunks this past Holiday, we have also added a special limited edition buy of Alvin and Brittany to tie into the worldwide DVD launch in March. In a unique cross-promotion with FYE/Suncoast, over 500,000 fliers will be handed out in their US stores promoting this product launch at Build-A-Bear Workshop. We will drive value to consumers, while building our transactions, by promoting this pair at regular $22 each or two for $35. Both Alvin and Brittany also have a musical add-on which will sell at a very high ratio to the animal itself. We expect to sell- through on this famous pair quickly. We have exciting new merchandise stories launching approximately every four weeks throughout 2010, and we believe that the combination of new launches with enticing promotions will deliver the growth we need.

Our third strategy is to give guests more reasons to come to Build-A-Bear Workshop, by expanding our leadership in the toy business with products that reinforce our brand values; as this broadens our consumer appeal, and gives consumers more reasons to come to Build-a-Bear Workshop beyond making their own plush animal. Our first expansion into other toy products was an initial test of Zuzu Pets, and in-demand plush hamster, and a perfect example of a toy that complements our brand essence and current offerings. Our product of Zuzu Pets includes product found at other stores, but also exclusive products and tie-in to Build-A-Bearville. We have approached the introduction of Zuzu very strategically, closely monitoring guest reaction, sales metrics and overall results. The test stores have seen an increase in sales, driven by an increase in transactions. Overall, the average transaction with the Zuzu Pets product is consistent with our historical average transaction. While the merchandise margin for this product range is below our proprietary levels, we expect to drive higher overall profits and enhance our bottom line. We initially tested Zuzu in eight stores, and at the beginning of February expanded to the current 50 stores, and will expand to all US stores in March, and all Company-owned stores worldwide by Summer.

Turning to our fourth strategy, which is to drive our online and e-commerce goals. The merchandise and marketing strategies that we are implementing also impact our e-commerce business. Online, our goal is to make it easier for our adults to shop with us, and even more engaging for our kids to play with us. Throughout 2010, we have planned enhancements for our website that will make it simpler to use, provide easier navigation, and allow users to easily find products with a focus on gift items. Already, our online focus is reaping results, with positive December sales. Our positive web trend continues in 2010, showing strength particularly around Valentine's Day, which has always been a significant gift-giving holiday for us.

In our virtual world, we continue to focus on increasing membership and driving monetization strategies to increase store revenue, sell virtual goods, and further engage our guests with our brand. Our research has shown that one out of every three guests visit Build-A-Bearville before visiting our store. Over 40% of all animals registered in our stores by our core demographic come online in Build-A-Bearville. In total, the value of the transactions associated with the animals brought to life online exceeded $64 million in 2009.

To further build synergy between the real and virtual worlds, this past Holiday we began to deliver coupons and other value offers in Build-A-Bearville, and we will be adding additional promotions to our virtual world citizens to drive store traffic throughout 2010. Traffic to Build-A-Bearville rose throughout 2009, and those trends continue in 2010. Site visitors spent an average of 28 minutes per visit, representing over 2.3 million hours of interaction with our brand every month.

Let me now move on to our final strategy of expanding our products, and revenues from other sources. Engaging kids in the story of our products has been important to our success, but also provides a larger opportunity to grow product and entertainment revenue both in our stores, online, and in other retail stores. As many of you are aware, we recently announced an agreement with A Squared Entertainment, a global children's and licensing company. Under this agreement, A Squared Entertainment, led by Andy Heyward and Amy Moynihan, will help us to create a stronger external licensing program. A Squared Entertainment, in collaboration with Build-A-Bear Workshop, will develop an expanded line of licensed merchandise that will be sold outside of Build-A-Bear Workshop stores, including DVDs, accessories, apparel and books, to name a few. In addition, we will develop multimedia entertainment for future distribution online, on air. and on other digital devices. A Squared will also collaborate to produce original programming to expand upon the success of Holly and Hal Moose, and will include other Build-A-Bear Workshop properties.

In total, we are providing more innovation, improving our marketing, and adding incremental revenue streams. We are excited about our strategies and encouraged by our early results in 2010. We are confident that our actions will result in improved revenue and profitability this year.

And now I would like to turn the call over to Tina, to review our financial results and outlook in more detail.

Thanks John, and good morning, everyone.

Our fourth quarter results showed a continued sequential sales improvement from the third quarter, and included 180-basis point improvement in merchandise margin, as well as the continuation of disciplined expense and inventory management. In fact, as Maxine mentioned, we saved an additional $7.1 million in the quarter, with SG&A as a percent of sales essentially flat with the fourth quarter last year. For the full year we achieved cost savings of $25 million, $10 million ahead of our original goal.

Our fourth quarter GAAP net loss included the following non-cash charges -- $3.9 million or $0.20 per diluted share in store asset impairment; and $2.7 million or $0.14 per diluted share related to losses associated with our minority investment in Ridemakerz LLC, a start-up company that began in 2007. Beginning in the second quarter of 2009, we were required to record allocations of Ridemakerz losses. With these current charges, we have written off our entire investment in Ridemakerz, who continue to work on their repositioning strategies. Excluding these charges, 2009 adjusted fourth quarter earnings per diluted share were $0.29, compared to 2008 adjusted earnings of $0.45 per diluted share.

Net loss for the fiscal 2009 year included the following costs -- a $4.1 million or $0.22 per diluted share non-cash charge related to store asset impairment; a $5.9 million or $0.31 per diluted share non-cash charge associated with the Company's investment in Ridemakerz LLC; and $600,000 or $0.03 per diluted share related to the Friends 2B Made concept closure. Excluding these charges, 2009 adjusted loss per diluted share was $0.10, compared to 2008 adjusted earnings of $0.50 per diluted share.

For the fourth quarter, total revenue declined 13.5% to $122.9 million, from $140.1 million in the fourth quarter last year. This year's fourth quarter included 13 weeks, and compares to a 14-week period last year. Based on the average revenue per week of $10.1 million in the 2008 fourth quarter, the year-over-year decline is 6.9% versus the prior year.

Consolidated net retail sales declined 15.4%, excluding the impact of foreign currency. The decline in sales was primarily driven by the 13.3% decrease in North American comp store sales, and the benefit of a 14th week in last year's fourth quarter. The comp decline was made up of a 9% decrease in transaction, and a 4% decline this average transaction value. While average transaction value was down year-over-year, the trend improved in the quarter. On a consolidated basis, our comp store sales decline in the fourth quarter was 9.9%.

Our European operations delivered another strong performance in the fourth quarter compared to the prior year, with total retail sales up 1.4% excluding the impact of foreign currency. The positive performance was attributable to the increase in comparable store sales of 4.5%, as our brand and experience continues to gain momentum with consumers. This was partially offset by having one less week in the fourth quarter of 2009 versus 2008. Based on an average revenue per week of 1.2 million pounds in the 2008 fourth quarter, the total retail sales growth in constant currency is 9.2%.

In the fourth quarter, international franchise revenue increased slightly to $1.2 million. We ended the year with 65 international franchise stores, up from 62 last year. During 2009, we expanded our franchisee business to Mexico, where we remain on track to open our first store in Mexico City in mid-2010. For the full year 2009, fiscal year revenue from franchise operations decreased 19% to $3.4 million, primarily reflecting the global economic slowdown during the past year. For fiscal 2009, we currently expect franchise revenue to be in the range of $3 million to $3.5 million. We are encouraged by strong new store openings in Australia, Dubai and Germany. Selecting the right real estate location remains a key objective, and as such our franchisees will continue to pay for store growth. We anticipate international franchisees will open a net of three stores in 2010, including our first store in Mexico. As a global economy strengthens, there is significant potential for growth within our franchising operations.

Turning to licensing, revenue in the fourth quarter was $500,000, down from $1.1 million last year. Full-year licensing revenue decreased to $2.5 million, in line with our expectations. The declining in licensing revenue for the fourth quarter and full year reflects the anniversary of the Nintendo DS and Wii games from December 2008, with new launches for both scheduled for Spring of 2010. For 2010, we anticipate licensing revenue to be in the range to $3 million to $3.5 million.

Gross profit margin for the fourth quarter declined 410 basis points to 39.5% from 43.6% in the prior year. While we achieved 160 basis-point increase in merchandise margin, asset impairment costs, and deleverage and occupancy negatively impacted gross margin by 280 and 250 basis points, respectively. For the full year, gross profit margin declined 460 basis points to 36.7% from 41.3% in fiscal 2008. Of this decline, 430 basis points is related to deleverage and occupancy, which includes 90 basis points related to the asset impairment charges.

Total SG&A in the fourth quarter declined 13% to $48 million from $55.1 million in the 2008 fourth quarter, reflecting further cost reductions in North America in marketing and store payroll, along with central office expense reductions in salary, outside services and travel expenses. This resulted in total expense savings in over $7.1 million in the fourth quarter. SG&A as a percent of revenue for the quarter was essentially flat with the prior year, at 39%.

For the full year we recorded a tax benefit of $11.4 million, with an effective tax rate of 47.7%, compared to an effective tax rate of 36.8% in fiscal 2008. The increase in fiscal 2009 compared to 2008 is primarily attributable to the impact of releasing valuation allowances that were previously recorded against the deferred tax asset related to net operating losses in the UK. For fiscal 2010, we currently anticipate an effective tax rate of approximately 36%.

Regarding cash flow, we ended the year strong, with consolidated cash of $60.4 million, up 29% from fiscal 2008, or up 18% excluding the impact of foreign exchange. As you know, we are an international company, and as a result about half of our cash on the balance sheet is domiciled outside of the US. Again this year, we had no borrowings under our revolving credit facility. Because our cash fluctuates seasonally, we evaluate our use of cash on a continued basis. Our cash usage peaks ahead of Holiday and key business periods, as we build our inventories. At year end, our cash balance is high due to significant gift card sales and seasonal sales volumes. For example, while our year-end cash balance was $60 million, the seasonal fluctuation at the end of January resulted in a reduction of $20 million below year-end levels.

Accordingly, we constantly monitor our cash against seasonal needs and other possible uses. We will continue to evaluate all opportunities to enhance shareholder value, including opportunistically resuming open market purchases of our Company stock, subject to market conditions; and we will also allocate our resources to opportunities that are expected to increase the sales productivity and profitability of our stores.

Depreciation and amortization for the quarter was $7.4 million, up from $7.1 million in the fourth quarter of 2008. For the full year, depreciation and amortization was $28.5 million, down from $28.9 million last year. Depreciation and amortization for 2010 is expected to be approximately $28 million.

At the end of the quarter, consolidated inventories totaled $44.4 million, compared to $49.7 million at the end of 2008. Inventory per square foot decreased approximately 11%, and on a two-year basis our inventory per square foot is down about 13%. We feel comfortable with the composition and level of our inventory as we begin fiscal 2010. Capital expenditures in the fourth quarter were $1.5 million, down $2.7 million compared to fourth quarter 2008, primarily due to no new store openings. Capital expenditures for the full year totaled $8.1 million, compared to $23.2 million in fiscal 2008.

Looking ahead to fiscal 2010, our top priority is to support the strategies we have developed to reignite profitable growth for our Company, particularly in the marketing and merchandising areas, as John just outlined. We expect to increase our capital spending in 2010 to approximately $12 million, which will primarily be driven by upgrades in our infrastructure, as well as the opening of three new stores; two stores in the UK in the Fall, and one new format store in the US by early Summer. In addition, we will relocate one store in early Fall, also in our new format.

With that, I'd like to turn the call back over to Maxine for her concluding remarks.

In conclusion, we began 2010 in a strengthened financial position. Our merchandising and marketing strategies have led to steady improvements in our North American comp and online sales results throughout 2009, and we are pleased with the ongoing improvements we are having in 2010. We also continue to improve operating efficiencies, with further reductions in costs.

Build-A-Bear Workshop possesses a highly passionate and dedicated team, and I am confident in our ability to generate improved performance in 2010. We are off to a good start. We look forward to updating you on our progress in the months ahead.

Now I'd like to turn the call over to the Operator to begin the question-and-answer portion of the call.

(Operator Instructions)

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

Thank you. Really my question is around that low single-digit comp comment, as well as the flat February to date. That is a pretty dramatic turnaround from what you've experienced thus far. Are there any anomalies in terms of comparisons? And can you tell us what is going on, what is working? Is it transactional base, is it AUR, or a combination of that?

And if -- John, can you give us some insight of what you are thinking in terms of your marketing dollar spend, and specifically how are you targeting dollars this year versus last year, what variances shall we see? Thank you.

Sure. I think what you want to look at is, as Jane said, we feel like we are making great progress, and again we have product people really want. Our marketing is spent effectively, and I'll answer the second part of your question in a second, and our store operations team is really performing at a high level. We are not going against easy numbers. Last year, in fact, we had some weather going against us. If the weather was better, we would be in even better shape. Everybody says that, so we are not blaming the weather for anything, but we are driving transactions. We are driving our average transaction, and we are driving our units by really trying to bundle things together. So we feel like we have a really good, strong, integrated program.

With respect to marketing, it's a new frontier out there. We need to -- as we've always had the challenge, we have to get Moms to say yes, we have to get kids to want to product. So new product is what we call shin-kicking. It gets the kids to say to Mom, I got to get into Build-A-Bear. Then we need something for Mom, whether that's a strong promotion, whether that's a bundling opportunity, whether it's some kind of limited edition. So we are trying to really drive both kid demand and Mom -- give Mom the ability to say yes. And again, we have to do it first and foremost through product. The team has really done a nice job, the product assortment, not only for the first two months of the year, looks great, but for the whole years it's laid out, and we feel fabulous about it. And then effective marketing, and effective store operations.

With respect to our marketing spend, we took a bunch of money out last year. As the [A to S] ratio, we are going to come down a little bit more in 2010; but it's not about taking money out, it's about trying to be more strategic with how we talk to both Moms and kids, drive our CPM down and ultimately get more people into our stores.

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

Hi, guys. Just wondering what the margin looks like on the Zuzu product compared to your regular assortment? Also Tina, how many stores are operating at a four-wall loss, and how many leases expire over the next two years? I'm also wondering if you can provide any details on rent reduction conversations that you've had? Thanks.

So this is John. Why don't I take margin, and then I'll turn it over to Tina. From a margin perspective, as we said, we are not going to make the same gross margin on a product like Zuzu that you can find at other locations. You can find it at Toys-R-Us, you can find it at Wal-Mart, you can find it at Hallmark, you can find it at Justice.

That said, as we look at the line up, we -- as we mentioned, we have both product that is available elsewhere as well as exclusive product. We will price strategically. Delivering value to our customers is very, very important; so we are not going to chase a Wal-Mart price point, but we are also not going to gouge our customers. We are going to have a fair price, and we are going to have product in stock when they're looking for it. So we actually believe that while we won't get to, as we said earlier, our proprietary product gross margin, we do feel like we can have a good, strong gross margin here net-net; as it's incremental business versus substitute business, it delivers more gross margin dollars to the bottom line.

Paul, in answer to your next question, we had a few stores in North America operating at a loss. We look at them from an accounting perspective from an impairment analysis, and impaired those this year as well as a few in the UK. But, again, we are not closing the stores. We are looking at every way that we can from a -- whether it be a rent concession or any other operating expenses that we can do to reduce costs associated with those stores, so that they can become profitable again.

In answer to how many leases we have coming up for renewal this year, over the next two years it's about 30 stores that will be up for renewal, but we continue to make progress with our landlords and negotiating rent concessions for anywhere from a period of one year to several years. And just as a reminder, those savings are amortized over the rest of the life of the lease, which is on average about five years.

Your next question comes from the line of Sean McGowan with Needham.

Thank you. Firstly, just a follow-up on Zuzu. Is this -- do you think this is more of a unique opportunity because their neighbor is in St. Louis, or is it an indication of a different direction that you are with going in with some of the other sort of licensed products? Specifically what I'm looking for, are you going to allow consumers to actually make a movable electronic Zuzu (inaudible)?

It is John again. Two things. It's coincidence, serendipity, that they happen to be neighbors in St. Louis. For us what is important is that the product is what our consumers said they are looking for. We did not jump into this lightly. We spent time talking to our customers, this started last Summer, and said what might a consumer expect to see? And we are about an experience, and Zuzu happens to be a product that is very experiential. There is a big play value.

So it made sense for us to bring that into our assortment, but again as a complement. It will not be the majority of our business. It's something that our customers said, you know what, it would be nice to have, and so we bring it strategically. But it will not be a big percent of our business.

So the second part of it is, do we fundamentally change it and make it stuffable? Probably not really. Right now, that team has done a nice job with their product. They have a great new product pipeline, and that's what we will capitalize on. And again, I mentioned we have exclusive opportunities with them, as I'm sure some of their other partners do. So that's how we will talk to our consumer; that we've got an in-demand product that complements, doesn't substitute, complements Build-A-Bear Workshop, and we are going to continue to offer you what you are looking for as a Build-A-Bear customer, both as a kid and a Mom.

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please proceed.

Good morning. I was hoping you could discuss a little bit more the new format store you are talking about, and then perhaps some commentary on the Toys-R-Us Holiday Express stores, and how they might have impacted your business this past Holiday season?

Let me talk new format. Here is what we are on our new format. We have one of the most iconic brands in retail; kids love us, Moms love us. If kids could, they would go to our store every single day of the year. So when -- but retail is about refresh, it's about innovation. So what is really critical to us is that we refresh and we innovate, but we don't lose our iconic status.

So we do have a new format that will keep the core of what people really expect of Build-a-Bear, the experience, the ability to create this personalized experience, but we will update it a little bit. We will make it more contemporary, we're going to give a chance to tell more stories, more vignettes. As we really push for big product ideas, we want to make sure when a customer comes in they see that product holistically, and they really get a chance to see the Be Mine Dalmatian with all of its outfits and with its sound, and we really get to have that kind of front and center, and we are really about that for a Valentine's Day or an Easter, or whatever it happens to be. So that's where we're going to go. We are shooting for Memorial Day, and we are confident in it; based on success, it would be where we would try to go with our renewals that we talked about earlier, as we start in some cases repositioning.

With the -- with respect to Toys-R-Us, we don't know what they did for the Holidays. We've heard they had a good Holiday season. The key is, when more interest comes to kids and kids' toys, all ships go up in a rising tide, so we feel good about that. If they drive more people to the mall, fantastic news for us, because we know we are going to capture them.

Thank you.

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

Good morning.

Good morning, Mike.

The Zuzu Pet thing, will you carry the whole item of Zuzu Pets, like the new Ninja that is coming out shortly?

This is John again. Again, Zuzu is a complement in our business to our core. Right now, it's on a two-way. So it's got about four linear feet of exposure in a store that is 2,500, 2,600 square foot. So that gives you some sense of kind of where it is.

What we will do, as our customer would expect, is a newness and freshness, and innovation. So when Zuzu -- Cepia, the parent company, says we have a new line for Summer, Fall, Holiday, whatever it happens to be, we'll take a look at that line, figure out what makes sense to go into our store, in terms of what the whole market has available to them, what we want to customize for our consumer, and then we will make the right choice; but, again, from a limited inventory perspective.

And just to reinforce both question as well as others, Build-A-Bearville is critical to us. So we mentioned earlier about continuing to engage our kids. When they online -- excuse me, when they come to us via Zuzu, as an example, we are also going to get them into Build-A-Bearville, and that strengthens our brand and our franchise and our virtual citizens. So kind of win both ways here; we feel really good about it.

(Operator Instructions)

Your next question is a follow-up from the line of Tom Filandro with SIG. Please proceed.

Hi, thanks. One quick one. Can you tell us what comp you need to leverage occupancy? And then can you give us some understanding of what you are seeing in terms of on the product costing side of the business? How should we think about IMUs in 2010? And John, maybe you can sort of regroup us on the concept of value as we move this strategy to more $10 and $12 skins, and how that plays out in 2010, and a view of AUR? Thank you.

Tom, I think from a perspective of what we need to comp, I think once we can -- to leverage expenses, I think if we did just a positive comp, we'll be able to have a good flow-through that will actually leverage expenses.

And as far as initial merchandise margin, we saw an improvement in the fourth quarter, and we hope to continue to see an improvement into the first and second quarter of this year.

Sure. It's John. Let me build on Tina's point on IMU, and then we'll hit the last point about value. We have a great product development team. We have great partners and, like all retailers, when we sat together and planned 2010, we said to them, we want to grow our business together, and we want you to charge us less for the product, but we want to deliver more value to the consumer. So we have initiatives in place to continue to work on our gross margin, our initial mark-up, as well as our maintained margins.

So while we have a promotional strategy during key times -- we talked about Alvin and Brittany. So Alvin and Brittany are coming out at $22 per, or two for $35. We have gone ahead and already planned the two for $35 into our gross margin. So we will be able to deliver to the consumer value, but also not just take $7 out of our gross margin. So that's how we are trying to think about it, and we feel good about that.

With respect to where we land our business, $10 and $12 is important to the business. It serves our party business well. Oftentimes it's an introduction to our customer, to a new consumer, but our core is a $15 or $16 animal, with an outfit, with sound, with shoes, and with an accessory. That is what Build-a-Bear was built on, and that's what we continue to focus on, and that's where we put our energy. So $10 and $12 will continue to have X percent of our inventory, X percent of our sales, because we want to be there. It's what we stood for early, it's what we still stand for; but our core business is in the $15 to $16, what we kind of call the heart, the middle of our Choose Me Wall, and that is where we are really going to continue to drive our innovation and our product development.

Your next question is a follow-up from the line of Sean McGowan with Needham. Please proceed.

I was wondering if you can go over again some of the metrics on Build-A-Bearville. If you can repeat what you said already, what kind of incremental benefit you are getting, and just give a little bit more color on where you see that going? Thanks.

I'll take that one, Sean. Build-A-Bearville has been a very, very strong for us. We have over 14 million registered avatars, and growing every single day over the prior year. So its engagement with our consumers is increasing. As John mentioned, about a third of our customers go to Build-A-Bearville before they even come to our store, to see what's new, to see whether there's a promotion, to see what is happening in our stores; and then they come to Build-A-Bear and then buy. Then when they leave our store, about 40% of them in our target demographic, which is girls over eight years old, come back online and register that animal for its prizes and its rewards and its accoutrements, and go with it online and play with it online; and just those transactions of that group altogether were $64 million in revenue last year.

So while we know that some people might have come to Build-A-Bear Workshop anyway, we see that they're -- we can see their play and engagement online, and that is very impressive. And then they spend almost 30 minutes online playing every time that they come on. So we have a very loyal customer. It may not be the highest number of unique visitors of some of these sites that come online, but it's a very loyal customer and they come frequently. They receive points, they play games, and now we've started to promote back to them, giving them a reason to come to the store, with a free Build-a-Bear outfitters credit card, something that they can bring back again to Build-A-Bearville and become engaged with our brand.

And that's the most important thing. Even in the days of a couple of weeks ago, when schools all over the country were closed for snow, we could see those were very, very large days of engagement with our kids. They were online playing in record numbers. If we didn't have that, we wouldn't have had any engagement with our kids that day. It would have just been a total white-out.

So we feel very encouraged by how this is growing on a month-by-month basis, on a week-by-week basis, and we can see it exactly; we can see into it, we can turn it on at any given time of the day, and notice children's engagement with our brand, and parents as well.

Your next question comes from the line of Matthew [Varkus]. He is a private investor. Please proceed.

Hi, guys.

Hello.

I understand it's a weak environment, but in 2010 you guys generated $13 million of cash and are now sitting on $60 million in cash on your balance. In a zero interest rate environment, isn't that destroying shareholder value?

I think, Matt, as we said in our conference call script, it continues to fluctuates. At the end of January, that balance was already $20 million less, because of the seasonal nature of our cash flow. And also as a reminder, that -- half of our cash is domiciled outside of the US. So as you know, there are tax implications of bringing the cash back, and we are going to utilize some of our cash in foreign operations to build some new stores.

So again just as a reminder, we have a seasonal nature of cash and that -- again as we talked about in 2009, that we wanted to protect our balance sheet, we also made mention that we would also continue to look for -- opportunistically to purchase -- repurchase our share,s we will continue to do that in line with our Board of Directors.

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

Hi.

Good morning, Brad.

I thought that overall, the quarter was pretty good. The cost savings were much better than expected, so I'll give you congratulations on that. The only thing that really kind of, I guess, stumped me was the North American comps. I thought they would be a little bit better. And when I look at the breakdown between traffic and ticket, I'm also a little surprised that ticket was down 4%, I believe Tina said. And so how did they flow through the quarter on a month-to-month? Because on the last call, Maxine, you said that they got better each month of the third quarter, and into October. You said also that they're kind of a lot less negative; you said, while not yet positive they're a lot less negative, and I don't know where a lot less negative falls, but it makes me believe that maybe through the quarter the comps weakened a little bit? I know we have seen a change so far year to date, which I'm happy to hear. But any help on the comps? And then also maybe -- I really thought with the price points being higher this quarter, that the ticket would have maybe flatlined or even been stronger. So any help on that would be appreciated.

On the ticket price, we actually did have an improvement in our animal sale price. Our animal prices did go up, but we lost a little bit on our units per transaction, so the number of units that people bought, which I think is reflective of the economy. They did buy the stuffed animals, and we are seeing that growth in our animal ratio to total sales, and they like the animals. But the prior year, if you remember, we had a huge amount of animals sold at $10 to $12, and there were a lot of transactions of that. While it may have looked like it was easy -- even we were surprised, we thought we could definitely maintain more of that traffic than we did.

In the third quarter, there's always a month up or a month down, but in the end what we did in the fourth quarter was better than the third quarter, even though October was better and November was slightly worse, and then December was back on track towards the improvement. What we are most encouraged about, and we have seen that consistently since December, is that each week is getting better and getting sequentially better. And then so far in February, which you know we wouldn't normally even talk about it, because we don't want to do anything to jinx it, but we feel so encouraged by it because of the weather that we've been impacted, and the number of closed stores we even had. And to be at the level that we are at, even through yesterday, is I think a very good sign that the consumer is coming back to Build-A-Bear Workshop.

Also as John mentioned, we had very strong product introductions in January. While they were singular and not yet on the strategy that we have of multiple animal promotions or introductions, they were very strong. We had an iCarly sneak-peek event over a weekend, with tremendous response, and we had the Valentine's animal, which actually we launched later this year than we did the prior year. We usually launched it right after Christmas but this year -- and that might have impacted a little bit in our December sales. But we had a very strong Hello Kitty launch at the end for the kids. As we launched the heart-spotted Dalmatian, the Be Mine Dalmatian, it has been strong since the day it launched, and we actually are very, very clean on it, and we had what I consider to be the best news of all, an incredible Valentine's weekend; our biggest weekend since last Valentine's Day, and our biggest Saturday ever. And also a very, very big, strong Sunday and Monday. Showing that the customer has got some interest in buying, and Build-a-Bear is a place they come, and that is continuing.

So I don't want to be overly confident, but I think these are very, very positive signs, and point to maybe even us getting -- we have a plan that takes us month by month by month back up to positive, and I think we may be slightly ahead of that track, based on January and February performance so far. Anything can happen. March is a very big month, we are excited about March, with our very big focus on Easter as a holiday and as an event in our store. I think we are going to have a good first quarter, and then we'll be able to feel a little bit better down the road as to how this is moving.

But we are very excited about our product introductions. The Build-A-Bear product line is incredible, and we really feel very strongly about how strong that -- how big that will be for our customers, and how strong it's been in the last several launches that we've had, even into the end of 2009.

Your next question is a follow up from the line of Tom Filandro with SIG. Please proceed.

Thanks. Just a broad, long-term kind of question Maxine, Tina and John. Is there anything structurally different in your business that would not allow you to achieve the high single-digit, low double-digit operating margins you've experienced in the past?

Structurally? Obviously the climb back up in comp store sales and sales productivity is going -- for any retailer would be sequential, and hopefully smooth and steady, but I think there's nothing in the way of us of getting there that I know of. I think it's incumbent upon us to continue to find the product, whether it's Build-A-Bear product or a new product outside of Build-A-Bear now, that we believe we can sell profitably in our stores to help us drive that.

If I could add one thing, it's John. I think further to Maxine's point, we feel positive about where we are going with sales, and we talked about taking $25 million of expense out last year. We didn't put that back in in 2010. In fact, we think there's a little bit more.

So if we get sales where we are all looking for them to be, we as well as you all, we are already in -- we have already got that going for us. So that I think is a big positive. Despite crummy times last year, taking that money out and keeping that money out for 2010 is important to us in making a little more progress, and that will help us overall.

And we have no further questions in queue at this time. I would now like to turn the call back over to Ms. Maxine Clark for any closing remarks.

Thank you. I would like to thank everybody for joining us today, and we look forward to speaking with you when we report our first quarter results in late April.

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