Build-A-Bear Workshop Inc (BBW) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Build-A-Bear Workshop second-quarter fiscal 2010 results conference call. My name is Modesta and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today [Allison Malkin] of ICR. Please proceed.

Good morning and thank you for joining us. With the this morning are Maxine Clark, Chairman and Chief Executive Bear, John Haugh, our President 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 through everyone's questions during this one-hour call. Feel free to requeue if you have further questions. Please note 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 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 set forth in the Risk Factors section in our Annual Report on Form 10K, 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, Allison, and good morning, everyone. Thank you for joining us to discuss our second-quarter fiscal 2010 results.

For our call this morning, I will begin with comments on our second quarter and update you on our progress towards achieving our priorities we set at the start of the year. John Haugh, our President, will provide additional insight into our product and marketing strategy, and then Tina Klocke, Chief Operating and Financial Bear, will review our financial results and outlook. Following my closing comments, we will open the call to take your questions.

Overall, our second-quarter results fell short of our expectations, but we remain on track towards achieving our primary goal of increasing shareholder value by profitably growing our sales. As we look back on the quarter, April's comp decline met our expectations, given the shift of Easter to our first quarter. Combined comp sales for March and April were up modestly consistent with the increase we indicated during our first quarter call.

May, however, fell short of our expectations. Our comp sales trend improved in June, making it the best month of our quarter as store traffic improved and the later ending of the school year brought moms and kids back to the mall. In July, we've had strong comp sales growth, giving us confidence that, overall, our key strategies are moving us closer to achieving our objectives.

Despite the roller coaster results, there were several bright spots in the second quarter and some key learnings that will help us better position our business for the back half of the year.

Highlighting our accomplishments for the quarter, average transaction value rose 2% or $0.62 per transaction on a consolidated basis. We grew visits and engagements with our virtual world, we advanced our licensing programs. adding in an exciting new program, Build-A-Bear Craftshop Kits, that will launch in all Michaels Stores at the end of September. And we ended the quarter with a strong balance sheet with $31.2 million in cash and invested $3.3 million since the beginning of the year to repurchase shares of our common stock. Once again, we had no borrowings on our credit line and remain debt-free.

In total, for the second quarter, consolidated net retail sales declined 10%, which included a comp store sales decline of 9.7% in North America. In Europe, following nine consecutive quarters of comp sales increases, our comp sales declined by 11.2%, driven by the Easter shift, election uncertainty, and general economic concerns that weighed down discretionary consumer spending.

We [believe] the brunt of an initial increase in January in the UK that was buffered by the earlier Easter, and we have seen the retail environment in general turn highly promotional in the UK most recently.

As I indicated, May proved to be very challenging for Build-A-Bear Workshop. We delivered our strategy to improve the size and value of our animal launches and fully integrate product, marketing, and operations with the return of one of our most popular licensed properties -- Tropical Hello Kitty -- which sold well throughout the month. However, having just one animal in the Featured Product story was not sufficient to drive our total business for an entire month.

As soon as the focus shifted to our Zoo Animal Collection, multi-animals assortment consisting of both core and limited edition products, our business rebounded, with June producing the best results of the quarter with low single-digit decline and spring momentum that has billed to a strong double digit July, sales increases with the release of the Ice Cream Bears collection.

We are making adjustments to our product and promotional cadence to improve our performance and have a great lineup for the summer month win period. We will continue to offer approximately one new product theme a month, but we will also be infusing some powerful promotions into the mix to maximize our reach for the pickup in mall traffic that comes with the back-to-school season. We will have something new in product or promotion to speak to in our communication cadence, approximately every two weeks, in order to convert guests with newness and provide great value each time they visit a store.

On a year-over-year basis, our core inventory per square foot is up modestly at 1.9% with total inventory increasing 20% including Zhu Zhu pets, which is an added category to last year. We are comfortable with the level and content of our core proprietary inventory and have taken appropriate action to bring Zhu Zhu pet inventory in line with the current trend of this product, which John will discuss.

We expect inventory levels to be aligned with total sales trends by year-end and expect our third-quarter balance sheet to show significant progress on this front.

As we look forward, we expect to build on our strong start to the third quarter and believe we have the right line up to capitalize on the back-to-school and holiday seasons. We do expect our third-quarter performance, while remaining positive, to moderate from the current double-digit sales growth as changes to the timing and promotions and advertising play out over the next couple of months.

With the backdrop of a challenging economy, we know the year won't be without its bumps. We are confident that our strategies will allow us to achieve our number one objective of increasing shareholder value by profitably growing our sales.

With that, I'd like to turn the call over to John to review our product and marketing strategy in more detail.

Thank you, Maxine. As Maxine indicated, our second-quarter results were short of our expectations, but we believe we are on the right track and expect better performance in the third quarter.

As you recall, we are focused on five key strategies for the year. First, product innovation that improves the size of our animal launches and the design and value of our products. Second, full integration of products, marketing, and store operations to create a sense of urgency with each new product launch. Third, add complementary experiential toy products to our assortment. Fourth, grow engagement in our virtual world and our e-commerce sales. And fifth, develop new opportunities for our brand to be sold outside of our retail store base.

During the second quarter, we advanced each of these objectives, and we are excited about the lineup we have in place for the rest of the year. In product innovation, our focus on larger merchandise stories was successful with the Enchanted line, Zoo Collection, and the Ice Cream Bears Collection, all of which sold at or ahead of our plans, and we have achieved higher out the door selling price on the animals.

The Empire Strikes Back.

All in all, we are very excited with the cadence of the content of our product introductions.

Our second strategy is to improve the execution and coordination of our product, marketing, and store operations by having one product theme supported by a focused message in one strong promotion. We have several exciting offers and tie-ins.

For example, in addition to the Adorable product, our Ice Cream Bears had a special two for 235 multi-animal pricing promotion, which resulted in doubling our standard rate of two animal transactions for this grouping. The Ice Cream Bears also featured a tie-in with Baskin-Robbins stores in North America, and we will continue to selectively offered tie-ins with relevant partners on future products.

On the heels of Ice Cream, our back-to-school bundle promotion has returned in which our customers can get any animal, any outfit, and any pair of shoes for $29.99 during a two-week time frame.

Following the bundle promotion, we will build on the success we have had with our GWPs in the first half of the year, as we offer a great messenger bag gift with purchase with qualifying transactions. We are making it easy for mom to say yes to Build-A-Bear Workshop at a time when she and her kids will be out in the malls, stocking up for back-to-school necessities.

Each product launch is the single focus of our stores and is supported with powerful visuals at our [lease] line as well as clear operational messaging and execution. We'll continue to use television advertising in the US to stimulate demand for the products and we will speak to mom in the digital space. The response with our repeat guests to our direct-mail programs has been strong this year and we are working on specific plans to continue to improve this key contact tool.

We are addressing the sales decline in our European business to get back into the plus column. After this point, we have grown our business in the UK by replicating North American best practices to improve our store experience, deliver more consistent product, manage inventory levels, and grow our brand awareness. We believe that we will need to be more aggressive in our outreach and brand and product promotion, as a national progression of our business model and to fit the current retail and economic environment of the market.

Our third strategy is to give consumers more reasons to come to Build-A-Bear Workshop by expanding our leadership in the toy business with products that reinforce our brand. This will be achieved through external sources, as well as internal development.

In September, we are very excited about the launch of our new proprietary brand, Small Fries. Small Fries is a line of smaller animals that are already stuffed and are packaged in a box resembling a French fry box with captions playing off the brand names such as Feed Your Friendship, or Animal Provides 100% of the Daily Nutritional Requirements of Friendship Characteristics Such as Hugs, Laughter, and Smiles.

Small Fries can be dressed, will have a Build-A-Bear build tie-in and are priced at $12 for the animal and $7 for the clothes. The launch will be supported with a fully integrated marketing program including a national TV advertising campaign in the US to get the word out to kids. We have done extensive research with this new line, and found that it is highly appealing to younger girls who think of them as babies to their bigger make your own animals and to older girls who love the mobility and collectibility of the entire series of eight animals.

We expect this initial limited edition, two-month run of Small Fries to be in high demand as they will be added on to core transactions, as well as increased impulse purchases.

Looking at externally sourced, nonproprietary product, during the quarter we expanded the Zhu Zhu Pets product line to all of our US stores. We initially tested Zhu Zhu product at the end of last year. The test performed well and we acted quickly to get it into all of our stores. The sales on the rollout are not performing up to the test levels and the line, overall, is under significant competitive pricing pressures that are somewhat unprecedented for a hot toy so early in its lifecycle.

We are taking aggressive action to move the product by reducing our average unit retails. Zhu Zhu Pets have been a modest part of our business and we expect to be able to offset the impact of these price reductions with other proprietary products in our mix.

We continue to advance our fourth strategy to grow sales on our e-commerce site and increase engagement in our virtual world. Although online sales in the second quarter declined by 2.6%, generally reflecting our store trend, they are up 6% on a year-to-date basis with flat year-over-year sales in June and back in the growth column on that double-digit basis for July.

Build-A-Bearville remains critical in our brand relationship with kids and we showed solid growth in our key metrics of unique visits, time spent online, and animal conversion to this site. As we have more seamlessly integrated our real world and virtual world to build buzz for new products, deliver coupons and promotions to bounce people to our stores, and increase our overall brand engagement, our community has continued to build.

For example, the tie-in to our Annual Camp Happy Heart with our Ice Cream Bear collection resulted in over 700,000 campers signing up this year, up over 60% from 2009's camp enrollment. We consider Build-A-Bearville, a key strategic platform and believe it to be an asset that has value to many brands that want to reach between demographics.

As we explore multiple ways to monetize Build-A-Bearville, we are working with complementary brands to form partnerships in the virtual space, similarly to ways we have partnered with powerful relevant brands in the real world. While many of our plans are still in development, we are continuing to move this platform to the next level and will update you further on the next goal as we continue to break new ground as the only company that has the ability to reach consumers -- kid consumers in both virtual and real world spaces, giving us a competitive edge to monetize and grow revenues from this asset.

Finally, our licensing strategy continues to move forward. Our licensing revenue in the quarter increased versus last year with the launch of the Wii and Nintendo DS games by Activision. As Maxine mentioned, we will also be launching an exclusive craft line to be carried in Michael's Stores, starting in September. We found that we have a significant overlap of guests that shop in Michaels Stores who rate the craft kits very highly.

Each kit that is sold includes a Build-A-Bearville tie-in, as well as a bounce back to a Build-A-Bear Workshop store or to our e-commerce site. We also expect this line to reach new guests and to increase traffic to our stores as they play and engage with our brand in a uniquely creative way.

In summary, we feel good about our core products and the cadence of the introductions and promotional support. We believe Small Fries will be a big hit on a broad age and gender basis, and we believe our strategies are taking hold and moving us toward our larger goals and objectives.

Now I'll turn the call over to Tina to review our financial results and outlook in more detail.

Thanks, John, and good morning, everyone. I will provide additional details related to our second-quarter fiscal 2010 financial performance.

For the second quarter, total revenues decreased 10.5% to $74.1 million from $82.8 million in the second quarter last year. Consolidated net retail sales decreased 10.2%, excluding the impact of foreign currency. The decrease in sales was driven by a 9.7% decrease in North American comp store sales and 11.2% decrease in European comp store sales. Consolidated comparable store sales declined 10% and included 11.7% decrease in transactions, offsetting a 2% increase in average transaction value.

Total retail sales from our European operations decreased 11.1%, excluding the impact of foreign currency. Net loss from European operations was $1.7 million as compared to a loss of $1.2 million last year.

International franchise revenue increased to $661,000 from $612,000 last year. We ended the quarter with 60 international franchise stores versus 61 in last year's second quarter. During the quarter, we expanded our franchise business with a successful launch of our first location in Mexico.

Turning to licensing, revenue in the second quarter was $985,000, up from $915,000 last year. The increase in licensing revenue reflects higher projected sales from our Wii and Nintendo DS games. As we mentioned last quarter, our 2009 licensing revenue reflects an immaterial reclassification of cost of sales that previously have been netted to licensing revenue. There is no impact on the 2009 net loss.

We continue to expect licensing revenue in fiscal 2010 to be in the range of $4.5 million to $5 million, which includes the impact of this reclassification.

Retail gross margin decreased 200 basis points to 30.9% from 32.9% in the second quarter last year. A 20 basis point increase in merchandise margin was more than offset by a 220 basis points (sic) of deleverage and occupancy costs.

Total SG&A in the second quarter was $36.4 million or 49.1% of total revenues compared to $37.5 million or 45.3% of total revenue in the 2009 second quarter. For the quarter, we recorded a tax benefit of $4.1 million, which compares a tax benefit of $4.5 million in the second quarter of 2009.

Net loss in the second quarter was $8.5 million or $0.45 per share compared to a net loss of $6 million or $0.32 per share in the second quarter last year. Net loss for the second-quarter fiscal 2010 included a non-cash charge of approximately $300,000 or $0.02 per share related to the impairment of certain long-term deposits. Net loss for the second quarter of fiscal 2009 included a charge of $100,000 or $0.01 per share for the closure of Friends 2B Made retail concept, as well as a non-cash charge of $325,000 or $0.02 per share related to our investment in Ridemakerz.

For the first six months of fiscal 2010, total revenues decreased 2.7% to $175.6 million from $180.5 million in the first six months last year. Consolidated net retail sales decreased 3.4%, excluding the impact of foreign currency. The decrease in sales was driven by a 3.3% decrease in North American comp store sales and a 3.60% decrease in European comp store sales. On a consolidated basis, our comp store sales decline was 3.3%.

Net loss from our European operations totaled $1.5 million compared to a net loss of $1.9 million last year. Retail gross margin increased 190 basis points to 36.8% from 34.9%, resulting primarily from a 120 basis point increase in merchandise margin and 60 basis points of leverage in buying and distribution costs.

Total SG&A increased 2% to $75.9 million from $74.4 million in the first six months of the year, mainly reflecting an increase in compensation costs. Net loss for the first six months of 2010 was $6.8 million or $0.36 per share, equal to the first six months of last year.

During the quarter, we repurchased approximately 244,000 shares of our common stock at a total cost of $1.9 million. At quarter end, we had approximately $27.7 million of availability under the current stock repurchase program which is -- was extended through March 31, 2011.

Regarding cash flow, we ended the quarter strong with consolidated cash of $31.2 million. As a reminder, we are an international company at quarter end. Over 60% of our cash on the balance sheet was held in the UK.

Because our cash fluctuates seasonally, we evaluate our use of cash on a continual basis. Our cash usage peaks ahead of holiday in key business periods as we build our inventories. We will continue to evaluate all opportunities to enhance shareholder value, including opportunistic 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 Company.

Depreciation and amortization for the quarter was $6.8 million compared to $7.1 million for the second quarter of 2009. For the full year, 2010 depreciation and amortization is expected to be approximately $28 million.

At the end of the quarter, consolidated inventories totaled $57.1 million compared to $47.8 million at the end of the second quarter in 2009. Inventory per square foot increased approximately 1.9% excluding non-comparable Zhu Zhu Pet (sic) inventory. Capital expenditures in the second quarter were $3.2 million, up $1.6 million compared to second-quarter 2009, primarily due to software and equipment upgrades to our e-commerce platform and the opening of one new store in the US. We continue to expect capital expenditures for the full year to be between $12 million and $15 million.

As we move forward, through fiscal 2010, our top priority continues to focus on reigniting profitability growth for our Company. The positive response to our store experience is best demonstrated through our customer satisfaction scores, which reached 82.5%, highly satisfied, for the second quarter.

As John outlined, we have a great lineup of product and marketing initiatives planned for the third quarter. And our performance thus far in July shows we are off to a great start.

This concludes my remarks and I will turn the call back to Maxine.

Thank you Tina. I will conclude the call with just a few comments. While we are not happy with our second-quarter results, we feel good about the strong start for the third quarter and are focused on delivering our biggest volume in fourth quarter to achieve our fiscal year objectives.

While we will be updating you on the full breadth of our holiday strategies on our next call, I do want to add that we are excited to announce that, after our success in 2009, Holly & Hal Moose -- Our Uplifting Christmas Adventure will air for its second holiday season on ABC Family. Our holiday television special is an extension of our initiative in entertainment, and is a meaningful way for us to broaden our broad exposure, while strengthening our relationships with existing gas.

We will also be featuring these characters in licensed products that are sold at other retailers, building synergy across several of our key strategies.

This year will certainly have additional challenges. But we are confident that our strategies will allow us to achieve our number one objective of increasing shareholder value by profitably growing our sales.

We will now open a line to your questions.

(Operator Instructions). Tom Filandro with Susquehanna Financial Group.

Thank you very much. I don't want to detract too much from the core [skin] business, but I do have a multipart question related to the Zhu Zhu Pets, John. What impact did Zhu Zhu Pets have on sales and margins in the quarter? And given the price promoting that you're currently experiencing in the classification, how should we think about the margins' impact during the second half? Is it fair to assume no more Zhu Zhu Pet buys will be made and when should the inventory differential related to Zhu Zhu Pets normalize?

Just a quick comment, anything on the Zany Band (sic). Thank you.

Okay, let me start and if anyone else wants to jump in, just let me know. So, first part is sales and margin on second quarter, little to none. It's a very -- we've said before it's a very, very modest percent of our business and, frankly, as our animals have continue to get stronger it has gotten even smaller.

It did test well. We brought it in in kind of late December. It tested very well. It tested well through January at which point we had to make buys. We bought product. And then, as you're well aware, the market just got [hit] up very quickly and pricing got very aggressive very quickly.

So from our perspective it has been a good complementary business that we will work to exit profitably. We do not see at this point an impact to our overall delivered gross margin, because as it's a modest part of our business and a proprietary product has good strong gross margin and we have got a couple more things up our sleeve, we think we can more than offset any discounting we are going to have to do to get rid of it.

We do not at this point see ourselves buying into that line again. They have had a couple of other launches. It just didn't make sense for us. Not necessarily against our core demo and too many SKUs, as an example. The Kung Zhu just would have required a lot of SKUs and not something that would've been accretive to our business.

And then I think the last part of the question was Zany Bandz. We took a real small position on Zany Bandz because it's very hot. We've got a proprietary Bear Head, Heart, Bear Paw set of Zany Bandz that will be in stores in about mid-August. We will run that for about -- kind of through September, October-ish, pick up a little bit of incremental business up at our Take Me Home.

All of our reads so far has shown that when Zany Bandz goes out in the transaction, it is an added [UPT] or we call it a bag. So we feel good about that and I think I missed the one part of your question which is where do we think we will be from an inventory standpoint.

We still have a lot of the year to go, but we are working toward exiting the Zhu Zhu product by year-end and getting our inventory back in line. So that's our plan right now.

Sean McGowan with Needham & Company.

Yes. Could you talk a little bit about Europe and whether you think there have been some significant enduring changes in the market place there? And related to that, what would be the potential profit implications of the changes that you addressed earlier in your comments in the European marketplace? Thanks.

In the UK, we believe that the consumer sentiment will remain weak for some time. You know, combined with their election results and not only their VAT increase January of this year, they are also looking forward to a VAT increase the of January of 2011.

But overall, on a long-term basis, we really believe we have continued growth in the UK. We are in good retail locations. We have a strong operations team and we are still newer in our lifecycle.

We see the opportunity to add more stores over the longer term and, really, regarding the quarterly loss, lower comps caused negative leverage on fixed occupancy and other costs. But also remember, they were affected by a switch in Easter also.

David Schick with Stifel Nicolaus.

Good morning. This is actually [Jamie Albertine] in for David. I had a quick question for you. One, clarification on the back-to-school bundle promotion. Just want to know if that had happened already or if that is coming up in the third quarter?

And then, kind of thinking more about the second quarter, now that you have transitioned into this new philosophy of promotions, one every three to four weeks instead of one every two to three, just -- how do you guys think about monitoring performance of that transition and from a ticket and sort of a traffic perspective.

It seems like your customer satisfaction scores continue to increase. So just any thinking on that would be helpful. Thank you.

The bundle promotion actually broke last weekend and will run through this weekend. Good thing is with this weekend, we think we really have timed it well. Our Ice Cream Bears came in and were very, very successful. As we started to sell out of that and we sold a lot of units. We felt good about that. As we started to sell out of that, we broke our $[20.99] nine promotion.

We came up a little bit earlier this year versus last year. Because while it was successful last year, we think -- frankly, we think we were a little bit late and this was a better time when we look at kind of when school -- when kids went back to school across the country.

So, we are halfway through it. We'll run through this weekend and then we will follow this with a strong follow-up gift with purchase with a messenger bag that we think every single kid in America is going to want to bring to school with them.

Promotion philosophy, I think what we really believe in, as we've said, is product leads the way, and if we have good product our business works. If that product can get communicated effectively through our marketing and have good strong alignment at the stores, we are successful.

So although, we have kind of increased our cadence and, frankly, gotten a little bit more promotional, our average ticket has gone up as Maxine stated earlier. Our traffic is up. So we feel like we are moving in the right direction.

We are not a promotional business. But we do have to be cognizant of what is going on in the world, and when we are in malls, and you walk up and down and you see the [lease lines] and everyone's got a lot of promotional signage, we are not going to go toe to toe on big discounting. But we do need to be able to offer the consumer a reason to make a purchase with us that day.

Gift with purchase we found have been very effective. In some cases, it's price promotion, but ultimately good product is what helps us deliver the results.

(Operator Instructions). Janet Kloppenburg with JJK research.

Good morning, everyone. I was wondering if you could talk a little bit about your marketing spend outlook going forward? Given what, that it seems like your promotional strategy is becoming more aggressive and in the United States and because it sounds like you will have to do some more marketing in Europe as well. And I got on the call a little bit late.

I know you are doing some new product introductions this month and then with Small Fries. I'm wondering if there is a stronger schedule of new product introductions that is programmed for the rest of the season versus last year? Thanks so much.

Okay, I'm going to jump in. And I apologize, I've got the first part. Someone is going to have to prompt me on the second part of the question. I apologize.

I can give it back. Go ahead.

Why don't you give it to me real quick? The second part of the question just so --?

I was wondering if you could talk to us a little bit about the new product introduction scheduled for the third and fourth quarter versus last year? I'm thinking that there will be a greater level of new product introduction, and I wanted to know how you want us to think about that. Thanks.

Okay, so from a marketing spend, we actually -- in 2009, we took a pretty sizable amount out of our marketing budget for 2008. And in 2010, we have modified the budget yet more. However, we think we have gotten even more strategic and precise with the budget.

So, we talk to kids through Kids TV and we talk to moms through the digital space as we have said before. We use our Stuff Fur Stuff for our database, which is our loyalty program, and we have gotten effective in terms of the response rate on our communication that way.

So we are actually going to spend a little bit less from a marketing standpoint. We are increasing our -- our net net is down. We have done some reallocation. We have gotten a little bit more aggressive with signing in our stores and our lease lines.

Our best message to the consumer is our real estate. We have great locations in 300 malls across the US and 50 across North America and 50 across the UK. So we really put a lot of energy there in terms of signing and alignment and training with our store teams.

So we feel very good about what we are spending our marketing dollars, and we continue to bring our A to S, advertising to sales, down.

With respect to schedule product, when you look at our products for the whole year, we actually -- in 2009, 2008, we launched lots of product and a lot of good product. We have really tried to group or bucket things a little bit versus just more.

So where we might have launched two or three animals in a month, this year we will try to pull those together into a collection which gives us a more unified theme, allows our stores to be more focused. So it's not necessarily a net more animals, maybe a little bit, it's much more trying to bring them together and trying to tell fewer but larger messages.

We do have all of the animals lined up for the remainder of the year, and we feel really good about our programs. As we go all the way through December, we are going to be bringing back a great equity that has worked for us in the past as well as some really other fun stuff. And we'll talk more about that at the next call.

But as we look at third quarter, we think as we alluded to, a lot of good product, Peace and Love as we said breaks this next -- the weekend that we are coming up on -- tomorrow. We follow that up with a great Sanrio and then we've got strong Halloween and a strong tie-in with Star Wars to end third quarter and fourth quarter we think is strong as well.

Just an addition to what John said because I think we used to always look at our launches as just animal. Meaning, whether it was one or two animals in a given month or -- but now we do clothing collections also that launch with them.

So for instance in the [Zoo] collection there was a line of clothing that went with them that actually also was able to be brought to life on Build-A-Bearville. But in the Ice Cream collection, we had -- for each animal there were four animals, we have four different outfits. And all the -- the selling correlation of those was very, very strong. So when somebody walked out with a $20 Ice Cream bear, they also walked out with an outfit and, possibly, shoes.

In the collection that we have for Peace and Love that's coming out, this -- tomorrow, is also there's clothing that goes along with it and that's all part of the launch. Which we really hadn't done before and then when we are focusing on Star Wars, there is a bear, only one bear in that collection, but there's also a series of outfits that are very adorable and have been -- and already some of them -- the first collection has sold really well for us.

So it gives us an opportunity to sometimes take another part of our -- a very important part of our business to the next level and associate it very strongly. If you look at any of our mailers and even our television commercials, you now start to see the animals for the most part dressed and accessorized with the theme that we are talking about. So that is a difference to our strategy in the past.

Tom Filandro with Susquehanna Financial Group.

Thanks. Two quick ones. One, can you just update us on the party business and if you guys are doing anything to further drive the performance therein? And I just want to ask a cost question. Are you seeing any increases for the buys for 2011? And if you are, any strategies in place to offset or put pressure on [AUC]? Thank you.

Why don't I hit costs first, if I can? As you are aware, and I think as everyone knows, there is a lot of pressure in Asia right now on labor. Mills are getting -- factories and mills are getting tighter. They are looking for larger MOQs. It is costing more to get stuff from their port over to this site.

So we have pricing pressure, frankly, across the line. That said, we've had a lot of pricing pressure in 2010. And as Tina told you, we have actually, despite that, been able to move our merchandise margins up.

We have started planning 2011 already. We don't plan quite as far out as a Wal-Mart or a Target, so we are really kind of into just the first quarter at this point.

But we have sat down with all of our partners. Our team is actually on the way over to Asia Monday to work on this, and we realize that there will be pressure. And so our ways to combat that are to work tightly with our partners and work on lead times and try to produce at opportune times -- it is to look at any kind of pricing opportunities when it makes sense for us. We have, in some cases, made pricing moves within our line and, in some cases, it has worked really, really well for us.

So we will continue to be smart about that, but we will not -- we won't go away from what our core business is, which is we are going to offer a $10 bear. We have since we started and we still will. And then, we will also just continue to take a look at the line and the number of SKUs and say, all right, are there ways to drive these bigger stories, both animals and merch -- excuse me, the accompanying merchandise, as Maxine mentioned? And how do we use that to, as we buy bigger, how do we buy smarter?

We are looking at other sources. Most of our stuff comes from China right now. We are looking at Vietnam and Cambodia and places like that. Frankly, doesn't really pay at this point. The infrastructure isn't there. It is a longer lead time. A lot of our raw materials still come out of China.

So we are looking at that, but we are not --. But right now, it doesn't make sense for us to leave China.

With respect to party sales, they are running roughly the same percent of our business that they did last year for -- actually just up slightly, up 0.02%.

We think this is a good business. We think there is opportunity to continue to grow it. We have -- we do have a test in place where we are trying to figure out some way to use some of our bundling strategy that has worked for us. We're not quite there yet, but we are relocating at what should be offered to the party kind of guest of honor. How do we drive that business?

So we think it's an opportunity. We don't have solved yet, but we are going to continue to stay on it.

And the second part of your question is our party businesses for the quarter is up slightly over last year as we continue it as a focus as part of our store operations and our marketing.

Justin Orlando with Dolphin Management.

Just one question. Given the kind of cost pressures you are seeing on the gross margin line and the revenue performance thus far this year, I'm wondering if our total cost structure is right sized for the opportunity you guys are seeing. Can you give us a little more detail into the SG&A line? Maybe some -- a couple of the categories and the percentages that those categories are of the total?

Well, we said basically that our SG&A was up for compensation costs over the prior year and prior quarter that we did not have in the past from a perspective of -- from a perspective of our overall strategy on retention of our teams. Our other portions of our SG&A were up and down slightly, but nothing that was major.

That concludes today's question-and-answer session. I would now like to turn it back over to management for concluding remarks.

Thank you all for your questions and we will look forward to talking to you during the quarter and at our next call, next October.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.