Build-A-Bear Workshop Inc (BBW) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Third Quarter 2010 Build-A-Bear Workshop Inc. Results Conference Call. My name is Marcella and I will be your operator for today. At this time, all participants are in a 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 Ms. Allison Malkin of ICR. Please proceed.

Good morning and thank you for joining us. With me 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 to everyone's questions during this one-hour call. Feel free to re-queue 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 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, Allison, and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal 2010 results.

For our call this morning, I will begin with comments on our third quarter and update you on our progress towards achieving the 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'll open the call to take your questions.

We are pleased with our third quarter progress, which demonstrates solid steps towards achieving our primary goal of increasing shareholder value by profitably growing our sales. We delivered positive comparable store sales, up 5.3% in North America, and up 3.1% on a consolidated basis ,as well as strong double-digit growth in e-commerce sales. Retail gross profit margin increased 210 basis points and we drove a significant improvement in our loss per share versus the third last year with disciplined expense management.

As we plan this year's business, we are mindful of consumer's preference to stock up on school essentials versus discretionary products during the key back-to-school season, primarily in August, and shifted the timing of promotions appropriately to maximize sales. Overall, our performance reflects stronger new product introductions, supported with powerful store visuals, marketing and promotions. By providing either new products or promotions approximately every two weeks, we had relevant news to communicate to our guests throughout the quarter.

As we told you on the last call, July got us off to a strong start with a double-digit sales increase in North America driven by a highly successful Ice Cream Bear collection and the movement of our $29.99 bundle promotion into a tighter two-week window from last year's entire month of August.

In August, even with the shift of our $29.99 promotion to July and consumer focus on back-to-school staples we recorded an essentially flat comp, we featured new product launches with our Love, Hugs, Peace Bears and Sanrio collection and we reinstituted a relevant GWP messenger bag to capitalize on the increase in mall traffic that comes with back-to-school shoppers.

In September, we achieved low single digit positive comp sales while launching our new smallfrys line of smaller pre-stuffed animals and outfits.

In addition to the North American comp store sales increase, our accomplishments in the quarter included consolidated e-commerce sales up 18.1% excluding the impact of foreign exchange, with double-digit increases in both North America and the United Kingdom.

We continued to grow engagement with our virtual world registering over 7 million hours of brand engagement in the quarter. We launched an exciting new program, Build-A-Bear Craftshop Kits in all Michaels Stores, as well as a new program with Borders at the end of September, setting the stage for long-term growth and licensing revenue.

And we ended the quarter with a strong balance sheet with $24.7 million in cash, while we have invested $7.3 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 third quarter, consolidated net retail sales increased 2.2%, which included a comp store sales increase of 5.3% in North America, driven by an increase in both average transaction value and number of transactions. We continue to face a challenging environment in Europe as our comp store sales declined by 6.6%.

For the fourth quarter, we will increase our promotional efforts in the UK with stronger in-store promotions and by adding branded television advertising, beginning in November, to attract guests and to reconnect with existing customers. We believe that this is an appropriate step as our research has shown that people in the UK who know Build-A-Bear Workshop love us. However, our brand is still building awareness and we have significant opportunity to increase our market penetration and drive sales growth.

Our inventory position is up 13% in total over last year, showing significant progress from our second quarter end. In addition to inventory needs for pop-up stores, the increase is driven primarily by core product positioning for the fourth quarter as well as higher in-transit time due to longer lead times from Asia. We are comfortable with the level and content of our inventory and expect year-end levels to be aligned with our total sales trends, excluding the impact of higher in-transit levels associated with longer lead times.

As we look forward, we believe we are well positioned for the upcoming holiday season and, as John will elaborate, our holiday strategy incorporates a number of exciting new product introductions that are supported with enticing promotional offers and events.

Finally, we are on track with our plans to open 11 pop-up stores in the fourth quarter. In addition to the revenue opportunity, the pop-up stores provide us with a strategic advantage of understanding the performance of these stores as well as the overall markets, some in advance of upcoming longer term lease decisions we will be making with significantly reduced capital investment and without the commitment of multi-year leases.

We expect all of the stores to be open for Christmas and our strategy is to remain open at least through April of 2011 to take advantage of the strong fresh business that comes with our Valentine's Day and Easter business. The first store recently opened in Nashville, Tennessee allowing us to partially offset a hole in the market from the closure of the Opry Mills Mall due to the -- last spring's flooding. We will evaluate the long-term positioning of each store after the Christmas season as well as the potential to expand temporary pop-up stores on a wider scale in the future.

In summary, we are pleased with the direction of our business during the third quarter. Our positive sales and margin performance are evidence of the progress we are making in achieving our number one objective of increasing value for all Build-A-Bear Workshop stakeholders' through profitable sales growth.

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

Thank you, Maxine. As indicated, we are pleased with the positive direction of our business and believe we are well positioned to continue to deliver improved year-over-year operating performance in the fourth quarter. I will discuss the plans we have in place to continue to move forward on our key objectives.

First, product innovation continues to focus on introducing larger merchandise stories and limited edition products. Key merchandise that is carrying October as the bridge month into the fourth quarter includes our push to Halloween featuring Candy Corn Teddy as well as an expanded lineup of Star Wars merchandise as the center piece of our Halloween costume collection.

In November, we will launch our Rudolph the Red-Nosed Reindeer story, one of our most beloved and requested collectibles. We have updated Rudolph and Clarice with an engaging interactive dialog feature and added Bumble, the lovable Abominable Snowman from the story. We will offer a fun gift with purchase to kick off the introduction as well as strong integrated marketing across multimedia.

In December, we will introduce the Speaker Stars Bear collection. These animals allow guests to attach an MP3 player and listen to their favorite music through a speaker in the bear's paw. Music coming from the bear is one of the most requested features from kids. We now have the technology to deliver high quality sound through the animal's plush paw. Each Speaker Stars Bear comes with free Build-A-Bear Workshop songs to download.

Finally, to capitalize on gift card redemptions, we will launch the Darling Doggies collection right after Christmas. All told, we are very excited about the merchandise lineup we have in place for this holiday shopping period.

Second, we continue to successfully execute on the coordination of our products, marketing and store operations with exciting promotional offers, store visuals and events. Our marketing continues to support each product launch as the single focus of our stores.

In the third quarter, we offered a serious of gift-with-purchase promotions for qualifying transactions. Our customers, particularly in North America, have responded very well to our events and promotional offers which helped to drive our positive count for the quarter.

For the fourth quarter, we will build on the success of our GWPs including offering Rudolph themed minis, Christmas stockings and passports that allow travel to the North Pole in our virtual world.

We have also planned an exciting Black Friday promotion to capitalize on the kickoff to the holiday shopping season and we have added a special collectible purchase-with-purchase bear to help build average transaction value through the month of December. We will continue to use fully integrated marketing to support our products, including television advertising to kids and moms in the US and, as Maxine mentioned, for the first time ever, we are adding KidTV advertising in Great Britain. Our other vehicles include direct and e-mail to existing guests as well as reaching moms through campaigns in the digital space and engaging kids through our virtual world.

Third, we continue to look for ways to get consumers more reasons to come to Build-A-Bear Workshop and get incremental purchases from existing store traffic by expanding our assortment of brand right toy products both through external sources as well as internal development.

In September, our proprietary brand, smallfrys, launched with the strong reaction from our guests. smallfrys are our line of smaller animals that are already stuffed and packaged in a box resembling a french fry box with captions playing up the brand name such as Feed Your Friendship. As we expected, smallfrys were both added on to core transactions as well as being impulse purchases. smallfrys will continue to be featured as a limited edition product for us with a new collection arriving about once a quarter.

Fourth, we made solid progress on growing our e-commerce sales and increasing engagement in our virtual world. We are pleased to report an increase of 18.1% in our total online sales for the third quarter, excluding the impact of foreign exchange. This strong performance was driven by new product launches and special web-only promotions that gave site visitors extensive urgency to make the purchase or increase their transaction value. We will maximize these business drivers throughout the fourth quarter including an exciting Cyber Monday event.

Build-A-Bearville remains critical in our brand relationship with kids as demonstrated through key metrics such as brand retention and times spent on the site. In fact, the traffic and length of visit on Bearville combined to equate to 7 million hours of brand engagement for the third quarter alone. We continue to break unprecedented ground in this space. For example, in late September, we teamed up with US Bank to increase financial literacy among children by introducing the US Bank of Build-A-Bearville. Citizen's love learning about saving and budgeting through interactive games and online activities. In just over a month, citizens have invested over 1 billion BearBills in 1.2 million certificates of deposits. We expect to gain added momentum as US Bank co-markets the site in their materials and branches.

We are uniquely positioned as the only company that has the ability to reach kids in both virtual and real world spaces, giving us the competitive edge to monetize and grow revenues from this asset. In fact, in the next few weeks we expect to tell you about several revenue building opportunities from a number of brand appropriate companies that will highlight products on the site that complement Bearville's programming and content features.

Fifth, we've also made solid progress developing new opportunities outside of our current store base. Our commercial revenue in the third quarter, which includes licensing, entertainment and wholesale revenues, increased 10% in the quarter excluding a single $5.8 million wholesale transaction which had no gross profit.

In September, we launched an exclusive Craftshop line that is carried in all Michaels Stores as well as a new program in Borders stores. Importantly, these programs include a Bearville tie-in as well as a bounceback to our store or to our e-commerce site. We expect to reach new guests and increase traffic to our stores as kids play and engage with our brands in a fun creative way.

In summary, we feel good about our core products and the cadence of the introductions and promotional support. We believe we are well positioned to maximize the holiday season with our exciting lineup of new products and supporting marketing programs.

Just a reminder, be sure to look for the Build-A-Bear Workshop float in the 2010 Macy's Thanksgiving Day Parade as well as catch the return of the one hour feature movie Holly and Hal Moose -- Our Uplifting Christmas Adventure airing again on ABC Family.

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

Thanks John, and good morning, everyone. Overall, we are pleased with the progress we made in the third quarter, which included improved comparable store sales, improved retail margin and decreased SG&A expenses, both in dollars and as a percent of sales.

For the third quarter, total revenues increased $100.1 million from $92.3 million last year, an increase of 2.1%, excluding the single wholesale transaction. Consolidated net retail sales increased 3.8%, excluding the impact of foreign currency. The increase in sales was driven by a 5.3% increase in North American comp store sales, partially offset by a 6.6% decrease in European comp store sales.

Consolidated comparable store sales rose 3.1% and included a 1.8% increase in transaction and a 1.3% increase in average transaction value. Total retail sales from our European operations decreased 3.7%, excluding the impact of foreign currency, which compares to a 7.1% increase last year.

Commercial revenue, which we have previously referred to as licensing revenue, increased 10% in the third quarter excluding the single wholesale transaction, reflecting the new partnerships with Michaels and Borders. 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 was no impact on the company's 2009 net loss.

International franchise revenue was $767,000 in the quarter and $2.1 million year-to-date, essentially flat to last year. We ended the quarter with 58 international franchise stores, versus 61 at the end of last year's third quarter.

Retail gross margin increased 210 basis points to 38.6% from 36.5% in the third quarter last year. The increase in retail gross margin was driven by 190 basis points of leverage in occupancy cost and 20 basis point improvement in merchandise margin and distribution cost.

SG&A as a percent of sales in the third quarter was 41.5%, excluding the single wholesale transaction mentioned earlier compared to 42.5% of the total revenue in the 2009 third quarter. The 100 basis point improvement resulted primarily from leverage on store salaries and other fixed overhead costs as well as a shift in timing of certain marketing programs. This was partially offset by the same closure costs.

Net loss in the third quarter was $1.4 million or $0.07 per share, compared to a net loss of $4.8 million or $0.25 per share in the third quarter last year. The net loss in the third quarter of fiscal 2010 included charges of $500,000 or $0.03 per share related to the decision to close a small number of stores within the fiscal year.

Net loss for the third quarter of fiscal 2009 included a non-cash charge of $2.8 million, or $0.15 per share, related to our investment in Ridemakerz and a charge of $150,000, or $0.01 per share, for the closure of the Friends 2B Made retail concept.

We continue to maintain a strong balance sheet. At quarter end, consolidated cash was $24.7 million, compared to $27 million last year, with over 60% of our cash in the balance sheet held outside of the US. During the quarter, we repurchased approximately 680,000 shares of our common stock at a total cost of $4 million. At quarter end, we had approximately $23.7 million of availability under the current stock repurchase program, which expires on March 31, 2011.

Capital expenditures in the third quarter were $3.8 million, up $900,000 from the third quarter of 2009, primarily due to software and equipment upgrades to our e-commerce platform as well as opening of new stores. We expect capital expenditures for the full year to be approximately $15 million.

Depreciation and amortization for the quarter was $6.7 million, down from $7 million in the third quarter of 2009. For the full 2010 year, we expect depreciation and amortization to be approximately $27 million.

Now I will turn the call back over to Maxine.

Thank you Tina. I will conclude the call with just a few final comments. As I mentioned, we are pleased with the solid progress we achieved in the third quarter. While the consumer environment remains uncertain, we believe we are well positioned for the upcoming holiday season, our largest volume quarter in terms of our product, our marketing and our operational plans.

We will now open the line for your questions.

(Operator Instructions). And your first question comes from the line of Sean McGowan with Needham. Please proceed.

Good morning, thank you. I was wondering if you could talk a little bit more about this one-time wholesale sale, what is that and what should we be looking for in the future regarding that kind of transaction?

Hi Sean, it's John. It was about $5.8 million and last quarter we talked about needing to move some inventory out, so this was a one-time transaction for which we got cash and some advertising credit that we will use in the next several years. Probably not a lot of this going forward, it might be a little bit as we have just a little bit of inventory left, but not something that we would expect to see on an ongoing basis.

So it's essentially a closeout?

It was essentially a way to move some inventory out of our system that we didn't think we could move through our stores.

So that's not related to Borders or anything like that?

No, not Borders, not Michaels, those are good healthy, good margin licensing businesses.

Okay. Well, thank you for straightening that out. And any comment on October comp so far?

Well, October is the -- it's Maxine, Sean, is the smallest month of the quarter and also it's the smallest month of the year. So we hesitate to use it as a proxy for good of the quarter or bad of the quarter. Last year -- it just continues to be the smallest month. So, November December are where is that and we are very excited about the momentum moving into those quarters, that's the positive part.

(Operator Instructions). And your next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed.

Good morning, everyone.

Hi Janet.

Hi. I was just wondering if you could talk a little bit about your strategies for promotions in the holiday quarter. It seems that you took a tactical approach in the third quarter, where you shifted to higher traffic periods and I am wondering if we should think that you will be spending more in the Christmas period, maybe from Black Friday on, Maxine as opposed to spending here in October and maybe pre-Thanksgiving? And also if you could talk a little bit about the flow of product issue in the fourth quarter versus last year and just maybe to help me understand the flow of products, more newness and if the promotional events will be a lot different than last year, as they were in the third quarter?

Well, they will be different, but they also follow a traditional cycle because there are the Veterans' Day and the Thanksgiving holidays in there. But traditionally we start, and I will let John elaborate on this in more detail. Traditionally we start our holiday season the day after Halloween, which is next Monday, with the kick off of our holiday mailer which will be in the homes of families sometime mid- to late- next week and that has all of our products in there. But we are starting differently this year with gift-with-purchase that starts, there is one that starts for the first two weeks of the month and one that takes us up to Thanksgiving and then right after Cyber Monday we have a very special promotion which is our special bear that we actually used to do this in the UK and we've brought that concept to the United States where if you spend $30 you get this bear for $5, which is bought very opportunistically from a profit perspective and it's been a very effective means of traffic driving in the UK. So that's what we're going to do here.

And then we have new products that are -- we always have launched new products down the line towards the holiday, the Christmas holiday date because we know that when we open our doors on December 26, kids have -- each of them have lots and lots of gift cards in their hands and we always have new products to give them that they may not have even seen before Christmas. So that's pretty traditional. It's just really the bigger differences in the promotional, the gift-with-purchases that we are doing to help make mom say "yes," the reason that's going to get her to come to Build-A-Bear over some other store, some things that she'll be "why not do this, we're going to go there anyway" kind of ideas and staying on top of her, making sure that we are giving the kids what they want, the shin kicking, but also her -- the value that she needs because there is no doubt that value is more and more important to mom even as it relates to Build-A-Bear products.

John, why don't you add some color to that?

Sure, if I can let me just start with product. Rudolph and Clarice and Bumble will break on 11/1. They compare really to -- our new story last year was Frosty and we have bought those three characters, Rudolph, Clarice and Bumble significantly bigger. We really, really believe in them. There is an interactive element between Rudolph and Clarice where they recite the four key lines from the TV show, and Bumble who is the lovable, Abominable Snowman, who if you remember is having kind of a tough show until they figure out he's just got a bad tooth, and then he is happy.

Normally we would have brought him as a mini. He was so cute we're buying him as a full size animal, so we are able to get a $20 plus dress up purchase instead of $7 in the old days. So if you look at the core product, we bought it bigger and stronger. Holly and Hal will be on TV, so they will make an appearance back in our store and we feel good about that. When we look at our product that then debuts in kind of mid-December, last year it was Alvin and he tied into the movie. It was very successful for us.

We have had for years' kids saying, "I want to play music for my bear" and we were never comfortable designing a product that had our quality and plush and comfort and squeezability and hugability. We have it this year. So we have something called a Speaker Stars Bear, they are two of them, and the sound is really good and you can plug, what have you got the fancy Apple iPod or you have the less expensive generic MP3 player. The sound is very good, so that will come in in mid December and then we always have a strong product that breaks on 12/26. Last year was Hello Kitty's 35th anniversary, this year it's three Darling Doggies that come in this great array of color. So from a product standpoint, we feel like we are significantly stronger and we put these in front of kids and they're pretty excited.

Just to reiterate Maxine's point on the promotions, it is right now. We can all walk through malls and it's tough out there. Consumers are looking for value. We deliver value on our product, but mom still wants to be able to say, I got great value, I got great product and I got a little bit of a deal. So, on 11/1 we start with a strong gift-with-purchase that will run for about 10, 11ish days and we come back with a different GWP. We have a planned strong Black Friday weekend product and then Maxine mentioned the purchase, we have purchased bear that's really cute that breaks on the Tuesday after Cyber Monday, not yet named but I am sure somebody will come up with a name. And that will carry us through the holidays.

So when we look at what's going on, we are strong. And then when you look at how we are going to communicate to the consumers, we've got more mailers than we had last year. We've got more spend in the digital space for mom. We have moms and kids TV, we feel good about that, and then we mentioned earlier we are going to go into the UK with TV, which we've never done before. We are optimistic about what that can do. We don't know yet, it doesn't break until next week, but we feel like we've got good spending, roughly the same as last year, but we think targeted a little bit better than last year. So when we look at the product, and we look at the promotion, and we look at the communication, we think we have a pretty good lineup.

And then finally, last year we debuted, if you remember, Santa's Workshop, right. Santa called Maxine and said, I need a little bit of help. We transformed Build-A-Bear Workshop into Santa's Workshop. Santa's Workshop is back, the signs will be outside the front of the store and we've got really neat in-store point of purchase materials. The biggest challenge when it gets, I know I am rambling a little bit, but just to close this up, the biggest challenge when we have something like Rudolph and Clarice that can talk to each other and light up is when it's so busy, sometimes our associates, our bear builders don't have a chance to show the consumer. We actually have a pretty innovative technology now that kids will be able to push the button and see the whole interaction on a little TV screen. So we think that will give us a chance to make sure we get credit for that feature even if our bear builders engage with a different guest. So, we feel pretty good about November and December.

Now, two things I want to add because I think they are important. Everybody always focuses on the bears and those are all obviously our key driver. But, we have a couple of other really good things that have shown up in our inventory in the last quarter. One of them was our furniture. We introduced a line of bedding for bears which has been really successful and it has its own sheets and comforter that is also part of our licensing program, meaning you can buy it in the adult size as well, and it blew out of our stores along with the bed in early back-to-school period and we were able to get back in stock with that and we are going to have that for Christmas and I think it's going to be a very, very strong seller for Christmas and there is a version for boys with a sports motif and there is of course a pink version for girls and it's always been strong.

The PJs are always have been a very popular part of our business, but it's all coordinated. So it really is a potentially very high ticket and also very cute and adds to the lifestyle of your bear. And the other thing is that we for a long, long time have had a relationship with Skechers. We've always been a licensee of Skecher since like 2000 and very successful and they have a hot brand right now called Twinkle Toes and we have Twinkle Toes for bears and we expect that that is going to be also a very, very strong addition for the fourth quarter and the whole line, the concept of shoes that are sparkly and light-up for kids that was translated for Build-A-Bear and kids recognize it immediately as soon as it hit the floor. It was a good seller for us and we sell hundreds and hundreds of thousands of pairs of shoes. We sell millions of shoes for bears in a year. You know that bears only need shoes when it rains or snows, otherwise they can be barefoot. But we sell these shoes and these are going to be phenomenal and I think we can maximize other things besides just the Bear and Frosty the Snowman and the good Frosty or Rudolph as we've done in the past. Rudolph fortunately though and Clarice have four paws and they often wear two pairs of shoes. each. So, there are really good opportunity for adding fashion and adding higher ticket.

And then last year you might remember we launched a gift-to-go idea at the front of our stores and we got a lot of feedback from our customers positively and we also got a lot of store suggestions and how to do it better and I think we have a really good mix of that this year where there is a couple of bears at really good prices dressed like a baby's first bear and a Merry Christmas bear that you can buy and walk out the store with -- especially towards the end of the Christmas season and also add to our display presentation. So we are also excited about that learning from last year that we are able to expand for this year.

You have a follow up question from the line of Sean McGowan with Needham. Please proceed.

Yes, thank you. Is there any impact in your SG&A on that litigation with Cepia?

No, there shouldn't be.

No, or is that the result?

You mean the result?

No, has it been resolved?

It hasn't been resolved. Sean, we obviously we can't talk about it for kind of obvious reasons. We don't -- we are optimistic it will be resolved amicably and don't see it to be a real big thing.

Okay. And I think earlier, I don't know for sure it was Maxine or John, you said something was up double-digits in North America and Europe. Would you mind repeating that?

That's our e-commerce sales.

E-commerce, okay.

Our web sales. We've really put a lot of effort behind that this year and it's absolutely paying off.

Okay. And Tina, any comment on the outlook for gross margin in the fourth quarter?

Sean, as you know, we don't give guidance on margin or anything. But I will say that we have worked really hard to help maintain the cost from our products from China and distribution cost, as well as when we get positive comp store sales, we are able to leverage the fixed charges in the retail gross margin. So we hope to be able to continue that trend.

Okay. And any comment on how the stores are performing, some metrics you used to give out, how the stores are performing by age class?

Yes. Actually it continues. The older stores still are doing better than the new stores. So, some of those stores -- were basically flattish for the year, getting close to flat for the year. They are slightly ahead. Those stores are more so than the others. It absolutely is following the same pattern it's always followed.

(Operator Instructions). And your next question comes from the line of Brad Leonard with BML Capital Management. Please proceed.

Hi. Can you guys -- I have two questions for you. One the store closings, I see you closed two, and then also bonus accruals for the year in the third quarter.

So Brad, what do you want to know about the store closings? We actually closed two.

You closed two, so you took a charge, is there going to be more that are closed or, I have not heard of the store closings before. So is it just the two or we are going to have more closings in Q4?

We closed two in Q3 and in the release we said that we anticipated closing a small number of stores by fiscal year end and that was part of the -- that was the $500,000 charge we called out separately.

Okay. But you are not going to detail how many you are going to close, it's undecided?

Yes, it's undecided and there is a difference between what you might close and what you might impair because you might impair stores that don't look like they are going to be going forward that aren't -- that's the difference. So we may impair more stores than we close. But we will possibly close a few stores based on our lease arrangements with the landlords going towards the end of the year. But we are in final negotiations on some of those and you wouldn't want to call our hand on them in particular yet.

Okay. And then, what about the bonus accruals for Q3? I know you guys accrued for them in one and two, what about three?

We are continuing to accrue [form] in quarter three.

Okay.

Based up on it...

And then lastly, while I have here, what about advertising spend Q3 and year-to-date versus last year?

Where we are overall?

Yes.

Hi Brad, John. Overall we have taken advertising spend down. By the end of fiscal 2010 we will spend less in advertising than we did in fiscal 2009.

Yes.

But there have been some shifts. So we have actually put a little bit more into store signage and point of purchase because we feel that that is working pretty hard for us. We've put a little bit more into the gift-with-purchases. We are as we mentioned going on TV modestly in the UK. So, we've done some shifting around but net-net when the year is said and done we will spend less year-over-year in advertising and if you look at an A to S ratio we are continuing to make improvement on that. A to S meaning advertising to sales.

Sure. And then what about Q4, what do you expect? Is Q4 going to be up or down versus last year?

I think we are relatively flat. Gone down slightly but relatively flat. It's about -- what we tried to do is -- if you think of the year, Maxine mentioned, someone had, I think, Sean had asked about October. October is a small month for us. May is a small month. So what we really try to do when we think of our marketing dollars and advertising dollars is put them in the key months for us, right, that's June, July, August, it's November, December, it's Valentine's Day, it's Easter. So in a month like October we won't spend. We will hold our powder, so to speak, and spend in November, December. So if we look at Q4, Q4 we're relatively flat over last year, making a little bit of improvement, but relatively flat.

And you have a follow-up question from the line of Sean McGowan with Needham. Please proceed.

Getting tired of me yet?

No.

Couple of questions. Franchise is down. Is there a bigger story there or is that one guy closed a couple of stories?

Yes, I think it's just -- a lot of it is timing of store openings compared to last year. And so I think what we looked at is on a year-to-year basis is relatively flat to last year even with decline in stores.

Are you expecting any further franchise declines, stores to be closed?

Yes, at this point, Sean we don't really talk about future. But again, what I would say is I go back to we're basically flat on a year-over-year basis even with the decline in stores.

Okay.

In the foreign markets too, the franchisees can take shorter term stores, open and close them, move them around. It's much more fluid than it may be traditionally in the United States. So it just depends on the market. But it's possible that some will open, some will close, will re-shift as we decide we need a smaller store or a bigger store whatever it happens to be. It's a much more volatile leasing arrangement status than in the United States for sure.

And we anticipate that our franchisees will open a number of stores in the fourth quarter.

Okay. And then one other clarifications just let me make sure I got this. So the entire -- the one-time wholesale sale, that entire amount is in commercial revenue?

Yes.

Okay, thank you. I will talk to you offline later.

Thanks, Sean.

Well, thank you for joining us today. We look forward to speaking with you when we report our fourth quarter and fiscal year end results in February. Have a great holiday season.

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