Build-A-Bear Workshop Inc (BBW) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Build-A-Bear Workshop Inc earnings conference call. My name is Crystal Lynn 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, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Miss Anne Rakunas with ICR . Please

Thank you. Good morning, everyone, 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 question 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.

And now I would like to turn the call over to Maxine Clark. Maxine?

Thank you, Ann, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal 2010 results. For our call this morning, I'll begin with comments on our full year accomplishments and fourth quarter performance, and introduce the priorities we are focused on at the start of fiscal 2011. 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 all prepared remarks, we will open the call to take your questions.

We are pleased to report positive net income for the fourth quarter and the year demonstrating the progress we made toward achieving our number one objective, to increase shareholder value by profitably growing our sales. While the 3.7% comp store sales decline in the fourth quarter is disappointing, for the year we stabilized our sales trends, increased our average transaction, and improved our margins as compared to 2009. We elevated our traditional product launches, and introduced a new proprietary product line, Small Fries. We also improved the alignment of our marketing and operations to drive sales even as we reduced total marketing expense versus 2009. We opened 11 pop-up stores and also tested new products outside of our core Build-A-bear workshop offering to broaden our sales and customer reach. We recognize that we have more work to do in order to achieve our sales growth goals, and have set strategies in place to achieve these.

Let me review the highlights of our fiscal 2010 accomplishments. In North America, we improved our comp trend by 15 points over 2009. In 2010, comps in North America were down slightly at 1.2%, as compared to negative16.7% in 2009. On a consolidated basis, our comp store sales declined 2%, compared to a 13.4% decline in 2009. Consolidated e-commerce sales rose 11% for the year. Retail gross margin rose 340 basis points for the year, which included the positive adjustment to deferred revenue related to the loyalty program. Our average transaction value increased by 1.8%. We reduced operating expenses by $6.2 million, excluding the impact of Ride Makers in 2009. We generated solid profitability in the fourth quarter, and delivered a modest profit of $0.01 per diluted share for the year, a significant improvement from a loss of $0.66 per share last year. Once again, we maintained a strong balance sheet with no debt and no borrowings on our credit facility, with $59 million in cash at year end. These results are a function of our focus on increasing the frequency and appeal of each new product launched supported by compelling promotions. We see further improvement opportunities for 2011 to excite kids with must-have products, and entice moms with great promotions, while improving our efficiencies and expense structure.

In the quarter, we began working with an outside consulting firm to review our supply chain logistics and other expense areas and expect to generate savings in the latter half of fiscal 2011. And we are also working together to identify opportunities for growth. We are committed to focusing on the business units that have the most growth potential. Therefore, by year end, we completed the closure of our three stores in France. The continued operation of stores in France would have required considerable investment and management's time, and we believe that this decision will allows us to improve the productivity of our core businesses and invest in opportunities that deliver a higher and more immediate return. We remain committed to our company owned European operations in the UK and Ireland, where we have critical mass as well as a significant growth plan from our other international geographies where we operate through franchise arrangements.

Now on to a review of the fourth quarter. Our fourth quarter total revenues were $125.8 million, up slightly from $123.1 million in the fourth quarter last year. The modest declines in comparable store sales were more than offset by increased revenues from new stores opened in the fourth quarter, inclusions of pop-up stores, increased e-commerce sales, and a positive adjustment to deferred revenue related to our loyalty program. In North America, comparable store sales declined 2.9%. We saw strong performance from our Rudolph collection, we increased average transaction value by 1.4%, and improved retail gross profit margin for the quarter. While our holiday themed merchandise was strong, our Speaker Stars Bears launch, which was planned to offset the Alvin and the Chipmunks product from last year, did not meet our expectations. Although kids reacted positively to the product concept in tests, in actuality it did not deliver sales. We know that technology is important to our guests, but we believe our best use of technology is to grow brand engagement through Bearville and other platforms, such as our iPhone app, which we launched last year. In 2010, our focus was on our launches and making them more dominant. That continues in 2011, but we'll also place added emphasis on our core products; they're also a very sizable part of our business. We will redouble our efforts to improve the fashion level and newness of our apparel and accessory categories in order to continue to grow our average transaction value.

Our pop-up store test generated results in line with our expectations, and we are continuing to evaluate the stores as we begin 2011. While we certainly intended to take advantage of excess real estate availability with this initiative, we also selected locations strategically in advance of other long term lease decision that we'll be making, so our analysis is focused on long term market layouts, as well as short term opportunistic growth. In 2011, our current plans are to open three stores to five stores net of closing, plus three to five relocations. Our e-commerce sales were up solidly in the quarter, and our on-line revenue continues to have significant growth potential. We are working diligently to capitalize on this opportunity in 2011. We also advanced our goals to sell Build-A-Bear Workshop products outside of our stores, with the successful introduction of our Build-A-Bear Craft Shop line in all Michael's stores.

Internationally, our sales in the UK and Ireland were impacted by severe weather that caused stores to close for a number of days ahead of Christmas. Comparable store sales in Europe declined by 7% for the quarter, but have rebounded nicely as weather has normalized. As we have previously told you, we added television advertising in the UK in the fourth quarter for the first time, and are seeing the early benefits of these brand-building efforts. As the world economy has stabilized, our international franchisees are benefiting and actively working on their growth and development plans. In 2010, our Mexican franchisee opened three stores with strong sales results and we also selected a franchisee to develop stores in Brazil. In order to maximize our international development plans, we are continuing our focus on our existing countries. These countries have the greatest future growth potential and we intend to ensure that they expand successfully and deliver the Build-A-Bear Workshop brand experience to its fullest.

Also at year-end, we renewed our two-year credit facility with US Bank. This extension lengthens the maturity of the facility through December 31, 2012, increases our financial flexibility, and includes the same or less restrictive covenants. Available credit has also been maintained and includes $40 million for the first half of each calendar year with a seasonal over line of $50 million from July to December of each year.

As we begin 2011, we'll build upon the ground work we've laid to further improve our sales and profitability. Our priorities are focuses on growing sales and improving profitability through continued product innovation in all areas of our merchandise selection. Increasing the number of transactions, as well as average transaction value, continuing the growth of our e-commerce sales, expanding our licensing business, expanding internationally by focusing on the business development of our existing franchisees, generating cost savings across our supply chain, and evaluating ways to invest our strong cash flow for the long-term benefit of our Company.

Given that we report on a calendar year basis, Easter will move into our second fiscal quarter this year compared to the first quarter last year. This will impact our quarterly comparisons in 2011 versus 2010. Also, the first quarter will incur approximately $1.5 million in costs related to our consulting work to reduce our supply chain costs and overall expense structure. We expect product and distribution cost savings to offset the consulting fees incurred in the first quarter by year-end.

In summary, we generated significant improvement in our results throughout 2010 to end the year delivering a profitable quarter and modestly profitable year. We remain intently focused on driving consistent increases in comparable store sales, total sales and profitability, and believe that 2011 will be another year of progress towards this goal.

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 our overall progress, which includes stabilizing our North America sales trend, increasing retail gross margins, and generating a significant improvement in profitability. I'm going to start with an update on the initiatives we put in place at the start of 2010, and how they will evolve to advance our key objectives as we begin fiscal 2011.

First, product innovation. The introduction of larger merchandise stores and limited edition products will continue to be a key focus for us in 2011. We will maintain our emphasis on offering a new themed collection approximately every month, supported by coordinated marketing and powerful store visuals. In keeping with this strategy, our Darling Doggies limited edition collection was introduced following Christmas to capitalize on gift card redemption opportunities and the increase in mall traffic associated with school vacations.

In January, we launched our Love Bug and Love Bear for Valentine's Day. This year we featured two animals versus one last year, and for the first time ever, we partnered with Sweethearts to present a candy give-away with a qualifying purchase to provide additional value. And in March, Build-A-Bear Workshop will once again transform into the headquarters for Easter with the launch of our Daisy Bunny and Floppy Lamb. To add to our Easter offering, we are excited about the introduction of E.B., the featured Bunny character in the Universal Studios film, Hop, that is due out April 1, 2011 and we believe will be a big hit with kids. This should be a good offset to last year's Alvin and Brittany, which was timed with the release of their DVD. Overall, we feel very good about our current product introductions as well as the inventory we've made -- inventory commitment we've made.

Second, we will continue to execute on the coordination of our product marketing and store operations. Our integrated approach includes one focused message and one focused promotion to support each product launch with exciting offers, store visuals, and events. The fourth quarter provided us with some key learnings that we will apply in 2011. On the positive side, we held a very successful Black Friday promotion, which drove a solid weekend business for us. We also had a strong performance from our limited edition Rudolph collection, as Maxine noted.

That said, overall, we believe we missed sales opportunities on the product side in two key areas. First, in 2009, we had a very strong launch of Alvin and the Chipmunks, which was supported with powerful marketing for the movie by the studio. Our launch our proprietary Speakers Stars Bears did not perform at the level needed to offset the Chipmunks. Second, we need to improve our core product offerings in our animals, and coordinate our fashion apparel to further grow our average transaction value. On the marketing side, we ran our first TV ads in the UK this holiday, and have continued advertising into the first quarter of 2011. Our early read shows that consumer reaction has been good. We will continue to measure the effectiveness on growing our sales and enhancing our brand awareness and evaluate its use for the remainder of the year.

Further, looking into 2011, we expect to keep our overall marketing budget in line with 2010. We plan to continue to selectively use gifts with purchase to add value to our product offerings. For example, in the first quarter, we will again feature our popular Easter basket giveaway with qualifying purchases. We will also continue our direct mail and e-mail programs to existing guests, and use social media and TV advertising to reach new guests. The digital space has been very important in our strategies to reach moms, and we have built an active following in the bloggers space as well as on Facebook and other social sites.

Third, we will continue to look for opportunities to compel consumers to return to Build-A-Bear Workshop and increase incremental purchases from existing store traffic by expanding our assortment of brand right toys, both through external sources as well as internal development. The latest editions to our proprietary brand, Small Fries, returned on February 15, 2011. We believe that Small Fries represents both an incremental purchase as an impulse item, as well as an add on to our full sized animals. By emphasizing the collectible nature of these animals, we believe we have an opportunity to increase visit frequency and the tie-in to Bearville increases ongoing brand engagement. We continue to evaluate externally sourced, non-proprietary products that complement the Build-A-Bear brand and expand our leadership in the toy business.

Fourth, we will maintain our emphasis to drive our e-commerce sales and increase engagement in our virtual world. Continuing the strong momentum of the third quarter, we achieved a double-digit increase in our total on-line sales in the fourth quarter, excluding the impact of foreign exchange. Our e-commerce site focused on the same strong animal launches we had in our stores, supported by the enhanced technology that was rolled out in the year, and strong line -- strong online promotions and offers.

Our Bearville community strengthened in 2010. During the year, we increased brand retention and time spent in Bearville. Traffic and length of visit on Bearville combined represented more than 25 million hours of brand engagement in 2010. Nearly 0.33% our guests report visiting Bearville prior to visiting our stores. We know that the top activities for kids on-line include watching videos and playing games. We believe to move our digital initiatives forward in 2011, we will introduce the next generation of Bearville, expanding beyond the virtual world experience into an entertainment destination with a special focus on fun and relevant cultural content for children and families. The site relaunches an open beta on March 1, 2011 featuring unique video programming, celebrity interviews, and a craft show to name a few. The launch our of iPhone app in late 2010 builds further digital synergy allowing kids to connect with Bearville across multiple platforms.

Fifth, we will continue to develop new opportunities and revenue streams outside of our current store base. Our commercial revenue, which includes licensing, entertainment, and wholesale revenues increased in the fourth quarter due to the success of our craft kits at a number of retailers. Following the successful launch of our exclusive craft shop line that is carried in all Michael's stores, we have further extended our brand reach. Importantly, these products include codes and tie-ins for Bearville, as well as a bounce back to our stores or to our e-commerce site, which drives additional traffic.

In addition to the pop-up store format we introduced for holiday, we are testing additional formats outside of our mall stores in 2011. In May, we plan to open a store at the Orlando International Airport, which will include pre-stuffed and dressed animals, as well as animals to stuff and dress yourself. A Build-A-Bear Workshop store will also open in Cook's Children's Hospital in Ft. Worth Texas, giving us another potential channel for expansion in the future.

In summary, we feel good about the progress we made in the fourth quarter and fiscal 2010. We begin fiscal 2011 with a solid foundation from which to grow. Finally, I'm excited to announce our partnership with our new brand ambassador, Victoria Justice, who was very popular with our targeted demographic. She is the lead character in Victorious, a highly rated show on Nickelodeon. In addition to television ads, Victoria will also be featured in our print and in-store marketing, and we will offer Victoria Justice apparel and accessories.

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.

Because this is quarter and year-end, I have a lot of detail to go through that should answer most of your questions. For the fourth quarter, total revenue increased $125.8 million from $123.1 million last year, an increase of 2.2%. Consolidated net retail sales were $123.2 million, an increase of $2 million, or 1.7% compared to last year's fourth quarter. Excluding the impact of foreign exchange, net retail sales increased 2.7%. The fourth quarter included a $4.3 million adjustment in deferred revenue related to our loyalty program, and a corresponding increase in net retail sales. In 2010, we changed the methodology used to estimate this liability to more accurately reflect our expectations for future customer usage patterns. As consistent trends in our loyalty program emerge, we will continue to adjust our liability as necessary. As a reminder, with the exception of 2009, an adjustment has been made every year since the program's inception.

Net retail sales from European operations were $25.5 million in the fourth quarter, which compares to $26.7 million last year. Excluding the impact of foreign exchange, net retail sales declined 0.9%. For the quarter, consolidated comparable store sales declined 3.7%, which included a 5% decrease in transaction and a 1.4% increase in average transaction value. While overall consolidated comparable store sales declined 2% for the full year, the North American comp decline of 1.2% marks a considerable improvement over negative 16.7% comps in 2009. For the full year, total revenue increased to $401.5 million from $359.5 million last year, an increase of 1.4%. Fiscal year total revenues included $6.4 million from non-recurring commercial transactions. Consolidated net retail sales were $387.2 million, a decrease of $1.4 million. Excluding the impact of foreign exchange, net retail sales increased 0.1%. As mentioned earlier, the full year included a $4.3 million increase in net retail sales due to an adjustment in deferred revenue related to the loyalty program.

Net retail sales from European operations declined $3 million to $69.5 million in fiscal 2010. Excluding the impact of foreign exchange, European operations net retail sales decreased 2.7%. Pre-tax income from European operations was $6.2 million in fiscal 2010, compared to break-even pre tax income in fiscal 2009. Fiscal 2010 results include a net gain of $4.2 million resulting from inter-company charges, as well as $1.9 million of costs related to store asset impairment and store closing expenses. This compares to $5.1 million of inter-company and store asset impairment charges in 2009. Excluding these items, fiscal 2010 pre-tax income from European operations totaled $3.9 million, compared with $5.1 million in fiscal 2009.

Our e-commerce business performed well with fourth quarter consolidated e-commerce sales up 13.4%, excluding the impact of foreign exchange. For the full year, the increase was 11%. We achieved a strong growth in both North America and the UK resulting from product launches and new on-line marketing and promotional initiatives. Commercial revenue, which we have previously referred to as licensing revenue, includes two significant wholesale transactions that had no gross profit; $5.8 million in the third quarter, and $600,000 in the fourth quarter. Excluding these transactions, commercial revenues increased $400,000 in the fourth quarter, and $800,000 for the full year. These increases reflect the success of our craft kits at a number of retailers in the fourth quarter.

As previously mentioned, our 2009 licensing revenue reflects an immaterial reclassification of costs of sales that previously had been netted to licensing revenue. There was no impact on the Company's 2009 net loss. International franchise revenue was $900,000 in the quarter and $3 million for the full year, both down slightly compared to last year. We ended the year with 63 international franchise stores versus 65 international franchise stores at the end of last year. In 2011, we were focused on helping our franchisees improve their business results through improved performance in existing stores and new store openings. We currently expect that our franchisees will open approximately 5 stores to 10 stores net of closures, including the Company's first store in Brazil.

Our retail gross margin rate in the fourth quarter was 45.7%, compared to 39.5% last year. The 620 basis point improvement in margin was primarily attributable to 360 basis point improvement resulting from the significant reduction in asset impairment charges in 2010, as compared to 2009. Additionally, we achieved 150 basis points of leverage on fixed occupancy costs, along with other improvements in merchandise distribution and purchasing.

For the full year, retail gross margin increased 340 basis points to 40.1%, from 36.7% in 2009 last year. This increase was driven by 110 basis point improvement resulting from the significant reduction in asset impairment charges in 2010, as compared to 2009. For the full year, we achieved 100 basis points improvement in leverage on fixed occupancy costs, and a 70 basis point improvement in merchandise margin, along with other improvements in distribution and purchasing.

SG&A was $48.9 million, or 38.8% of revenues, compared to 39% in the fourth quarter last year. SG&A included $800,000 related to the closure of our two remaining stores in France and increased corporate payroll costs. This increase in SG&A expense is offset by marketing savings and improved leverage on store salaries and other fixed overhead costs. For the full year, SG&A was $163.9 million, or 40.8% of revenues, which is the same percentage as last year. SG&A included $1.6 million related to the closure of our two remaining stores in France, and increased corporate payroll costs primarily associated with a bonus (inaudible). This increase in SG&A expense was offset by marketing savings, and improved leverage on store salaries and other fixed overhead costs.

As we closely monitor our costs, we continue to deliver a great experience in our stores as measured by our guest satisfaction scores. We finished the year with 80% of all guests giving us the top score on overall satisfaction. We are pleased -- we were also pleased to be named to the Fortune 100 Best Places to Work for the third year running.

Net income was $8.3 million, or $0.44 per diluted share, a significant improvement over 2009 fourth quarter net loss of $900,000, or $0.05 per share. Net income for the fourth quarter of fiscal 2010 included $800,000, or $0.04 per diluted share in costs related to the closure of our operations in France, and $500,000, or $0.02 per delighted share of store asset impairment charges. These costs were more than offset by $2.6 million, or $0.14 per diluted share for the adjustment to the deferred revenue related to our customer loyalty program.

Net loss in fiscal 2009 fourth quarter included $3.9 million in non-cash asset impairment costs and $2.7 million in non-cash losses associated with the Company's investment in Ride Makers LLC. Net income for the full year 2010 it was $100,000, or $0.01 per diluted share, and marks a considerable improvement over a loss of $12.5 million, or $0.66 per share in 2009. Net income in 2010 included $1.6 million, or $0.08 per diluted share in costs related to the closure of our operations in France, and $500,000, or $0.02 per diluted share of store asset impairment charges. These costs were more than offset by a $2.6 million, or $0.14 per diluted share benefit for the positive adjustment to the deferred revenue related to the loyalty program. Net loss for the fiscal 2009 year included non-cash charges of $10 million for asset impairment and the write-off of investments, as well as a $600,000 charge related to the Friends to be Made concept closure.

The income tax benefit was $2.6 million for fiscal 2010, as compared to $11.4 million for fiscal 2009. The effective tax rate was 104.3% for fiscal 2010 compared to 47.7% for fiscal 2009. The increase in the effective tax rate was primarily attributable to a release of valuation allowances on net operating loss carry-forwards associated with our France operations, as well as the impact of lower taxes in foreign jurisdictions and the releases of tax reserves. In 2011, we anticipate our tax rate to be approximately 38%.

Our balance sheet remains strong, and we ended the year with consolidated cash of $59 million, compared to $60 million last year, with over 35% of our cash held outside of the US. We have no debt, and no borrowings on our credit facility. Historically, our cash balance is highest at the end of the year due to the significant gift card sales and seasonal sales volumes.

During the quarter, we did not repurchase any shares of our common stock, and at quarter end, we had approximately $23.7 million of availability under the current stock repurchase program.

Capital expenditures in 2010 were $14.6 million, up $6.2 million from 2009, primarily due to software and equipment upgrades to our e-commerce platform, as well as opening 11 pop-up stores. For 2011, we expect capital expenditures to be approximately $15 million to $20 million. Depreciation and amortization for fiscal 2010 it was $27 million, down from $28.5 million in 2009. For the full 2011 year, we expect depreciation and amortization to be approximately $26 million.

At the end of the quarter, consolidated inventories totaled $46.5 million, compared to $44.4 million at the end of 2009. Inventory per square foot increased approximately 4.8%, a considerable improvement over the 13% increase in Q3. As we enter 2011, we are comfortable with both the composition and level of our inventory investment.

As Maxine mentioned, in 2011, we will continue to support the strategies that have resulted in improving comp store trends and profitability. In the first quarter, we will incur approximately $1.5 million in costs related to our consulting work to reduce our supply chain costs and overall expense structure. We expect product and distribution cost savings to offset the consulting fees incurred in the first quarter by year-end. In addition, we expect our first quarter results to be negatively impacted by a later Easter in 2011 versus 2010.

That concludes our prepared remarks, and now I would like to turn the call over to the operator to take your questions. Operator?

(Operator Instructions) Today's first question comes from the line of Gerrick Johnson with BMO Capital Markets. Please proceed.

Hi, good morning. I was wondering if you could discuss how your comp trends progress through the quarter, specific how they looked in December 2010?

Sure, Gerrick, it's John. How are you?

Hi, good.

You know we, we gave you where we followed the quarter. We actually were kind of about the same month by month by month. We, we frankly, as Maxine mentioned, and we talked about, we felt like we really had a great holiday promotion, Rudolph and Clarice and Bumble significantly outsold our holiday presentation last year. We had some great GWPs. We just, the one big miss we had was what we were calling Speaker Stars. In 2009, we had Alvin and the Chipmunks, and a lot of support by Fox studios, and it was a really good product for us. I were hoping Speaker Stars, with a launch in mid-December, would give us that shot in the arm. It just didn't deliver, and if we look at the units we missed, Alvin versus this year's Speaker Stars, and kind of our average transaction of $35, we would have been right, right there at a flat comp for the quarter.

So good news is -- bad news is we didn't get where we wanted to go. Good news is we have identified it and think we've got it corrected for Q4 2011. So that, that kind of, that's how quarter four came out for us.

Our next question comes from the line of Sean McGowan with Needham & Company. Please proceed.

Thank you. I was wondering, Maxine, if you could repeat, or John, if you could repeat the store plans for 2011 and comment a little bit on what the timing would be?

We said that we would be opening up three to five new stores net of closings, and those usually start around -- we'll open the airport store in April, late April, early May, and then we'll have a few stores after that. And then we have three to five relocation stores that we're moving within the same mall that are being down sized or reformatted. Again, most of those will happen toward this latter half of the year.

Our next question comes from the line of Janet Kloppenburg with JJK research. Please proceed.

(Inaudible) everybody. I was wondering if you could talk about the success of the pop-up stores and if that is going to be a viable avenue for growth for you in the upcoming holiday season? And I also am hearing a lot about product cost increases from some of the apparel companies that I follow, and I was wondering what was happening on that front for Build-A-Bear? Thank you.

Hi Janet, it's Maxine, I'll talk about the pop-ups. We are, as I said in my comments, we looked at our pop-up stores, our first eleven that we did. One of them was actually a replacement to our Opry Mills store that closed in -- due to the floods in Nashville, and so we don't look at it exactly the same way. But the ten other stores, we looked at them before we went into them as which ones could possibly be replacement locations for Build-A-Bear as we look at our real estate portfolio that's coming up for renewal, or just because we want to try some other kinds of locations; strip centers, all kinds of things like that. So some of them were looked at for that. Others were looked at for just being in a market that we might not have been yet, and was the market good enough to support a store full time or possibly part-time.

So we have been evaluating those results. Because Build-A-Bear does so much business from Christmas, Valentine's, and Easter, we'll be in most of the stores throughout that time period, and we think that we'll have a much better idea after that. But we have seen in every market that we've entered, that our sales as a market have increased, even though we've had modest, in some cases, modest cannibalizing of sales. But we have seen a growth, and our plan would be not necessarily to have had that -- those two stores in the mall. One might have replaced the other one. So we're looking at all of that through all the demographics and quite an intensive review, but we do believe we will be closing some of these, turning some of them into permanent stores, and then opening up different and more pop-up stores possibly in the fourth quarter of this year.

Why don't I -- second question, but let me hit it, the product cost end. Tina mentioned inventory was up slightly over last year, although significantly better in the third quarter. Just to address that real quickly, primarily driven by Chinese new year and making sure our product was put in before that, and also kind of longer lead times in trying to take advantage of getting product placed to offset what are a whole bunch of pricing pressures that are coming from Asia. Are they real? Absolutely. What we have really tried to do, and we have talked about the consulting firm we've got in helping us, we've really tried to deconstruct what we pay for product and make sure we understand what the raw materials are. We know they have gone up. In some cases labor has gone up and we know we need to kind of account for that, but we don't want to necessarily let our partners just get kind of a free ride on bumping up their profit margin, or their distribution, kind of logistics cost.

So, as we have gotten even more precise in there, we have worked hard to figure out what price increases we can absorb, where we might want to do some product redevelopment, and in some cases where we are going to have to take some price increases within our line. We have every intention of managing this aggressively and delivering at or above margin for 2011 versus 2010, so our goal is to not -- you know, we made good progress on margin in 2010. We do not want to go backwards in 2011 despite kind of insane pressure in the marketplace.

Yes, and just to, I think I said it, but to make sure, the big -- the big task of the consulting firm that Maxine mentioned and Tina mentioned was to really help us, again, understand costs, how we can change our development cycle, how we can drive out non-value added cost that doesn't best Build-A-Bear, our shareholders, or our consumers.

Our next question comes from the line of Tom Filandro with Susquehanna Financial Group. Please proceed.

Hello, thanks. Quick question on new toy categories, John. Is there anything going on in that front in terms of testing of new categories that you would like to add to the overall mix? And then, can you , you may have stated this, but the inventory, I think you said, or a per square foot dollar basis was up roughly 5%. What does that look like on a unit basis, and how should we think about the level of inventory, up or down, for the balance of the year? I understand it's some adjustment, so if you could answer that, I would appreciate it. Thank

Let me talk product real quick, and then mix. Tina will probably jump in, too. We, Tom, we had people walking, Toy Show this week and kind of over the weekend, we had people walking Toy Show in Hong Kong. We believe in Small Fries. We have a couple of other things of our own that we're in development on, and will be in test in our stores pretty quickly. That's said, there are still some other things in the market that are pretty hot. You've seen them. Someone at some point would normally ask a question about Pillow Pals at this point. We didn't know if it was a fad. If you want Toy Show, it's still out there in a big presence. The price hasn't really broken in the market, they're still kind of holding their SRP. So, obviously we need to be aware of something like that.

There are some other things that we think could be, some other grab-and-go items. But again, what we fundamentally have to do is we've got to make sure that if there are other categories that we were to bring into our store, that we put a Build-A-Bear ownership on them. So in other words, when we do something and Build-A-Bear-ize it, it sells considerably better than if we just grab kind of open market products, so our opportunity is to look for things that are going on the market, kind of bring them in potentially in an open market and say does this have legs, and then we can quickly develop it into something proprietary, that's our best way to look for new ideas and that's, that's kind of our approach on this one.

Do you want to add anything?

No, I think that's pretty, pretty accurate. I think that there are lots of interesting things going on, not only in products that Build-A-Bear would normally carry, but products that would apply to our Licensing business, and we see that growing from some of these new kinds of products that are out there. And there will be some new products coming to Build-A-Bear this year, whether it's -- we've interpreted it into an individual animal, or a series of animals, you will see, as always, lots of newness. We took our Ice Cream Bear collection that will be coming out again, repositioned it, marketing it, paired it with a new partner, I think a more exciting partner, and also adding attributes to the product that weren't there last year; like scent. And we have found ways to do that so that it's not overwhelming to the customer, and the customer can actually have a selection. So we see some things down the road that I think will be product enhancements, as well as tweaks, but also lots of interpretations of things as they relate to our stuffed animals.

The same in the Fashion side of the business for the clothing. One of the hottest things that's out there in fashion, I know this always sounds silly when we're talking about bears, but our Gladiator shoes, and our shoes have -- our bears have Gladiator shoes, and the Twinkle Toes from Sketchers that are just blowing out of the stores, as well as -- our stores. And then Jeggings, which are leggings for humans and bears, and it's just been something that is sometimes hard to see in Build-A-Bear as a key item because we don't have rounders of it, but we sell lots and lots of them. And we just have to make sure we're on top of all of those things. And I think we've enhanced our fashion apparel staff significantly this past year with a new addition to our team who comes from that side of the business, and will really -- I think has already added a great, great amount of fashion influence, and we're starting to see that hit our floors in this next quarter.

So, I feel really good about what we saw. But there wasn't anything radical there. There's wasn't anything, there's nothing really radical. And we are testing a few things, and I think we'll be able to report to you in the second quarter and certainly into the third quarter how those are doing.

Tom, let me hit inventory real quick. Prob -- I'm not going to break out kind of units and dollars right now. We're up about 4%-ish, probably about that through that the course of the year. That said, part of our project, again with the consulting firm, is we have -- we're probably over SKU'd, so we're going to take a look at SKU productivity, and really try to drive better velocity and better turns through our stores. That also to the earlier question about costs. That will help us manage our costs. So, so our inventory, we think we've got it managed well. As you know last year, we had a little blip because of Zhu Zhu. We've got that managed, we're back into kind of daily operating business, but that said, we think we can make improvement on it and it is part of this, this larger project that we're working on, and we should start to see benefits of that kind of Q2, Q3 of this year in terms of starting to keeping our inventory a little bit tighter and drive better velocity on the units that we carry.

But some, obviously, there are big cost increases, and so some of that is come from cost increases. Not as much yet as it might come to be, but we're working on maintaining that, and, as John said, mitigating it as best we can, but it is a reality, and we have to make sure that our products are worth it. That we can, if we're going to, you know, take that cost increase, can we add a little more to give the product some pizzazz, or in some cases, is there something we can take out that won't diminish its value to the customer. That's always harder, because Build-A-Bear always gives a lot for the money. But we are looking at all aspects of that to make sure that our inventory, as a discretionary product, our inventory and our products are easily accessible to the customer from a value perspective, a price point perspective.

Our next to question is a follow-up from the line of Gerrick Johnson with BMO Capital Markets. Please proceed.

Hi. Was hoping we could discuss some of these one-time items in a little bit more detail. First of all, the deferred revenue, what lines does that impact? Is it just the net sales line? And then what were the store asset impairments?

Okay, Gerrick, it's Tina. The deferred revenue impacts the top line sales line, and so I just want to -- just to give a little color around it, it's a point in time adjustment. So in reality, if you look at the beginning of the year balance to the end of the year balance, it netted to a much smaller number of, you know, around $1.7 million. So it was to a point in time adjustment based upon the methodology we're using to calculate the deferred buy stuff, or deferred revenue liability.

And then the second question was store asset impairment. As we -- as you know, at the end of the year, we look at all of our estimates, and we look at four wall net contribution and it was -- we had to impair four -- about four stores, none of which were in the US. So, very significantly down over the prior year.

We have another follow up from the line of Sean McGowan with Needham & Company.

Thank you. The -- I wanted to talk a little about the timing of Easter. Historically, in the past, how much of the, of the revenue impact have you seen from when Easter shifts from one quarter to the next?

Well, again, this is probably the latest Easter that we've had in quite a bit, and so, you know, again we -- we look at, you know -- you have to put together March and April, and last year, I think in our call, we said we were up, you know, a modest improvement over the prior year, so I think that, you know, while we don't break out comps on a monthly basis, and we don't give forward guidance, I mean, that's what you have to do. Because we're at calendar year-end, and our quarter ends in March, there could be a, you know, a fairly significant impact to the first quarter. So as we get, you know, through the first quarter and get on our first quarter call, we'll definitely have a better information as to what that impact will be.

(Operator Instructions)And we have a follow-up from the line of Tom Filandro with Susquehanna. Please proceed.

Hi John or Maxine, can you give us more insight on that comment about being a little over SKU'd, and like maybe the magnitude of what you believe you're over SKU'd? And what implications does that have for your go-forward view of store format and size? And if I'm not mistaken, I think you tested a smaller store format as well, so if you could give us an update on that? Thank you.

Well, I think that Build-A-Bear always prided itself in having about -- around 400 SKUs to 500 SKUs per store, and for the most part, you do have that. But as the older you get, little bit here, a little bit there, stores have this team or that team, and you look at yourself and you find that you have some stores in Texas that have the Pittsburgh Steelers, and do you really need that? This year, you would have needed it, because it sold everywhere that we had it, but you know, in some -- most of the time, you wouldn't necessarily need that. And so we're just looking at a real closer scrutiny of our store productivity, because actually what we have prided ourselves on in the years, is that on A volume store and a C or D volume store have the same SKUs, meaning they all get the best of everything. They may not get as much behind it, after we see the floor with that merchandise, they get back what they need in sales to replenish their sales. So you can go to a store in Asheville North California and buy the Love Bug the week before Valentine's Day, and you can buy it in New York City. So it -- that small markets aren't penalized. That being said, they all have about the same number of SKUs except for Disney and New York, which may get, you know, a bigger SKU, (inaudible) planned for them around Disney costumes or New York merchandise.

So we are -- you know, we think we have a -- maybe an opportunity to cut 10% to 15%, you know, SKUs, and just narrow it -- that doesn't mean that SKUs will be gone out of our assortment, but would be out of many stores, so it might be in, only in the stores that it needs so your inventory is working harder. Because, quite frankly, when you get to the Pittsburgh Steelers, I'm just using that as an example, because it's one near and dear to my heart, or to the Green Bay Packers, and you don't have the merchandise in Green Bay Packers' home town because you distributed it far across the country, then you've miss the opportunity there. So we are just much more aware of that than we have been in the past, because every dime does have to count.

In the smaller stores that we're building, Tom, they don't have lesser fixtures, they just have -- might have fewer registers, one stuffer, so we have consolidated down the space and give them still the same amount of merchandise that we would get the best merchandise what we can advertise nationally and bring customers in with, what's on our website, all of that, but they don't necessarily get as much of it. And so the store is tighter. There's not as much, you know, walk around room as there has been in the past, yet the store still follows all guidelines. So it's really more like that. It's not necessarily smaller.

In the UK are smaller stores, which we inherited, those stores might not have -- those stores have like 30 animals, versus 36 animals, but for the most part, they have everything else, and again, they would have not the American sports teams, but they would have their own UK sports teams, and we would market accordingly to that.

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

Hi. We haven't talked about, how is the first quarter starting? What are the quarter to date comps looking like?

Hi Brad, John. You know, we're early in the first quarter, you get some funny things with some weather, you get some funny things with separating Valentine's Day and President's Day. So we're not probably at this point going to say where we are. We felt good about Darling Doggies, which came out on December, 26, 2010. We felt good about our Valentine's Day animals. We did two against one last year, and frankly it sold right through Valentine's Day, and in some cases broke a little bit early. I think we have to -- we're really looking at the first three months of the year as kind of the first four months of the year, because you've got a weather, but you always have a little bit of weather, you've got a President's Day shift, and then there was a question earlier about the later Easter. We are hopeful that when this has happened in the past, we've actually been able to get a little bit of a bump from kind of that Spring Break, and then a bump from, from Easter. So I think the best indicator of performance in 2011 will be where we sit at [Quem] April. And we've got, we believe, a very strong product line-up, we've got good marketing in place, we've got the store teams jazzed, and as Tina mentioned 80%+ OSAT rating. So probably too early to call, and I think we're like [Quem] April will be the best time to evaluate how we did in "quarter one" even though it's four months.

We have a follow-up from the line of Gerrick Johnson with BMO Capital Markets. Please proceed.

Hello. Forgive me if I missed this, but did you discuss the tax rate in the fourth quarter? It looked a little low.

I didn't discuss it in the fourth quarter, I just talked about it on an annualized basis, and why it was what it was, the benefit from relating to the valuation allowances, and in our foreign jurisdiction.

And we have a follow-up question from the line of Brad Leonard with BML Capital Management. Pleased proceed.

First of all, John, it is -- I mean, I'll leave it at that, because you guys obviously don't want to give out the comp, but that doesn't make any sense to me why you can't compare 45 days in a quarter versus 45 days. We've gone through Valentine's Day, we've had all this stuff, the Easter shift is going to look ugly, I get that. But it doesn't make any sense to me.

So, Brad, Brad, believe me, I always want to be as informative as we can. You do have a President's day shift, so you've got to account for that. East Coast goes out next week versus this week. UK shifted there -- what they call -- mid --

Winter break or something.

Winter break. They call them half term, but winter break for all of us. That would have been this week in the UK last year, and the year we're in, it will be next week. So, frankly we don't want to give you something that's not accurate. It's not to dodge you, it's to not give you something that's not accurate. So I hope you respect that.

Well, I'll leave it at that. I understand there are shifts, but as an owner, it's nice to have the information versus waiting until April 25th to figure out how we did. So I'll leave it at that, and understand that I think it's useful, but I guess no one has asked about this. I mean, there's obviously this report, you guys aren't talking about it, so we're just not going to comment on this report of you guys in discussions, or having hired Barclay's again to a potential deal. Is that just something we're not going to discuss?

The Company did not make an announcement and, again, it's our long standing policy not to comment on rumors or speculations.

There are no further questions. I would like to hand it back to Miss Anne Rakunis for closing remarks.

Great. Thank you very much. Thank you everyone for joining us today. We really appreciate your interest and your participation in our call. We look forward to updating you on our next call in April to discuss our Q1 results. Thank you so much.

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