Build-A-Bear Workshop Inc (BBW) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Build-A-Bear Workshop Inc.'s first quarter 2011 Results Conference Call. My name is Crystal 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 Allison Malkin of ICR. Please proceed.

Thank you. Good morning. Thank you for joining us. With me today 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 and one follow-up 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.

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 first quarter fiscal 2011 results. For our call today, I'll begin with comments on our first quarter performance and update you on our progress in the second quarter. 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 our prepared remarks, we will open the call to take your questions.

In the first quarter, total revenue declined 6.1%, excluding the impact of foreign currency. On a consolidated basis, comparable store sales declined 8.5%, including a decline of 9.3% in North America and a decline of 4.1% in our European operation. The shift in Easter impacted our first quarter by approximately 5.3% in consolidated comp performance. In the quarter, our e-commerce business was solid, increasing 1.5% on a consolidated basis, even with the Easter shift.

We had a net loss of $2.3 million or $0.12 per share in the first quarter compared to net income of $1.7 million or $0.09 per diluted share in the first quarter of 2010. As previously announced, our 2011 first quarter results included cost of $0.05 per share associated with our consulting project to improve our efficiencies and reduce expenses. I'll review our progress on this project in more detail in just a moment.

As indicated in the press release, consolidated comparable store sales are negative 3.2% year-to-date through April, which includes a 3.3% decline in North America and a 2.7% decline in Europe.

In order to give you the best understanding of our business and because of the sizable impact that the shift in Easter has on our first quarter, I am going to review our performance in two time buckets. First, by combining January and February results and then reviewing March and April together in order to capture the Easter season as a whole. Note that April falls into our fiscal second quarter, but we feel it is important to update you on March and April combined to fully explain our business. Note that April falls into our fiscal second quarter, again just for clarity.

For January and February combined, our North American comparable store sales fell 4.8%. For March and April combined, our comp store sales improved, posting a decline of only 1.6%, reflecting very strong April comp performance of plus 26%.

We attribute the January and February decline in North America to two key issues. Lower sales overall in the fourth quarter also meant decreases in gift cards. This decrease impacted our first quarter sales because we recognize the revenue from gift cards when the cards are redeemed, which primarily occurs in the 90 days following activation. With the lower distribution of cards in the market, we had fewer cards redeemed in the first quarter. We believe the gift card impact was approximately 1.6% on our comp sales or about a third of the total decline for this timeframe.

Second, as you may recall, we told you that we'll put more focus on our core plush animals and the fashion level and newness in apparel and accessory category. We feel we have made strong progress towards our goal, but the first quarter was a period of transition for us. We expect to be in a stronger position both in terms of quality of assortment and inventory level by the end of the second quarter.

We attribute the improvement in trend in March and April to three key factors. We added the gift card up-sell event for the Easter season and comped the up-sell event that we had at Valentine's Day. During these promotions, guests with qualifying purchases could purchase a $10 gift card for half-off. The strongest redemptions of the card were in the 90 days following the purchase. Therefore, we expect this promotion to continue to positively impact the current second quarter. We added a freestanding ad insert to our marketing mix at the end of March to maximize early spring break traffic. Redemptions were strong in April.

Our core product, particularly our apparel and related accessory, have had strong sales. We are increasing our purchase quantities and pulling in some early receipt to help us maintain our inventory levels in these categories.

Turning now to our European results. For January and February combined, our comparable store sales increased 5.4%, and for March and April combined declined by 10.5%. We attribute the strong January and February performance to benefits from weather, which made year-over-year comparisons easier, and from pent-up demand due to severe weather that impacted the UK in December.

In contrast to North America, the UK had higher year-over-year gift card sales, which positively benefited this timeframe. And we also had television advertising to support Valentine's Day for the first time in Great Britain.

For the Easter season, combining March and April, we believe that the increase in VAT and government cutbacks and spending in the UK negatively impacted consumer spending overall. We realize we can only control that goes on in our own four walls, so we are focusing on increasing brand awareness and promoting key products through added marketing initiatives, but we do expect the business in the UK to continue to lag North America throughout this year.

We continue to see strength in our e-commerce sales in both the United States and the UK. Year-to-date through April, consolidated online sales are up 8.5% after strong March-April combined growth of 20%, reflecting web specific marketing initiatives and improvements in conversion, units per transaction and average dollar sale.

We've seen a significant increase in our add-on sales driven by enhancements to our technology platform. For example, now when a guest selects a particular outfit to go with an animal choice, we also show her a wider selection of matching shoes and accessories which has led to additional items in her basket at check out. This is just one example of how we are making it easier for our guests to shop our site. We continue to expect a positive impact from our improved technology this year.

We have confidence that we will be able to meet our annual retail sales goals on a consolidated basis and offset the shortfall of the first quarter with several key product launches and other initiatives that John will discuss.

Turning now to our consulting engagement. As you know, we've made significant reductions in our expenses over the past two-years in response to the economic environment. In order to continue to improve our expense structure we determined that fresh eyes with broad industry experience would move us towards our goals on an aggressive time line. We initiated a consulting project with a focus into product sourcing a supply chain because of the global pressure of pricing and other component transportation cost. We have recently moved into phase II of the project, focusing on additional areas of operation, including store productivity, marketing and other expense areas.

We expect to realize savings in the range of $4 million to $6 million in 2011, primarily in the second half, or $0.13 to $0.19 per diluted shares and project annualized savings of $10 million to $15 million. We are aggressively acting on the findings in order to get the most benefit we can in 2011. Our 2011 first quarter results include a cost of $0.05 per share related to the project. We expect to have a similar expense in our second quarter for our combined impact of $0.10 per share in the year.

We are also aggressively reviewing our existing store portfolio to optimize our overall productivity and profitability. During the quarter, we closed two stores, and for the year we expect to close 5 to 10 stores as we adjust markets to optimally position our stores for future growth. In the next 18 to 24 months, many of our North American leases have either a kick out option or expiration. In the course of business we are reviewing essentially every market of operations to maximize the profitability of our portfolio. We expect to close some stores, downsize other locations, and strategically open new stores throughout this process.

For example, by the end of the second quarter we will downsize and relocate four key stores in North America. We believe we will maintain the sales volumes and thereby increase each store's overall productivity and profitability. As part of our long term planning, we will continue to use pop-up stores to test new locations. For example, in the fourth quarter we opened a pop-up store in Tupelo, Mississippi. This allowed us to test this small market with a modest investment in a temporary location. Tupelo proved to be a huge success for us, and we've extended our lease on this store. Had it not been for this pop-up strategy, we would not have proven in the potential of this market. In short, this is a great way for us to use our capital wisely and make better long term real estate decisions.

We ended the quarter with a strong balance sheet, including $45 million in cash, inventory that was well controlled, declining from the first quarter last year, and we had no debt. During the quarter we invested $2.5 million to purchase 375,000 shares of our common stock and now have $21.2 million available under our share repurchase program. We believe in our business model and our ability to achieve our goal. We are in a unique position in that we have great financial flexibility. This allows us to continue to invest in our company and future growth while evaluating all uses of cash for the benefit of our shareholders.

As we look ahead, we feel we are moving in the right direction with our business and will deliver our annual goal. We know that consistency in our sales and operating performance is important, and we firmly believe our strategy have us to poised to achieve this objective. I will now turn the call over to John to give you more detail on our product and marketing results.

Thank you, Maxine. I'm going to highlight two areas of our first quarter product and marketing, and then I will focus on the key initiatives for the second quarter. In the first quarter, we continued to focus on product innovation and the introduction of limited edition products supported by our fully integrated approach to marketing and promotion. We've had several successes, including our Valentine's Day Animals, the second release of our proprietary small price product line, and a good overall reaction to Easter product, particularly E.B., the Bunny featured in the highly successful Universal Studios movie HOP. Our tie-ins with theatrical releases have been consistently strong, and we are excited about our lineup in this category for the remainder of 2011.

While we are happy with these parts of our business, we did have one launch under performance comp with Wizards of Waverly not matching last year's iCarly. In addition, the fourth quarter shortfall of SpeakerStarz lead to a price reduction on these animals, but we moved through the inventory profitably keeping our assortment quality in place.

On the marketing side, we matched closely to last year, but we did reduce our North American television spending in quarter one to hold dollars for a later Easter. We introduced Victoria Justice, who stars on the hit show Victorious on Nickelodeon, as our brand ambassador in our advertising and marketing programs. Build-A-Bear has always been known for our fashion, so partnering with Victoria is a great fit. She is all about the latest trends and hot looks, particularly with our core demographic. She is featured in our TV ads, online and coming soon will be Victoria Justice exclusive products in Build-A-Bear Workshop.

The addition of an Easter gift card up sell program put over 200,000 incremental gift cards into the market and will drive business, particularly in the second quarter as these cards are redeemed. In the UK, we supported Valentine's Day with TV ads. Our brand tracker shows positive movement in consumer awareness and attitudes. We know that the UK will be challenging this year, but we are committed to maximizing our business in this market.

Looking ahead, we feel very good about where we are headed with our product and marketing. It was the second quarter last year that our plans to focus on one product with one promotion and one store emphasis really started to gel. While we feel the strategy has moved our business forward, we believe we are just now really hitting our stride to deliver our results.

The focus on themes or stories of animals has been well received with all of our collections selling through very close to their planned out dates. However, we believed we missed some volume opportunities on certain animals by retiring them at the end of the launch period, therefore we are going to be increasing our quantities on select animals in the collections and moving that animal to our core once the theme has ended. We will able to build volume on some very strong animals this way.

For example we will launch our Hot Dogs and Cool Cats collection in May. Dogs are our number 2 animal category behind bears. So in order to maximize sales from these key items, two of the dogs and one cat will remain after the theme retires and continue to sell in our core lineup. We feel this collection will exceed last year's Zoo event, in both animal sold and coordinating outfits and accessories.

Last fall we added new design talent to our product team to up our fashion quotient and improve our apparel and accessory business. We are very pleased with the results of the initial assortments. We expect to grow our units and average transaction as we continue to improve our apparel and maximize the latest trends.

As you may recall, we had a high successful Ice Cream Bear collection last year, and in 2011, we will introduce the Dairy Queen Blizzard Bears, supported with color coordinated fashion apparel, which we believe will have greater appeal versus our Ice Cream themed outfits last year. The Dairy Queen tie in will feature our products in more than double the number of outlets versus last year's Ice Cream partner. And we have moved the arrival into this year's second quarter to kick off the start of summer vacations with a very appealing collection and match the strength of this product to a big power period for our sales.

As I mentioned, tie ins with movies have been great for Build-A-Bear, building buzz and leveraging the energy and advertising that the movie studios create. Looking into third quarter we are excited to have a tie in with the upcoming Smurfs movie, anticipated to be a summer blockbuster for families, with nostalgic appeal to parents and just plain fun for the kids.

We are happy with the business we are getting from our Small Fries lineup. As a remainder we launched Small Fries in the third quarter last year and brought out the second collection into our stores this last February. Based on its success we will have several new collections throughout this year. We are also testing a number of new categories in the next several months to continue to grow our store productivity with expanded product range just like we did with Small Fries.

We are intensely focused on delivering all of this at a merchandize margin that works for our business. We continue to work very hard on managing escalating costs, and expect to mitigate the increases through supply chain efficiencies as well as by taking selective price increases.

On the digital marketing side, we are keeping our brand alive 24/7, and have several online initiatives driving these goals. As it relates to kids, Bearville is the key strategy and we have added new innovative features to this site that have been well received with the brand engagement continuing to grow. In April, visitors were up over last year by 30%, and total business to this site grew 15%. Our Bearville iPhone app launched in the fourth quarter of 2010, we now have over 500,000 users and over 4 million sessions played.

In addition, we are growing our top of mind brand awareness and spreading our product news through social media. For example, we have an avid community on Facebook, with over 1 million fans. As a comparison, we stood at 300,000 fans at the end of 2010, and with an all out push, we have more than tripled our fan base in a very short time. We have specific plans to engage these enthusiastic brand advocates and drive revenue, both online and in store. These digital initiatives will drive our online sales, which are showing double-digit increases as well as drive brand awareness and store traffic.

To summarize, with these product and marketing strategies we expect to deliver increased comp store sales and operating performance in 2011. Now, I'll turn the call over to Tina to review our financial results and outlook in more detail.

Thanks, John, and hello everyone. For the first quarter, total revenue was $96 million, compared to $101.4 million last year, a decrease of 5.4%. Consolidated net retail sales were $94.2 million, a decrease of $5.6 million or 5.6% compared to last year's first quarter. Excluding the impact of foreign exchange, net retail sales decreased 6.4%. Consolidated comparable store sales for the first quarter declined 8.5%, primarily driven by the decrease in transactions which were adversely impacted by the Easter shift.

Net retail sales from European operations were $16.1 million in the first quarter, which compares to $15.8 million last year. Excluding the impact of foreign exchange, European net retail sales declined 1.1%. Our e-commerce business was up 1.5% in the quarter, excluding the impact of foreign exchange with the solid performance in both North America and the UK. Commercial revenue was $1.1 million, up 14.4% compared to last year.

International franchise revenue was $726,000 in the quarter, up 6.3%. We ended the quarter with 63 international franchise stores. We expect our franchisees to open approximately 5 to 10 stores in 2011 net of closures, including our first store in Brazil.

Our retail gross margin rate in the first quarter was 38.8% compared to 41.1% last year. The decline was primarily due to the deleverage of fixed occupancy costs resulting from the lower net retail sales in the quarter. SG&A was $41.3 million or 43% of revenues compared to 39% in the first quarter last year. Included in this are $1.5 million in costs associated with our ongoing consulting project. Excluding the consulting project cost, SG&A as a percent of sales was 41.4% in the first quarter.

The income tax benefit was $1.4 million for the first quarter to compare to an income tax expense of $1.1 million last year. For the full year 2011, we continue to expect our tax rate to be approximately at 38%. Net loss was $2.3 million or $0.12 per share compared to net income of $1.7 million or $0.09 per diluted share last year. As a reminder 2011 results include $0.05 per share for consulting fee.

Our balance sheet remains strong and we ended the quarter with consolidated cash of $45 million, compared to $53 million at the end of the first quarter last year. We have no debt and no borrowings on our credit facility. During the quarter, we repurchased 375,000 shares of our common stock and at quarter end we had approximately $21.2 million of availability under the current stock repurchase program.

Capital expenditures in the first quarter were $2.3 million, primarily for software and equipment upgrades as well as store related capital, compared to $3.3 million in the first quarter last year. For the full year 2011, we expect capital expenditures to be approximately $12 million to $15 million.

Depreciation and amortization was $6.5 million for the quarter, down from $6.9 million in the first quarter of last year. For the full year, we expect depreciation and amortization to be approximately $26 million. At the quarter end, consolidated inventories totaled $39.5 million, compared to $47.1 million at the end of the first quarter 2010. Inventory per square foot decreased approximately 17%. This inventory decline compares to an increase of 11% on a per square foot basis at the end of the first quarter last year. The lower inventory levels give us an opportunity to chase the trends and styles that have been emerging and to keep our assortments fresh.

As a reminder, the second quarter is our smallest quarter of the year, and we typically post a loss even when Easter shifts in this period. We are pleased with the start to our second quarter with growth in both our comparable store sales and our e-commerce business. Based on our enhanced product and marketing strategies, we expect a positive sales trend to continue for the remainder of the quarter and result in an improvement in our loss for the second quarter.

Now, I would like to turn the call back over to Maxine for concluding remarks.

Thanks, Tina. I want to take a moment and thank Kathy Savitt for her work on our Board of Directors. And as we recently announced, I am pleased to welcome Brad Leonard to our Board. We are excited to have Brad, who is not only a significantly investor in our company, he is a successful entrepreneur and a father of three daughters who are avid Build-A-Bear fans. We are looking forward to his input on many levels.

In conclusion, while the Easter shift was a tough one, our business is moving in the right direction. We have strengthened our product and marketing strategies, and we have identified cost savings which are expected to drive efficiencies across our company. We are improving the productivity of our stores and we have a strong balance sheet to support our future growth. I am encouraged as we begin the second quarter and expect our strategies to deliver improvement in sales and operating performance in 2011 and beyond.

With that I would like to turn the call over to the operator to begin with the question and answer portion of the call.

(Operator Instructions). Today first question comes from the line of Tom Filandro with SIG. Please proceed.

Hi, thank you. I actually had two quick questions. First is, can you guys really give a little more detail on where the $10 million to $15 million in savings is coming from? And then my second question is, John, you alluded to testing some new categories I think you said over the next few months. Can you give us a sense of exactly what that is that you are talking about? Is that similar to like a Small Fries or is this maybe a Toy Experience type product? What are you thinking about? Thank you.

Tom, on the consulting project, we are looking at just every phase of our business, from our product sourcing to our distribution, to ocean freight, to store supply -- It's really across the board. Our IT, just everything that we look at from a perspective of indirect and direct expenses. And again, we just started phase II, so we are really diving into that to see where the potential savings are. So it will be really across the board.

Hi, Tom. With respect to some of the thing we are trying for new -- some new products. I talked to you last about Small Fries. We spent a lot of energy and thought putting that in the market and it's worked pretty well for us. There is a little bit of cannibalization but by and large it's an incremental purchase. It's helped us with the twin customer, it's skewed even a little bit more girl, it's got a good proprietary Build-A-Bear margins, so we feel great about it.

So, with that as a backdrop, we've got several things in test -- I mean I kind to put them in some groups. Some is some open market products, so for instance, we are going to have Angry Birds in our stores next week, 50-ish stores and in the rest of the chain about two weeks after that. We are going to start with some product that we just bought in the open market, but we wanted to be out there quickly and if it makes sense we could turn that into a Build-Your-Own if we thought that was logical.

We also more importantly believe we've got some proprietary opportunities where we take a look at some other pre-stuffeds, plush in some cases again incremental pickups, product that plays off of our heritage -- again it's done with our proprietary margin. We are also taking a look at -- we're going to go in to test with a Craft Shop product line in some stores. We are going to take the product that we have develop for some of other license partners, we get asked for it on a regular basis, we are going to put that on a fixture in the store and see if we can drive some business.

We also have something that's going to up this summer that we think could expand our demo a little bit. We really -- we've always talked you to about kind of 3 to 103, but 3 to 12 is really our core. We are going to put a product in the market this summer that we think can capture some business from 0 to 3 -- I'd say this summer kind of June -- July-ish, and we are going to put these ideas and a couple more -- we're going to put these ideas across the country in some different markets, and in one market we're actually going to kind of put them all in there and see if we can really drive the business.

But we believe -- that the core of what we do, is to make your own experience. We are going to be continue to be strong there, but we believe we can drive incremental visits and incremental baskets with some of these new ideas, and so we are going to stay on it pretty aggressively, and you're going continue to see us trying more things and we are going to miss some, we are going to make some, but we think if we continue to stay on this little it will drive the four wall productivity of our business.

Thanks very much and best of luck.

Thanks Tom.

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

Hi. First, I just wanted to ask you to repeat something that you did earlier in the call. What was the European January - February increase?

It was an increase of 5.4%.

5.4% okay. Thanks. And then, in terms of a question following up on something you said earlier, John, regarding keeping some animals in the mix after their promotion period. Just wanted to get your thoughts on -- is that a SKU management problem or an inventory management problem. How big that could be over time? Do you plan to keep them indefinitely or just a little bit longer than the promotional period?

I think more of the later than the former. I may use last year's Ice Cream Bear, as an example. We brought out four animals. Obviously, there is a best seller and there is a number four seller in any of those. That collection literally came in and out the store in three, three and halfish weeks. We were still getting e-mails at Christmas, saying can I get the Bubble Gum, can I get Mint Chocolate Chip. What we will do is we look at some of these collections. We talked to kids ahead of time. We are usually pretty accurate as to what's going to be the best seller. So, instead of that line being kind of in store for six weeks, the majority of the line will be in for six weeks, but that big seller, we'll plan to keep around for a few months, because we can then still get maximum volume out of it. So, we talked about Hot Dogs and Cool Cats this summer. Our lead guy is this great little Weiner Dog and he will debut in about two Fridays, but we will keep him along around longer, because we know we can get several months of traction out of that.

With respect to SKU management, two things will happen. We will plan for that. So, we won't get ourselves kind of overassorted. The second thing we will do, we mentioned briefly, in 2010, while we were happy with the launches, a lot times our apparel would be really specific to the launch. So think of ice cream again, we had things that were really -- our Mint Chocolate Chip bear had a little dress that was all about mint chocolate chip ice cream.

In '11, we are going to have fashions that match back to their look and to the color of the animal, but that fashion will be able to go against more animals and we'll able to leave it a little bit longer as well. So we think we can get more mileage out of some of this great fashion emphasis that we mentioned earlier.

So we are acutely aware of managing the inventory but we think this is actually a win-win because we'll have the strength of the launches and those toy animals will stay around even longer. And if you remember, one of the things we learned last year, we talked about it in our last call, is our core was not quite as -- our launches were good but our core was not as strong as we wanted to be. We think this kind of hits both sides.

And one thing about the SKU management, we only have 36 bins in every store in the United States and about 30 in the UK. So that's all the animals you can have at any one time. And last year we just weren't the core animals that John just referred to weren't changing out as much, because we didn't let these launch animals became part of the core, which they did in prior years. So, even though we may not have had four animals in a launch in 2009, we might have had one, that animal what after it launched stayed in our line unless it was a seasonal animal like St. Patrick's Day or something like that, and that allowed our core to be fresher. So, this is I think the perfect balance between where we might have been prior to 2010 and where we will be going in the future.

So, customer doesn't visit us every single month. So the customer who comes to visit and wants the ice cream sees the Ice Cream Bears because they go on Bearville and they go to our website all the time, but they are child and mom is not going to bring them to the store until they came to town or when they go to grandma's house and they miss some of those things. So, we really listen to those comments and I think that many of these items can become stronger parts of our assortment. And while they are planned to be shorter, if the sales warranted we'll keep them longer like we had Peace Bear. Our Peace Bear continues to be a really, really strong seller, no matter which way we bring it in, and it was meant to be part of a trend in 2009 that was playing off peace symbols that were hot in fashion. But we have a Peace Bear that we've had since then and we just launched one as part of our Rainbow Collection, the Rainbow Peace Bear, which is very strong and we are revaluating whether we want to keep that longer than just a few months, because it's such a good bear. So I think those are kinds of things that we like to be flexible about. But we have always done it in some way, shape or form but the 36 bin container and makes us very SKU aware.

Thank you.

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

Hi, good morning. I was wondering how is your merchandise margin compared to last year, excluding the fixed occupancy?

Yes, Gerrick, it's John. Our retail margin, which is what we talk about to kind of keep wholesale and some things isolated, our retail margin for the first quarter was actually down 0.2%, so 20 basis points. That was a mix issue that was not a escalating price issue. So, we feel pretty good about that.

As we talked about it and as you are well aware the whole world is seeing price pressure but we have spent a lot of energy trying to really manage our margins. We have looked at our product and how we build it and seeing where there might be opportunities to re-engineer it a little bit. We have looked at our supplier base. This is again all part of this larger consulting project that Tina, Maxine have mentioned.

So, we've also looked at our supplier base and said is it appropriate to add a supplier or two in some of different categories to continue to keep our pricing in line and keep everybody kind of honest. We have made good progress in our logistics expense. So, we've taken some money out of what it costs us to get product from Asia over to the West Coast and then from the West Coast out to our stores.

And then, finally, as mentioned, we have looked at some pricing opportunities where we think it make sense where we think we can deliver value to the consumer and charge just a little bit more. So, when we put all that together while we were off a little bit in Q1, we believe we will keep our retail margins in line with our plan for 2011.

Okay. There has been a lot of discussion about rising cotton costs, but how does that impact polyester and what you are seeing in those other inputs that you use?

Well I think what happened -- the guys who do polyester, remember it's an oil-based product, and oil is up kind of 2x. I think in the past when one commodity went up, the other guys would say, hey I am going to capture bunch of market share. While we sell a polyester and acrylic and some of the things right now, as when cotton went up they said why don't we get in on it too and they just started raising the prices right along with it, not quite to the 2x level that cotton saw, but all of those raw materials have gone up, and labor has gone up in Asia, as you are probably aware.

So, I don't think it's gone up quite to the same levels as cotton, but it has gone up. Rubber has gone up. Obviously, rubber goes into our shoes. So, we've got material cost pressure across the board, no different than probably anybody else you cover or anybody else in our industry.

Okay. And then on the stores, you talked about leases coming up for renewal or subject to kick-out, what percentage or portion of your, say, US store base would be coming up for either renewal or kick-out in the next 12 to 18 months. And then, kind of related, any plans on reformatting stores, the existing store base and when was the last time these stores were kind of refreshed?

Hi, Gerrick, it's Maxine. We have in the next 18 to 24 months about 45% of our stores will come under review for a kick-out, either first or second kick-out, we often put two in there or lease renewal, so that gives the great opportunity to really look at market-by-market, really store-by-store in that market.

And then the refresh of the stores, we constantly refresh our stores as we put something new in the stores, a new fixture, a new category, then all the stores get it, like last year when we launched Small Fries we put in a whole new fixture for Small Fries, every single store got that fixture.

And last year we also did a couple of experiments in a new kind of format that we have several stores that are in that look. It's pretty -- it's still the Build-A-Bear process and procedure but a slightly fresher look, if you will, not necessarily seeing any more sales from those stores that have that look. But we are working on a much more engaged, maybe back a little bit more to our roots, magical experience that pulls back some of the things we put in the store originally that we took out actually for space at first just to make room for customers and then also started taking out as part of value engineering that we are going to be looking to add back into our stores, especially some of our larger volume stores like Disney, New York, Myrtle Beach, where they truly tourist and vacation and long experiences, longer than the average, which is 45 minutes in a store, longer when they come to a tourist attraction like Disney Land or Myrtle Beach or New York City for that matter.

Okay. I will just throw one more in there. You touched on some of the tourist tractions. How about the Orlando Airport store and your Children's Hospital store, status of those and your initial reads on how those are performing?

The Orlando Airports opens next Friday or Thursday.

Okay.

So it isn't open yet. We don't have any sales to report but we are excited about that because obviously lots of kids come through Orlando Airport. And while May is not the biggest month in Disney's schedule, we will have a good start to just see how the traffic goes and then obviously it heats up pretty dramatically for the summer and beyond.

In the Children's Hospital, that opened up last month and is doing well so far. It was a quiet opening and they are getting their -- going through their experience because not only did they open up, expand and opened up Build-A-Bear store, but they opened up a Starbucks and essentially looks like a mini mall in this hospital. So, they are managing that and if all reports are that it's going as planned and very, very smoothly.

All right. Thank you very much.

You are welcome.

(Operator Instructions). And our next question is a follow-up from the line of Tom Filandro. Please proceed.

Hi, thank you. I want to go back to the comment originally you talked about the gift card trend in the fourth quarter. Could you -- maybe Tina, could you tell us precisely what happened to the gift card trend in the fourth quarter like how much was it down? I hear you stated I think you had a negative impact of 1.6%. So I have two questions related to that. One is any initiatives in place to reverse that trend during the holiday season as we approach this year? And then, the second one is what impact are you anticipating the Easter gift card redemption to have on the second quarter results? Thank you.

Sure. Tom, I think that again some of the decline was the decline in the overall fourth quarter sales in the North America. And I think the one way to stem some of that offset was to put in the upsell gift card program we put in at Easter in the US, which we had not done in the past year, and continue our up sell gift card program at Valentine's Day, which we had last year. So, that put about 200,000 more cards in the marketplace.

And I think on a go-forward basis in holiday again this year, we'll continue to have our upsell gift card program. At Easter time and Valentine's Day, we actually lowered our limit from a perspective of -- it used to be a $30 purchase you could get the $10 card, and we lowered that to $20 to help stem and put more cards in the marketplace. And again, I think, we will probably do that at holiday time to help put more cards in the marketplace. But, again, our gift card program is very successful, and we are going to continue to look at outside places to sell our gift cards, whether it's Walgreen stores or Costco's or what have you. As you walk into the grocery stores most everywhere carries gift cards now. So, we will continue to enhance that program as we go forward.

Tom, one of the other things -- it's Maxine. One of the other things that we are doing is one of the things that Build-A-Bear is known for is our packaging. And as we go into the holiday season, we're going to put that some really fun packaging for our gift cards that we had actually -- it was available, but people had to ask for it more so then it was -- we just sort of went to this fast mode, let's just sell a lot of cards and put them in an envelope and sell them out the door and we are going to put back some fun packaging for them to make it as giftable.

But we do have a lot of outlets now in the United States. It's a pretty mature market in the United States selling gift cards in grocery and drug stores. But the UK, one of the reasons why the UK had a positive year is that we just opened up secondary outlets for them last year, not as many as we would have even liked, but that opportunity is still way -- is out there strongly for the UK to have expanded places to buy a Build-A-Bear card.

And as our awareness grows to that, just a perfect timing. So, we think with all those things. We are looking -- we look at every single piece of marketing. It wasn't so much that gift cards were less a percentage of our business, it's just that overall the business was less, so. And we do have the strong upsell program. So it could have been some trade off of customers instead of buying a $35 or $50 card were buying the upsell card. But it's such a successful program and has over time put a lot more cards in the hands of our customers that we felt it was valuable and worthwhile trade off.

Thank you.

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

Hi. You had Hop for Easter this year. Was there comparable sort of licensing event last year, I can't really recall?

Yes. Do you remember, Gerrick, we brought out Alvin and his friends for Q4 '09 and it was so successful. We scrambled and brought Alvin back and Brittany in full size make your own. We had them for about three weeks, kind of right in the middle of March. So, Hop was really kind of a comp to Alvin and Brittany last year, both $22 price points. Hop was supported by the -- kind of the first introduction of the movie. Our E.B., excuse me, was the first introduction of the movie and Alvin and Brittany were right in on the DVD release in Q1 '10. But yes, those were pretty much in comp.

Okay. And ever since the Shrek debacle several years ago, your licensing initiatives, at least on the skin side, have seemed to perform pretty well, things like Hello Kitty and Hop and Alvin. What percent of your skins these days are licensed, and how does that compare? And how do you think that will look through 2011 with the addition of Smurfs and other licensed skins you're going to bring on?

Yes, I think you've to kind of put in a couple of categories. You're right, Hello Kitty is licensed and she has done very, very well for us since -- she came in '04 and then in apparel in full size in '06 and she's been a star for us ever since. We have on 6/10, or June 10th, we are breaking a pink Hello Kitty first time ever and we're really, really excited about it. We've got Smurfs, and then we do have some things with the holidays, which we're not going to hear today but we will next time we talk to you guys.

When we look at our license skins and then you could also think about licensed products throughout the store, right. So whether that is sports uniforms, whether that is a tie-in with iCarly or Wizards of Waverly, when we look at all that license business overall, kind of 20ish%, a little bit more, somewhere in that range though. Some skin, some apparel, we want to be there, we want to be contemporary, we want to certainly trade on these large theatrical releases and the budgets that they bring and the energy they put to market, but we don't want to get over-licensed, right. So we're always trying to find that balance.

So you do have some evergreen properties like in HK. Then you have some of the movies that we kind of have for the period of time. And then we will do something like a Victoria Justice, who will be our brand ambassador this year and into next year, and we'll do some product with her, both apparel and animal. So that's how we look at that business overall and again kind of 20ish%, a little bit more.

Okay. And your existing stores, I guess, 2,800 square feet was kind of the average and then you talked about shrinking down to 2,200 with some new stores and reformats and relocations. Is that still kind of the goal, 2,200 square feet, or maybe are we shooting for something lower? What kind of square footage are you looking at for relocations or new stores?

No, they are in the 2,200 to 2,600 range that will just depend on the shape and the store. We are not lower than 2,000 square feet anywhere. I mean, the selling square feet might be below 2,000, but the store itself, the gross square footage is usually 2,200 to 2,600.

Right. But stores that you relocate...

What we're relocating are stores that are 3,000 square feet. We are relocating them to the current -- which we believe is the current optimum size of 2,200 to 2,600.

Okay.

Somewhere in that range. So they were bigger, much bigger stores and in some case they would have been over 3,000 square feet. One of the stores that will open this week, I believe it's this Friday, is International Plaza, which was opened in 2001 in Tampa right after 9/11 actually. It had a party room in it. It was over 4,000 square feet. And now it's being downsized to a 2,500-ish square foot store. So significant reduction, but in the same mall and generally the same location, and so it will be a good store for us and much more cost effective.

And is the birthday party concept, is that a significant part of your business anymore or is that kind of gone by the wayside, how is the party business?

The party business is not insignificant. It's never been as big as a lot people think it is. It's under 10% of our business, but it still is a healthy business and a very important part of our business.

Okay. All right. Thank you.

That concludes our question-and-answer session. I would like to turn the call back to Maxine Clark for closing comments.

Thank you again for joining us. We look forward to speaking to you when we report our second quarter results. Have a great day.

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