Build-A-Bear Workshop Inc (BBW) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Build-A-Bear Workshop, Inc.'s second quarter fiscal 2011 results conference call. My name is Kiana and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we'll conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Miss Allison Malkin with ICR. Please proceed.

Thank you. Good morning. Thank you for joining us. With me today are Maxine Clark, Chairman and Chief Executive 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 questions during this one hour call. Feel free to re-queue if you have further questions. Please note that our call is being recorded and broadcast live via the internet. The earnings release is available on our Investor Relations portion of our corporate website and a replay of both our call and webcast will be available later today on the IR site.

Before we get started, I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties. Our actual results could differ materially from those currently anticipated due to a number of factors including those set forth in the Risk Factors section in our annual report on Form 10-K, and we undertake no obligation to update or revise any forward-looking statements.

Now, I would like to turn the call over to Maxine Clark. Maxine?

Thank you, Allison, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal 2011 results. For our call today, I'll begin with comments on our second quarter performance and other key initiatives. I'll also give insight into our product and marketing strategy.

As you know, John Haugh, our President, recently resigned. I'd like to thank John for his contributions to Build-A-Bear Workshop and we wish him well. Before we evaluate our future organizational structure, we've assigned his responsibilities to other senior leaders of our Company, all with significant retail and Build-A-Bear Workshop experience.

Following my remarks, Tina Klocke, Chief Operations and Financial Bear, will follow our financial results and update you on progress with costs and savings related to our recent consulting project. Then we'll open the call to take your questions.

In the second quarter, we grew our total revenue by 9%, excluding the impact of foreign exchange, driven by a 7.1% increase in our consolidated comparable store sales. Comp sales were up in both North America and Europe, positive 8.3% and positive 1.3% respectively. While the shift in Easter benefitted our second quarter comp by approximately 6%. Our sales growth continued positively post-Easter. Consolidated comp sales in May and June combined were up approximately 1%, with strong margins, giving us confidence that we are making solid progress towards our annual goals.

Our top-line growth also reflects strong e-commerce business, up 22.8% in the quarter reflecting the success of web-specific marketing initiatives and our ability to improve conversion and transaction metrics with an updated technology platform.

Our net loss in the quarter was $6.7 million or $0.37 per share, a significant improvement from last year's second quarter loss of $8.5 million or $0.45 per share. As you know, the second quarter is our smallest quarter and typically results in a loss, even when Easter shifts into the period.

We remain very focused throughout our organization on increasing shareholder value. We are intensely focused on continuing to grow our comp sales through our merchandise marketing and operations initiatives and improving our profitability by aggressively implementing the findings of our consulting project to reduce costs. We see major opportunities to grow our international revenues in an increasingly global economy through existing franchisees and by adding additional countries.

We believe Build-A-Bear Workshop is a great investment, so we continue to repurchase our common stock and we will strategically use our strong balance sheet to take advantage of other growth opportunities as they present themselves. We also see opportunities to update our store design and experience with exciting new features that will increase guest engagement and drive traffic to our stores.

During the quarter we made solid progress towards our product, marketing and expense goals. Our consolidated comp store sales increase was driven by a 5.4% increase in transactions and a 1.7% increase in average transaction value, reflecting the strength of our animal launches and related apparel, marketing support and operational execution.

Our retail gross margin was up 490 basis points and our merchandise margins were strong as we moderated product cost increases through strong negotiations and selectively increased retail prices, optimizing our merchandise mix in the process.

We are in a full-court press implementing projects to improve our efficiencies and reduce expenses identified in our consulting project. As expected, our 2011 second quarter results included costs of $0.05 per share associated with this project and we expect to realize significant annualized savings beginning in the back half of this year.

Now, let me go through some of the main highlights driving our sales growth in the quarter which gave us growth across all geographies. Our key merchandise initiatives moved us forward including our new animal introductions, updated core animals, improved coordination of apparel and accessory and the addition of new product category.

For example, our encore to last year's Ice Cream Bears, Blizzard Bears in North America and Ice Cream Bears in Europe, had updated features such as a scented ice cream cup and fashionable related apparel. We launched this collection earlier than last year in order to leverage a high-traffic June and give us a strong kick-off to summer. We brought two great brands together this year in North America with the tie-in with Dairy Queen. This gave us brand exposure in over 6,000 DQ stores and high visibility in digital marketing media resulting in many more brand impressions than last year. In the UK, we partnered with Baskin-Robbins in a similar way to expand the reach of our brand beyond our stores.

In our previous calls, we said we would be making more frequent updates to our core animals, which in this quarter included a great launch of Pink Hello Kitty. Hello Kitty has been a powerful property for us for several years, but this is the first time we offered a pink version. Pink Hello Kitty has a higher-than-average retail and her coordinated apparel and accessories result in a high average transaction value. This was such a successful core update that we're going to leverage other colors seasonally as we move forward.

Our most recent launch starting July 15, was the introduction of Smurfs in conjunction with the movie's release. Theatrical tie-ins generate and help bring traffic to our stores as we leverage the energy in advertising that the movie studios generate. The Smurfs' launch has been such a strong traffic and sales generator that we are bringing in another round of product timed with the release of the movie's DVD coming this holiday.

We continue to capitalize on opportunities to sell other brand-consistent toy product to spur impulse purchases and add-on sales. After a successful test, we added Angry Birds product, plush versions of the birds and pigs that are featured in the highly popular mobile game to all stores in late June and we also added a new collection of our proprietary smallfryes on July 1 and we'll introduce another collection in September. We are building a key business category by offering relevant pick-up items that are easily added onto core product sales, but also appeal to an older demographic and bring new customers into our stores.

Our integrated marketing and promotional support was also very effective. Our Easter gift card upsell promotion where guests could purchase a gift card for half-off with a qualifying transaction resulted in 200,000 incremental cards going into the market, taking advantage of strong Easter traffic to feed business into the summer months as redemptions peak.

We engage with kids and moms and we're using digital media to reach both of these targets through online initiatives that put our brand where our customers are spending more and more time. For kids, Bearville continues to grow and our new features have resulted in improved key metrics.

Unique visits to the site were up over 48% over last years second quarter and we now have over 20 million Avatars created. The amount of time children spend on the site per visit has increased, which means engagement with our brand continues to grow. Camp Happy Heart, a highly anticipated annual event, is once again in session and is on track to set new records this summer. Moms have shown their loyalty to our brand as well. We now have over 1 million Facebook fans, making us one of less than 300 companies worldwide to have over 1 million fans.

We have new initiatives at work that will engage our guests with video content and creation and give us a stronger presence on YouTube, a site that is very popular with kids and adults. Victoria Justice, our brand ambassador and star of the hit show, Victorious, on Nickelodeon, continues to be featured in our advertising and marketing programs. Build-A-Bear Workshop is known for our fashion, so partnering with Victoria is a great fit. She is all about the latest trends and hot looks. In August, we will be launching Victoria Justice Fashion for Bears to leverage this relationship even further.

We are confident that our strategies will continue to grow our sales in the second half and we expect to achieve our profitability goals for the year. On August 5, we'll start the third annual $29.99 bundle promotion that gives our guests the opportunity to purchase any animal, any outfit and any pair of shoes for $29.99. This event makes it easy for mom to say yes to her kids when they're out doing their back-to-school shopping.

In September, we are really excited to introduce the world famous Peanuts character, Snoopy, for the first time ever. Our version of Snoopy has a fun movement and musical feature.

While we typically review our Q4 product introductions on our next call, I do want to mention some highlights. We are very excited to partner with Microsoft on the fall launch of Kinectimals now with Bears. Introduced last year, Kinectimals has become one of Microsoft's most popular titles for their animal-friendly Kinect for the Xbox 360 platform. As you may know, the Kinect system launched in the fourth quarter of 2010 with record-setting demand, over 10 million systems sold. In Kinectimals, kids, families and animal lovers of all ages interact virtually with animals featured in the game. The play experience is adorable and has brought a whole new customer to Xbox including tween girls.

Thanks for the leadership of digital marketing chief, Teresa Kroll, and our CIO, Dave Finnegan, we are once again bringing two great brands together. This year's extended release of the Kinectimals game has a bear theme and Build-A-Bear Workshop will offer several exclusive bears that will unlock branded, Build-A-Bear Workshop bears inside the game. It is a natural fit for the leading gaming system and the authority on plush to come together in this unique way. Both companies will use full marketing assets to drive revenues and cross-promote each other's product.

In addition to the Smurf's DVD, we will also tie in with two major holiday theatrical releases, which will bring a lot of attention to our product and bring guests to our stores to bring the movie characters to life with our plush version.

To summarize, we are optimistic about the back half of 2011. Our product assortment looks great. We're supporting this with strong marketing, integrating these initiatives into our signature store experience. While the quarter has just begun, July is off to a good start.

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

Thanks, Maxine, and good morning, everyone. Let me start by giving additional details about our second quarter results. For the second quarter, total revenues increased 10.4%, to $81.8 million from $74.1 million in the second quarter last year. Excluding the impact of foreign currencies, total revenues increased 9%.

Consolidated comparable store sales increased 7.1% with increases in both North America and Europe of 8.3% and 1.3% respectively. International franchise revenue increased to $714,000 from $661,000 last year. We ended the quarter with 70 international franchise stores versus 60 last year. During the quarter we expanded our international business with a successful opening of our first franchise location in Brazil. We believe that international growth is a key opportunity and are working closely with our franchisees to gradually move the business forward.

Retail gross margin increased 490 basis points in the second quarter to 35.8% from 30.9% last year. This increase was primarily driven by 130 basis point improvement in merchandise margin and 320 basis points in leverage of fixed occupancy costs. We will continue to refine our sales mix and expect the benefits of our consulting project to allow us to maintain strong merchandise margins in the second half of the year.

Total SG&A in the second quarter was $40.5 million or 49.5% of total revenues compared to $36.4 million or 49.1% of total revenues in 2010. Excluding the consulting project costs, SG&A as a percent of total revenue was 47.7% in the second quarter.

For the quarter we recorded a tax benefit of $4 million, which compares to a tax benefit of $4.1 million in the second quarter of 2010. For the full year of 2011, we continue to expect our tax rate to be approximately 38%.

Net loss in the second quarter was $6.7 million or $0.37 per share compared to a net loss of $8.5 million or $0.45 per share in the second quarter last year. As Maxine mentioned, the net loss for the second quarter of fiscal 2011 included a consulting fee that impacted our earnings by $0.05 per share. As a reminder, that loss for the second quarter of fiscal 2010 included a non-cash charge of approximately $300,000, our $0.02 per share related to the impairment of certain, long-term deposits.

Now, turning to our first half results, total revenues increased 1.3% to $177.8 million from $175.6 million in the first six months of the year. Excluding the impact of foreign currency, total revenues increased 0.8%.

On a consolidated basis, our comp store sales declined by 2%. This includes a 2% decrease in North America and a [1.7%] (changed by Company after call) decrease in European operation.

Net loss for the first six months of 2011 was $8.9 million or $0.15 per share compared to a net loss of $6.8 million or $0.36 per share in the first six months of last year. Net loss this year included $0.10 per share in consulting fees. Net loss in 2010 included $0.02 per share non-cash impairment charge related to certain long-term deposits.

Regarding cash flow, we ended the first half with a strong consolidated cash balance of $34.7 million. We have no debt and we did not make any borrowings against our credit facility. During the quarter, we repurchased 389,000 shares and now have $18.6 million available under our share repurchase program.

Depreciation and amortization for the quarter was $6.2 million compared to $6.8 million in 2010. We expect depreciation and amortization for the full year 2011 to be approximately $25 million. Capital expenditures in the second quarter were $3.8 million, primarily for store-related capital and software and equipment upgrades. This compares to $3.2 million in the second quarter of 2010.

We continue to aggressively review our existing store portfolio to optimize our overall productivity and profitability. During the second quarter, we completed a downsizing and relocation of four stores in North America. Initial results from these relocated stores are in line with our expectations.

For the year, we're on track to open five permanent new stores across geographies. In addition, we expect to open three pop-up stores, which allows us to reuse fixtures and equipment and test new markets prior to making long-term lease commitments. We expect to close five to 10 permanent stores this year. To date, we have closed three stores in North America and one in the UK. We have also closed three pop-up stores that were open last fall.

We expect capital expenditures for the full year to be between $12 million and $15 million. At the end of the quarter, consolidated inventories totaled $46.2 million compared to $57.1 million at the end of the second quarter 2010. Inventory per square foot decreased approximately 20%, in line with our plan and puts us in good position to respond to product and pop culture trends in the back half of the year.

Turning now to our consulting engagement, we initiated the consulting project with a focus into product sourcing and supply chain because we anticipated the global pressure on pricing and other component and transportation costs that the industry is now experiencing. Towards the end of the first quarter, we moved into Phase 2 of the project focusing on additional areas of operation including store productivity, marketing and other expense areas.

We continue to expect to realize savings in the range of $4 million to $6 million in 2011, primarily in the second half, which would equate to $0.14 to $0.21 per diluted share. We expect annualized savings to be $10 million to $15 million. We are aggressively acting on the findings in order to get the most benefit we can in 2011.

As we move into our fiscal third quarter, we are pleased with our current sales trend. We are focused on implementing the findings of the consulting project to improve our cost structure and we are committed to our goal of increasing shareholder value by profitably growing our sales. For those of you that build models in our business, we would like to remind you that last year's second half included $6.4 million in non-reoccurring commercial revenue at no gross margin, $5.8 million coming in the third quarter. We do not anticipate a similar transaction this year.

This concludes my remarks. Now I'll turn the call back to Maxine.

In conclusion, we feel good about the start to the second half of the year. We are growing our business in our Company-owned stores and e-commerce by building synergies between our core products, our partnerships with other world-class brands and through added engagement in and out of our iconic stores. Build-A-Bear Workshop is a powerful, global brand. Kids love us and moms trust us worldwide. We are in a strong financial position to drive growth, both domestic and international. Along with our Board of Directors, we will continue to evaluate all potential uses of our capital including the repurchase of shares and invest as opportunities arise in strategic initiatives for the benefit of Build-A-Bear Workshop's stakeholders.

With that, I'd like to turn the call over to the operator to begin the question and answer portion of the call.

(Operator Instructions). And our first question comes from Sean McGowan with Needham and Company, please proceed.

Good morning. Thank you. My question is regarding gross margin. Now, typically over the years, this second quarter is generally the lowest of the four quarters in terms of gross margin as a percentage of sales. Do you expect that to be the case this year and how much higher than this level do you think they can get?

Hey, Sean, it's Tina. Last year we ended the year with a gross margin of 40% and so we believe that we can get to that and hopefully, improve a bit upon that with our cost savings initiatives throughout our consulting project. But again, in the second quarter we were able to leverage our fixed overhead expenses because we had comp growth in that quarter.

Okay, so that would imply then that the margins in some subsequent quarters could be higher than 40, right?

Right.

Okay. Thank you.

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

Hi, everybody.

Hi, Janet.

Hi. I just wanted to ask about Smurfs. It sounds like it's doing very well and I'm wondering about the inventory availability there and if you think you'll have enough to meed demand as we go through this period and then, I think the DVD release is the fourth quarter. Will you be able to meet demand there?

We've actually have been sourced out for a couple of weeks, so we've been selling it like hotcakes and while we will have some through the weekend, I'm sure, we have small Smurfs, the little pick-up items, add-ons. We'll have those longer than we'll have the Make-Your-Own plush. It depends on the store, but obviously there's always opportunity to sell more and we have gone into it for the fourth quarter to make a bigger deal of it and we also are bringing in Papa Smurf for the fourth quarter, so that will be a really nice addition to our assortment.

Okay and I just wanted to ask about the comp store sales trends in the post-Easter period. They were positive, is that right?

Yes.

And were they up to your expectations or did you think that you might have done better if you had had different inventory or different promotions? Perhaps you could talk a little bit about the post-Easter period.

I think that we have some inventory challenges out of coming out of Easter. We had a very strong Easter. You reposition your inventory, but I think that considering how much better our Easter was than our plan, you take some customers out the market earlier than later. Then, in May and June, which were positive, we ended up there was some change in school holidays and things like that, but June ended on a very strong note and then July is very strong, especially since the Smurfs have come out. So, July is good and it seems to continue to build, so we're building back our inventory position and we are feeling good about our business as we go into this part of the year, as I said. It's just getting all the inventories back in line and also making sure that we have the inventory behind the key products that we are featuring for our guests. The Smurfs has just been fantastic and we're very excited about how that's added to our business in the last few weeks.

Great. Thank you so much. Thank you.

Thanks, Janet.

And we have a follow-up question from the line of Sean McGowan with Needham and Company.

It's actually sort of a multi-faceted question about the consulting project and the subsequent cost savings, if you can touch on a couple of things. Was there any benefit of the cost savings seen in the second quarter? Similarly, where will we see the impact? Will it all be in SG&A? Will some of it be in cost of sales? And is the savings goal that you're articulating, is that net of the cost of the consultants or is that before taking out that cost?

Okay, so there was really just slight benefits, not even worthy to call out in Q2 as we started at the latter part of Q2 with the transportation savings that we have gotten and that will be in third and fourth quarter. When we look at where it will be, I would say right now we're looking at probably about 40% between the $4 million and $6 million will be related to gross margin and the other portion will be in SG&A expenses. The $4 million to $6 million are after consulting services, so it's the net because we've already taken the $0.10 or the $3 million in consulting expenses in the first and second quarter.

Okay, so it's of the annualized as well. That's after --

Right.

I mean, right, because you don't want to pay $5 million to save $5 million. Okay, thank you.

Right.

(Operator Instructions). If there are no further questions, I'll turn the call back over to Maxine Clark for closing remarks.

I want to thank you again for joining us and we look forward to speaking to you again when we report our third quarter results in October. Have a great day.

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