Build-A-Bear Workshop Inc (BBW) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2011 Build-A-Bear Workshop, Incorporated Earnings Conference Call. My name is Karis and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder, today's call is being recorded for replay purposes. And I would now like to hand the call over to your host for today, Ms. Allison Malkin of ICR. Please proceed, ma'am.

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. 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 the 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 entirely subject to risks and uncertainties. Our actual results could differ materially from those currently anticipated due to a number of factors including those set forth in the risk factors section in our annual report on Form 10-K. And we undertake no obligation to update or revise any forward-looking statements.

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

Thank you, Allison, and good morning everyone. Thank you for joining us to discuss our third quarter fiscal 2011 results. For our call today I'll discuss our third quarter performance and give insight into our product and marketing strategy. Following my remarks, Tina Klocke, Chief Operations and Financial Bear, will review our financial results and update you on progress with cost savings related to our recent consulting project, and then we'll open the call to take your questions.

I am very pleased to report solid profitability of $0.05 per diluted share in the third quarter, a significant improvement over the loss reported in the third quarter last year. In the quarter we grew our total retail sales, our comparable store sales, our E-commerce and our international revenues.

We improved our gross margins and realized savings in our expense structure. We believe our results show continued progress towards our number one objective, to increase shareholder value by profitably growing sales.

Additional highlights for the quarter include delivering another quarter of positive comp growth and increasing our third quarter comp for two consecutive years. We had double digit growth in our E-commerce business. Besides enhancements that we've made and continue to make, our marketing initiatives and our social media presence are paying off at both top line and key metric improvements in this channel.

We reduced promotional activity and we put an intense focus on product costs and optimization of retail pricing which led to an increase in our retail gross margin of 160 basis points.

We started seeing expense savings from our consulting project and are on target to hit our annual goals.

Our international revenues from franchised operations increased 14% in the quarter. To put our full international presence in perspective, when you combine our company-owned stores in Canada and Europe with our franchised operations, we had 153 stores in 16 countries at quarter end. We continue to see major opportunities to grow internationally in existing countries as well as in new countries.

We continue to believe that Build-A-Bear Workshop stock is a great value and we invested $5.1 million of our cash to repurchase 934,000 shares of our common stock during the quarter.

Now let me talk about some of the key drivers of our sales growth in the quarter. We effectively capitalized on the back-to-school season with strong results in the key traffic months of July and August, which led to a solid quarterly performance. As we mentioned on our second quarter call, our July launch of Smurfs in conjunction with the movie's release was a great success. The tie-in with the Smurfs enhanced our own marketing and generated a lot of buzz and excitement.

We will continue to partner with relevant and brand appropriate characters and movies and these tie-ins help bring traffic to our stores which drive sales across all of our products.

In August we held our annual bundle promotion where we offer any animal, any outfit and any pair of shoes for $29.99. We supported this promotion with our full marketing arsenal including TV advertising, direct mail and e-mail, online and in-store. This is the third summer we offered the promotion. Our guests responded very positively and we have improved our sales and execution each time we held the event.

In September we introduced Snoopy for the first time with a fun movement and musical feature, as well as our Halloween launches of Orange Owl and Halloween Hello Kitty.

We also eliminated several promotions that ran in 2010, keeping the marketing and operational focus on the excitement of the new product launches and improving our overall profitability for the quarter.

Our Furbulous [Finds] category which includes smallfrys, Angry Birds and other pickup items continues to be strong. We are building a key business category by offering relevant impulse items that are natural add-ons to core product sales, but also are easily picked up by casual shoppers or children's allowance.

As we move into the fourth quarter, we are very excited with our lineup and expect to maintain our positive comparable store sales trend. Continuing to build on our success with major theatrical releases, we have some exciting tie-ins coming this holiday.

Next Tuesday we will launch the Happy Feet collection in advance of the US release of the movie Happy Feet 2. Previously, we featured the starring penguin in the original Happy Feet movie and it was an extremely popular launch.

On the Friday before Thanksgiving, we will introduce our Alvin and the Chipmunks collection ahead of the much anticipated Chipwrecked movie in 3D which launches in theaters in December. Included in this assortment is a line of apparel featured in the movie and found exclusively at Build-A-Bear Workshop.

In mid-November, we will bring back the Smurfs to capitalize on the release of their DVD. Our assortment will include the return of the highly popular Smurfette and Clumsy, and just in time for Christmas we're adding Papa Smurf.

With this launch we expect to gain sales from guests that missed out on the first release as well as collectors that want to complete the trio of characters. Also, as you may recall, we began our partnership with Microsoft and their Kinectimals title, Now With Bears! this October, which will help drive sales of our core items.

As we move into the holiday season, we will once again promote Build-A-Bear Workshop as the place for gifts this holiday with our Get Your Wish On campaign, that promotes gift bears as well as the gift of the experience that comes with a Bear Bucks gift card.

Our gift cards are sold in our own stores as well as through third parties and we increased the outlets of distribution by over 10%. Gift card redemptions are key to our first quarter business and we expect our fourth quarter plans to result in improved sales as we move into 2012.

Our store experience remains strong with guest satisfaction levels maintaining at 80% highly satisfied for the quarter. Our brand is unique in that we have a connection with our guests in and out of our store with both kids and moms. Our digital initiatives are a key component of staying connected with both of these segments and put our brand where our customers are spending more and more time.

Kids engage with our brand on Bearville resulting in over 3 million hours of online engagement per month. And our Facebook community, a prime platform for us to connect with moms, continues to grow. We now have approximately 1.6 million fans. To put that in context, we're one of only about 150 retail or consumer product companies worldwide to have over 1.5 million fans.

To summarize, while we recognize that the economic backdrop continues to be uncertain, we believe our product and marketing strategies position us to deliver the holiday season. We also remain on track to achieve our margin and expense savings objectives. As a result, we remain confident in our ability to achieve our sales and profitability goals for the year.

And 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 third quarter results.

For the quarter, our total revenues were $97.4 million, an increase of 2.3% excluding the impact of foreign currency and last year's single wholesale transaction of $5.8 million, which had no gross profit.

Consolidated net retail sales increased 3.1% excluding the impact of foreign currency. This increase was driven by comp store sales growth across geographies; specifically a 0.7% increase in North America and a 3% increase in our European operations. We increased our average transaction value by 4.5%. This was partially offset by a 3.4% decline in transactions as we reduced promotional activity, significantly improving our profitability.

International franchise revenue increased 14% to $872,000. During the quarter, our franchisees opened 6 locations. We ended the quarter with 76 international franchise stores versus 58 last year, demonstrating our progress in our strategy to aggressively grow our international operations.

Retail gross margin was $38.4 million, an increase of $3.1 million, or 8.4%. Our retail gross margin percentage was 40.2% and represented a 160 basis point increase over last year. This increase was primarily driven by a 70 basis point improvement in warehouse and distribution costs, and 60 basis points in leverage of fixed occupancy costs.

Total SG&A in the quarter was $37.8 million, or 38.8% of total revenues; excluding the prior year wholesale transaction represented a 270 basis point improvement. This was driven by 160 basis point reduction in marketing-related expenses, 50 basis points in store operations expense, and a 40 basis point decline in corporate depreciation expense.

For the quarter, we recorded a tax expense of $1 million, which compares to a tax benefit of $524,000 in the third quarter of 2010. For the full year, we expect our tax rate to be approximately 35%. Net income in the quarter was $900,000, or $0.05 per diluted share, compared to a net loss of $1.4 million or $0.07 per share last year.

Net loss for the third quarter of fiscal 2010 included a $0.03 per share cost related to the decision to close our operations in France.

Turning now to our first nine months results, total revenues were $275.2 million, an increase of 1% over last year, excluding the impact of foreign currency, and the $5.8 million wholesale transaction that had no gross margin.

On a consolidated basis, our comp store sales declined slightly, 0.9%. We had a 1.1% decrease in North America and a flat result in Europe. Net loss for the first nine months of 2011 was $8.1 million, or $0.45 per share, compared to a net loss of $8.2 million, or $0.44 per share in the first nine months last year.

Net loss this year included $0.11 per share in consulting [fees]. Net loss in 2010 included $0.05 per share in costs associated with the decision to close our operations in France.

Regarding our cash flow, we ended the quarter with a strong consolidated cash balance of $25.1 million. We have no debt and we did not make any borrowings against our credit facility.

During the quarter, we invested $5.1 million to repurchase 934,000 shares. Through the first nine months we have repurchased 1.7 million shares for $10.2 million and now have $13.6 million available under our share repurchase program.

Depreciation and amortization for the quarter was $5.9 million, compared to $6.7 million in 2010. We expect depreciation and amortization for the full year to be approximately $25 million. Capital expenditures in the third quarter were $3.8 million, primarily for infrastructure and new stores. We expect capital expenditures for the full year to be approximately $12 million.

For the year, we are on track to open 6 stores across geographies. We expect to close 6 stores this year in accordance with natural lease expirations and kick-out clauses. This reflects our ongoing refinement of our real estate portfolio as we work to optimize our store locations.

At the end of the quarter, consolidated inventories totaled $56.3 million compared to $54.7 million at the end of the third quarter 2010. Inventory per square foot increased approximately 2.9% in line with our plans and puts us in a good position to respond to top sellers and new trends.

Turning now to our progress on our expense savings initiatives. We generated $700,000 in savings in the third quarter of which $400,000 was in SG&A areas as we reduced store payroll and other store expenses. The remaining $300,000 represented a reduction of cost of goods sold primarily through freight and sourcing cost improvements.

We expect cost savings to be approximately $4 million, or approximately $0.14 per diluted share in 2011. On an annualized basis we continue to expect savings in the range of $10 million to $15 million inclusive of the reductions that we expect to achieve this year.

As we begin the fourth quarter, we are pleased with our positioning for the holiday season. We are focused on continuing to reduce our expenses and improve our cost structure, and we are committed to our goal of increasing shareholder value by profitably growing our sales.

Now, I'll turn the call back to Maxine.

Thanks, Tina. In conclusion, we are confident in our strategies and our ability to continue to achieve improvement in our sales, in margin and in profitability as we enter the final quarter of the year.

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, who 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 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) Your first question comes from the line of Sean McGowan with Needham & Compan. Please proceed.

I have two questions, probably more directed at Tina. First, you have a loss through the first nine months of the year, so it kind of creates a weird tax quirk. Would that result in the effective rate in the fourth quarter needing to be quite a bit below that 35% in order to get the full year to 35%?

Yes, I mean, I think that's what you have to do, you have to back into the 35% number.

Right. And I know that's a function of how profitable it will be and you don't give --

Absolutely.

-- that estimate, but that's the adjustment you'd have to make, right?

Right. And it also depends on profitability in each jurisdiction.

Right, yes.

Because Europe has a different tax rate than the United States.

Right. Okay, and then second, if you could review again the year-to-date savings and where you think those savings in the fourth quarter are going to -- for the full year of $4 million, where do you think you'll see the impact in the fourth quarter?

So, we have -- to date we've saved approximately $700,000 which was primarily in the SG&A category related to store operations. We believe that on a fiscal 2011 we'll save about $4 million. And it will be split primarily between SG&A expenses and cost of goods sold, looking at freight and transportation being the primary drivers of that.

On an annualized basis, so for 12 months, inclusive of the $4 million, we believe that we'll save $10 million to $15 million.

Now when you say annualized, do you mean taking the year-to-date and assuming that it was full months, like do you know if it's a quarter to multiply it by four, is that what you mean?

Yes. So for instance we save four months -- $4 million in 2011, we'll have saved $6 million to $11 million in 2012.

Okay, got you. Okay, thank you.

And your next question comes from Janet [Carpenter] with JMC Research. Please proceed.

Hi, it's Janet Koffenberg, how are you guys?

Good morning, Janet.

Hi. Just a couple of questions. I think your [comp churn] was stronger in July and August, at least you talked about it on your last call, then it turned out to be. And I think that had to do with the promotional activity being pared back in September. I'm just wondering how successful you thought that was and if you're going to continue to use that policy going forward, or if you think that the customer needs those promos to keep visiting the stores and the website?

Well, we think it was a successful strategy because I think we got out of balance. We had so many promotions that it was hard to get a customer to come in to buy anything at regular price. And in a year that we have such good launches that are supported by outside media such as a movie launch of The Smurfs or earlier in the year of E.B., or is coming up this holiday season, we really can allow those to stand on their own and drive traffic at full price versus sale price. And we want to use our promotional dollars or our markdown dollars to help make sure that we're clean at the end of the season. Our inventories are in very, very good shape, very fresh, and we don't have to give it away all the time.

Build-A-Bear, they're only going to buy so many bears a year, and I think that we are -- don't want them to -- they're going to come in a buy a few, they're going to buy them, stock up. We see that over the course of history. We haven't seen any change when we offer a sale or we have that regular price how many bears people put into their home. So, how do we optimize our retail?

And our emphasis -- the other part of it is our emphasis has been on the must-win months of July and August and November, December, and February and March and the Easter, wherever Easter falls. And so we want to make sure that we're driving those times, because those times -- and if the other -- we have to rob from Peter to pay Paul, take out markdown dollars in some months to drive the -- when the geese are flying, so to speak, then we're going to do it. And it's worked out for us in all the quarters that we've pulled back on that, those promotional techniques that we were using.

And so then when we look into the fourth quarter, I know you have the, several different benefits from movie launches like Happy Feet and the DVD and all these, et cetera, et cetera, [Albert.] Is that a improved schedule of movie releases and collaborations versus the fourth quarter last year, or is it about the same? How --

No, it's much improved. Last year our holiday animal was Rudolph the Red Nosed Reindeer which, while he was successful, it wasn't -- it was one theme. We had Rudolph and Clarice and we didn't have a movie, because that's a classic. So while children watch it on television it's not something new. These are both new and the Smurfs' DVD is new. Now you won't have those next year; those are the challenges that you have looking forward. But right now this is a plus and is a very positive plus at least as our history has taken us.

And we look back on all of these events that we've tied into in the past, Build-A-Bear goes after it in a very meaningful way and we're able to get out ahead of it. So we launch the movie Happy Feet 2 on Tuesday right after, the day after Halloween, and the movie doesn't come out for a few weeks. So we get ahead of it just like we did for Smurfs. And then on Thanksgiving we'll launch the Chipmunks and that comes out in December. And then in between the both of those, in the middle of November, we'll have The Smurfs that hit the store again and we actually have a lot of customers waiting for those to come back in, so we're excited about their re-launch.

Okay. And my last question is, it seemed like a big part of your SG&A reduction was the 160 basis point reduction in marketing. Is that a trend that we should look forward to continuing?

It's a timing thing. Again, when we made some decisions not to run some promotions we moved those marketing dollars that would have supported that promotion into different things in the fourth quarter. So we expect to then use the marketing dollars in the year but not necessarily in that quarter. And we look to save wherever we can, but we had reserved some marketing for promotions should we need them. But again, we're trying to optimize our retail sales and use the marketing dollars on more branding, more gift cards, more high value retails and low promotional pricing.

Okay, thank you very much.

You're welcome, Janet, thank you.

Good luck for the fourth quarter.

Thank you.

(Operator Instructions) Your next question comes from the line of Berke Bakay with BBS Capital Fund, please proceed.

Good morning, hi Maxine and Tina. First of all, I have a comment and a couple of questions. But I'd like to congratulate you on positive same-store sales and positive EPS number and, more importantly, the aggressiveness that you've shown on the buy-back plan. And as one of the larger outside shareholders of the company I want to encourage you to keeping the aggressive pace, especially with the recent trends and the valuation that the stock has.

So, that's my comment. And what I'd like to know is, how do you feel about your in-stock position going into the fourth quarter for some of the popular items? And when we look at -- the second question, when we look at the expense savings plan that you identified, there's a significant difference between what you have achieved in the third quarter and what you expect to achieve in the fourth quarter. So what's your comfort level there, how quantifiable in terms of timing that we should expect for the fourth quarter and the first half of next year because we're talking about fairly significant numbers here?

And then I'd like to also ask you about your comfort level and visibility on positive same-store sales which you have already commented for the fourth quarter?

Okay, great. Thanks for that multi-questions, we appreciate it. I'll answer the one about the stock position and then Tina will talk to you about the savings and how that's going to look as it rolls out.

So we feel like we have a really good stock position. We've been very clean all year long. In fact, we felt we were almost too clean in some places, and repositioned our inventory so we're in stock on the things that the customer wants. All of our holiday goods are in transit and/or are in the warehouse and flowing out to the stores as we launch our holiday floor set next Tuesday. We always launch the day after a holiday, for the holiday season. And then our mailer will hit the -- our holiday catalogue and mailer will hit next week too to our customers, so all the merchandise when they come in there, will be fresh and new and exciting.

The other thing that we did earlier in the year when we were -- we are so successful with these movie launches because we do benefit from the marketing that the studio does. And if you recall earlier in the spring we had E.B., the movie that was about the Easter Bunny and we sold out of that really quickly.

That success made us go back in and look at The Smurfs inventory that we launched in July and we doubled our buy on Smurfs at that point in time, and that wasn't enough. So we went, when we had the Smurfs success this summer, we went back in and not only bought more Smurfs, but also looked at our plans around the other characters that we had to make sure that we were in-stock on all those things, and that we were calling attention to the right characters and the right quantities and the right percentages, which we thought we had, but we upped the ante.

So, we feel like we're really in good shape to maximize this holiday season with what the customer's going to be looking for and what will be in the popular culture. We happen to see a lot of it here in St. Louis, but all across the World Series they've been advertising the Happy Feet 2 movie, which I think is good exposure for that. And it's already started, so we feel really excited about how the media will be supported not from Build-A-Bear's budget but from the budget of our business partners.

We also have the Kinectimals which tie in with Microsoft, which I mentioned, which is a really fantastic partnership. We didn't really -- there's nothing quirky about our products, they're just our regular teddy bears. But they come to life when you buy the Kinectimals game. And we've started to see those animals really pick up pretty dramatically in the last several weeks as Kinectimals was launched on October 11th.

So, we're very excited about that because those are four core animals that are in that game, and we've seen them pick up. And I think as kids get that for holiday -- and again, it's their marketing, it's their efforts to promote their game that's going to help drive customers to the Build-A-Bear store. So we're really looking at a 1 plus 1 equals 10 kind of marketing plan there.

And then I'll answer your comp store question. I think we commented on it already. We feel really positively about the plans for the quarter just based on what I just told you, things that are just a total plus the last year. A multiple story, a multiple faceted story, not just a one story like we had with Rudolph and Clarice last year, which was a very strong classic story. But this is a much more contemporary Christmas and we believe that that alongside of our gift cards which kids are going to want, is going to be a very successful holiday season for us.

And as we embarked on our cost savings initiatives this year we knew that we were going to recognize most of the benefit in the fourth quarter because first of all, it's our largest quarter. And we knew that some of the things that we would be doing such as looking at our operational payroll would be more affected in the fourth quarter, again, as it is our largest quarter.

We started recognizing savings on our freight in late June and that will carry through again -- again more of a cost savings in the fourth quarter because we're shipping a lot more product and bringing in a lot more product.

So, we feel comfortable with how we have it laid out throughout the next 12 months and how we will achieve between the $10 million and $15 million.

That's very helpful, thank you very much.

You're welcome.

(Operator Instructions) Your next question comes from the line of Tom Filandro with Susquehanna Investment. Please proceed.

Hi. Thank you, and congratulations, nice quarter.

Thank you.

Thanks, Tom.

Can you guys, can you update us a little bit on your pricing strategy as you enter holiday, both on like-for-like items and just give us a sense if there's any mix changes that we could -- that we might see in the holiday season? And then I have a follow-up question, please.

So, the pricing, because obviously we have a -- every holiday season we go into a licensing mode and we are, whether it's a holiday animal like Rudolph or Clarice, or it's these movie tie-ins, and those are usually top of our line. So the key characters this holiday season are $23 which is our price point for licensed characters that have light-up features. And we've been successful with that price point so far. So that part is -- so a good percentage of our focus is on those kinds of animals.

On the other hand, the Kinectimals animals which are part of the -- that story, there are four of those are $18 and $20, and they are really much more core price points. And then we still, of course, have our value proposition or our value items that are always strong for us, our $10 to $15 animals. And then for Christmas if you recall last year on -- after Thanksgiving, a couple years ago we started adding a promotion. And this year we were able to buy into it so we bought it very opportunistically and we'll have a really great value for our customers on the two days after Christmas. It's a Collectible -- I mean two days after Thanksgiving, excuse me, but it's a Collectible and great value.

And good news is, the way it's organized, it's the same day as we launch Alvin and the Chipmunks, so they can come in and get the new hot item and also get a great value of a tremendous value for Christmas.

And then later in the month of December, we also have a promotion that we had last year, and we've been running in the UK for the last five years, which is our -- when you spend a certain amount of money you get an animal at a great savings. And then we have our Bear Bucks up-sell that we do every year that's a great value.

Our line overall though is up slightly. I would say that some of our clothing items that maybe used to be $10 or $10.50, we've added some oomph to our products to make them worth the next price point.

But it's not up dramatically, it's not up like 20%, 30%. It's just in some selected places, and we've worked really hard to keep our price points in the middle. We do see a resistance from customers when it's not licensed, over $23, it becomes harder. But we just had a really good launch of our German Shepherd, which is -- our Bearemy's Kennel Pals price point which is $22, not licensed but we make those always $22, and our Dachshund earlier in the year was really successful.

So, I think we're seeing a strong acceptance of our better products, those products that have more details, that have novelty fur, that have a reason for being. And our lower price animals which are our core animals continue to be the core. They continue to be-- they're not as -- don't get as much promotion, but in holiday with so many fashions coming out, those become the items that really kids dress up and doll up because they're more modestly priced and you can put all the clothes on them that you want.

The Smurfs come dressed, so it's a tremendous value. When you buy -- and so is Alvin and Brittany, they come with a little outfit on them. Now, thank goodness, people buy more outfits for them. But when you buy that for $23 it already comes with a little dress or a little shirt if it's Alvin, and that is another way that the parents get a great value from us.

So, Maxine, can I just sort of get a more direct answer to this question? Do you guys think that the trend in transactions will remain slightly negative and your view is as you become less promotional and balance your assortment to some of these better goods, slightly better goods, that we should see ATV, your average transaction value and/or AUR offsetting what might be a slower transaction environment? Or am I misreading that?

No, I think that's certainly what we're working on. We want to make sure that -- you know, Tom, we want to make sure that we do get as much value out of our pricing as we can. Because we're working really hard to keep our prices low or the same as they have been without taking cost increases. So then if we just cost increase it and then have to give it away on a sale, we haven't really accomplished anything for our customers. But we do know that sales drive traffic, and we have them more planned. And we also have sort of planned into them, like I told you about the Thanksgiving animal. Last year we just sort of took it out of our hide, but this year we've planned it into the margin.

So, we can give the customer a balanced assortment of really good day in and day out pricing, as well as great licenses that come in that are worth the top of the line pricing. And we do expect that transactions will be less. I think it's just slightly less. It depends on really -- when we had Smurfs they weren't less, so I think it's what you got that drives people in. But overall we know that those promotional ones, we literally eliminated a clearance event in the month of October that we didn't need because we didn't have a clearance to mark down.

So, yes, we had less -- the transactions were lower than -- on that weekend than we expected, but way more profitable. So, I think we're trying to balance that and kind of wean ourselves off of these things that are -- diminish the value of the product and the experience. But it might give you some transactions, but takes you a really long time get the -- you've got sell a lot more of them to make up for the lower retail.

So, I think we've got a balance now. We're watching it closely, we reserve money, we've reserved ideas, we've got signs designed and ready to go should we need to be offering promotions to our customers. But we're not doing it every single month, every single weekend. It is just more than we can handle. Now there are some great promotions on the web, and if a customer wants to shop on the web, but of course they have to add on the freight to do that as well.

So, we're kind of balancing all those things to see where it works, and it's been working. And if we see that it isn't working we'll do some other things, but we think we have a good balance right now.

And I applaud you focusing on profitability. Are you guys currently testing any complementary toy or experience-based products? And can you kind of update us on your longer term view as it relates to potentially offering maybe a broader assortment of them, what you currently have?

You mean broader than like the Angry Birds?

Yes, I mean, not -- I don't want to bring up a sore point, but Zhu Zhu pets.

Yes, we continue --

Have you thought of that --

-- to test things all the time.

-- or are you currently testing something more broad?

Some things are more successful than others.

Sorry to bring that up.

That's all right. No, we continue to test products and we want to be where our customers want us to be. So we have several tests going on; some work, some don't. We've found that the Angry Birds has really continued as they've even brought out new things for the fourth quarter, and that continues. We're just feeding it as the customer wants it.

We also know that these character friendships and things that we have -- every fourth quarter we come out with these friends of the characters that we promote, and those are just hitting the stores and will be hitting next week. And I think those are going to be really good, and that's sort of part of those pickup items. But, yes, we are, in fact, working on several programs that we think can be, in addition to the Hug-A-Cub, which is our -- you may have seen it in our stores which is sort of a beginnings of a line that when a child comes into our store where the mom's got an older sibling, they pick up something for the baby. And we've seen that in the test stores be an interesting beginning to what we think can be a bigger strategy, and then we have some other things that you'll see next year.

Again, some we might decide to test, some we might decide to go full boat on depending on what the pop culture is around that idea.

Okay, thank you. And one final one and I'll let you go. Do you guys plan on filling the former President role?

We're looking at all that and evaluating it, and we'll keep you posted as something is worth conversing about.

Thank you very much. Best of luck over the holiday.

Thank you.

Thanks, Tom.

And at this time there are no further questions in queue. And I would now like to hand the call back over to Maxine Clark for closing remarks.

We thank you and we hope that you'll be shopping here for the holidays at Build-A-Bear Workshop. We've got lots of great gifts and we'll talk to you soon. Thanks, have a great holiday season.

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