Build-A-Bear Workshop Inc (BBW) 2011 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Build-A-Bear Workshop fourth quarter and fiscal 2011 earnings conference call. At this times all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this call is being recorded.

It is my pleasure to introduce your host, Allison Malkin of ICR. Miss Malkin, you may begin.

Good morning, and 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 remembers of the media who may be on our call today to contact us after this conference call with your questions. We ask that you limit your questions to one question and one follow-up. This way we can get to everyone's questions during the one-hour call. Feel free to re-queue if you have further questions. Please note the 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 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 the Annual Report on Form 10-K. And we undertake no obligation to revise any forward-looking statement.

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

Thank you, Allison. Good morning everyone.

Thank you for joining us in discussing our 2011 fourth quarter and fiscal year results. On our call today, I will talk about our full year results, including our fourth quarther. Then I'll turn the call over to Tina Klocke, our Chief Operations and Financial Bear, to preview the financial details. After that I will conclude the call with an overview of our growth plans for 2012 and beyond.

For the full year of 2011, we had essentially flat net retail sales, and our comp store sales declined on a 2% consolidated basis. I'm extremely disappointed to report a sales decrease in the fourth quarter, paricularly on the heels of two periods of positive comps in our second and third quarters. We do understand the reason for the decline, and we are already putting changes into effect in 2012 to improve our result. In fact, through Valentines Day, comp store sales are essentially flat in North America and the UK, and e-commerce is up almost 9%.

Coming off of a solid third quarter in which we grew our total retail sales, comparable store sales, and e-commerce, we believed that we had a lineup for the fourth quarter that would continue to improve our sales. Not only did we have a solid core assortment of Build-A-Bear Workshop proprietary products, but we also had tie-ins with highly anticipated feature film releases, particularly Happy Feet 2 and Chipwrecked featuring Alvin and the Chipmunks. We were excited that the movie industry was putting such a strong emphasis on family-oriented films, and given our strong sales history of products that tied into the movies, we felt that our holiday would benefit from these partnerships.

Unfortunately, for the movie industry, and for Build-A-Bear Workshop, the holiday season at the theater was one of the most disappointing in years. Both Happy Feet 2 and Chipwrecked were sequels with strong historical box office performance and very strong sales on the feature characters at Build-A-Bear Workshop, but neither film performed as projected or in accordance with their box office. In fact, both box office revenues down 60% and 40% respectively to their last releases. This contributed to a sales shortfall to our plans to the movie-related product. Had either of the films performed to expectations, our fourth quarter would have had positve sales on a consolidated basis.

As many of you know, the holiday season was also very was discount-driven. We anticipated this trend, and offered promotions throughout the holiday to entice shoppers, including our popular bundle promotion, which we had used successfully in the past, to increase average transaction value and guest conversion. However, when the characters from the movies came up short of plan, we had to step up our promotions to move the inventory and drive traffic. These promotions impacted our merchandise margin for the fourth quarter, which declined by 150 basis points from the prior year. It was the right thing to do given the season and our product challenges.

The final note on the fourth quarter is that our gift card sales increased on a consolidated basis, indicating that the Build-A-Bear Workshop, the gift of the experience, is still very much in demand. And to add to that, our guest experience floors for the fourth quarter were at record levels.

As we begin 2012, we recognize the global economy remains uncertain and consumers are still focused on value and promotion. And yet we have demonstrated that we have the right product, make it easy for moms to say yes, and deliver our signature guest experience, we've been able to grow sales, both in our stores and online. We are intensely focused on improving our product offerings, refining our promotional strategies, and putting our learning from the holiday season into practice right away.

On the product side, our goal this year is to continue to leverage our proprietary product collection, which arrive about once a month, to increase shopping visits and offer new products when guests come into the stores. In early March we begin our build up to the Easter season with the arrival of the Watercolor Bunny and Sunny Chick. We will also launch a purple Hello Kitty, and in conjunction with Girl Scouts' 150th anniversary, we will introduce a limited edition Girl Scouts bear and an official uniform for the first time ever. I do want to note that while we had a rough season at the box office this past holiday, we continue to have success with licensed product and we will evaluate each opportunity that develops, and maintain a greater balance in our offering.

On the marking front, our goal was to let kids know about our exciting new products, as well as our fun store experience, and make it easy for moms to say yes. To highlight three key marketing events, we are currently running a promotion with McDonalds Happy Meal, a kick-off to our fifteenth birthday year, and a refresh of our loyalty program.

Starting with McDonalds, beginning February 10 and running through March 8, McDonalds Happy Meals feature a collectable mini Build-A-Bear Workshop animal. There is a coupon for the free mini-tee for the Happy Meal animal that isbringing guests into our stores, and while they are there, they can use a $10 off coupon that also comes in the meal to purchase our latest merchandise. In addition,Kids receive a code to use in Bearville for a promotional prize. McDonalds is supporting the program with national television, online, and in-store marketing.

And while this is our fourth Happy Meal promotion in total, this one is a plus over last year. There will be between 25 million to 30 million meals with Build-A-Bear Workshop co-branding during this time, and historically we see a lift in our business in conjunction with the program.

Second, we will be adjusting the balance between product-specific advertising, those that feature the store experience, and the brand marketing. We will leverage the occasion of our 15th birthday and highlight Build-A-Bear Workshop as the place to celebrate, to increase visitation, and grow our party business. In December, we sold our 100 millionth furry friend, and we used this platform to re-emphasize the connective and emotional elements of our brand and store experience. Our guests are our best brand advocates, and they can tell their own personal stories across a wide variety of channels, including our Facebook community, which has now grown to 2 million fans.

This month, we are refresthing our Stuff Fur Stuff loyalty program, with the objective to increase program awareness and increase guest retention metrics, such as shopping frequency and spend per household. Members can earn rewards sooner and more often. For example, guests will get a reward every 50 points versus the previous a 100 points threshold. While early, we are pleased by the initial response, and expect to see benefits in the second half of of the year.

We continue to be in a song cash position, ending the year in $46.4 million in cash, and no borrowings on our credit facility -- even as we invested $15 million to purchase 2.5 million shares of our common stock during the year.

In summary, we had a good second and third quarter in 2011, and tough fourth quarter, with our dependence on movies. We are constantly acting to move our business in the right direction in 2012. Our product and marketing strategies are key to our success for the year and we have initiatives for expand our customer base and to connect more closely with our loyalty members, who drive incremental sales in our stores and online channel.

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

Thank you, Maxine, and good morning everyone.

Before I review our results this morning, I would like to discuss the non-comparable costs and benefit that impacted our fourth quarter and fiscal 2011 year results, which are also detailed in a reconciliation table in the press release we issued earlier this morning.

For the fourth quarter, these costs included a $15.6 million, or $0.93 per diluted share, noncash cost to the establishment of a tax valuation allowance,a $285,000 after tax, or $0.02 per diluted share, noncash store asset impairment cost, and a $915,000 after tax, or $0.05 per diluted share benefit, to deferred revenue related to our loyalty program. Excluding these noncomparable cost and benefits, our adjusted net income for the fourth quarter of 2011 was $5.9 million or $0.34 per diluted share.

For the 2011 year, in addition to the costs and benefit included in the fourth quarter, we also incurred a $1.7 million after tax, or $0.10 per share, in non-comparable costs related to our consulting project. Excluding the cost and benefit just mentioned, adjusted net loss for fiscal 2011 was $435,000 or $0.03 per share.

As many of you are aware, GAAP requires companies with a three-year accumulative book loss to record a valuation allowance to reduce net deferred tax assets. The recording of the valuation allowance is a noncash book charge and does not have any impact on our consolidated operating income or cash flow.

In addition, the recording of tax valuation allowance does not affect our ability our deferred tax assetswhen we generate taxable income in future periods. As such, we will be able to recognize a benefit in future profitable periods.

Now on to our review of the fourth quarter. For the fourth quarter, total revenues were $119.1 million, compared to $125.8 million in the fiscal 2010 fourth quarter. Total revenues include $1.5 million in net retail sales due to an adjustment in deferred revenuerelated to the royalty program. In the fourth quarter of 2010, this adjustment added $4.3 million to net retail sales. Excluding the impact of foreign exchange, total revenues declined 6%.

Consolidated net retail sales decreased 5.8% excluding the impact of foreign currencicies. Comp store sales decreased 4.9% on a consolidated basis, which included a 6% decline in North America and a 0.6% decline in Europe. This was driven by a 6.1% decline in transactions, partially offset by higher transaction values. Consolidated e-commerce sales rose 3.5% in the fourth quarter excluding the impact of foreign exchange.

Retail gross margin was $50.7 million, a decrease of$5.6 million, a decrease of 9.9%. Our retail gross margin percent was 43.3%, a240 basis point decrease from last year. The decrease is primarily driven by a 150 basis point decline in merchandise margins due to higher promotions and discounts and 100 basis points of de-leverage on fixed occupancy costs.

Total SG&A in the fourth quarter was $42.7 million, or 35.9% of total revenues, a290 basis point improvement, primarily due to a reduction in salaries and bonus compensation, as well decreases in marketing costs. In 2010, SG&A included $800,000 related to the closure of the remaining stores in France as well as higher payroll costs associated with a bonus.

Turning now to our full year results. For the full year 2011, total revenues were $394.4 million, compared to $401.5 million in the fiscal 2010 full year, a1.8% decrease. Excluding the impact of foreign exchange and of $6.4 million from nonrecuring commercial transactions in fiscal 2010, total revenues declined 1.2%.

Consolidated net retail sales were $387 million, essentially flat compared to $387.2 million in 2010. Fiscal year 2011 included $1.5 million in net retail sales due to an adjustment to deferred revenue related to the loyalty program, which compared to a $4.3 million adjustment in 2010. On a consolidated basis, comparable store sales declined 2.1% and included a 2.5% decline in North America and a 0.2%decline in Europe. Consolidated e-commerce sales rose 8.5%, excluding the impact of foreign exchange,and included growth in both North America and the UK.

For the full year, retail gross margin was $154.5 million, a modest decrease of $660,000, or 0.4% from 2010. Our retail gross margin percent was 39.9% and represented a 20 basis point decrease from the prior year.

Total SG&A for the full year was $162.3 million, or 41.2% of total revenues, a 40 basis point decline from the prior year.

Regarding cash flow, we once again ended the year with a strong consolidated cash balance $46.4 million. We have no debt, and we did not make any borrowing against our credit facility. During the year, we invested $15 million to repurchase 2.5 million shares of our common stock.

Depreciation and amortization for 2011 was $24 million, compared to $27 million in 2010.

Year-end fiscal 2011 inventory was $51.9 million, representing a 12.5% increase on a per square foot basis as compared to fiscal year 2010. Over half of the increase in inventory was driven by an earlier Chinese New Year, which caused in-transit inventory to be higher in the fourth quarter this year.

Also at year end, we are renewed our two-year credit facility with US Bank. This extension lengthens the maturity of the facility through December 31, 2013, increases our financial flexibility, and includes the same or less restrictive covenants. Available credit has been maintained, and includes $40 million for the first half of each calendar year, with a seasonal over-line of $50 million from July to December of each year.

While Maxine will go into detail of more plans in just a moment, in 2012 we will be very active on the real estate front. For the past two to three years, we have been aggressively renegotiating rents and executing short-term extensions to line up lease dates within markets as part of an overall strategic plan to optimize our store locations and market positions. As the next phase of that plan moves forward, we will close 15 to 20 stores this year with natural lease expirations and kick-out clauses, primarily in multistore markets. We expect to maintain a percentage of sales from the store closings by transferring customers to other stores that remain open in the market. We will also open four to six new store, relocate 10 to 15 stores, and remodel approximately 5 stores in a new store design and enhanced experience.

In support of those plans, capital expenditures for 2012 will be between $20 million and $25 million. This compares to $12 million in 2011.

Turning now to our progress on expense saving initiatives -- for the full year, we generated $3 million in savings, of which$1.6 million was in SG&A areas, as we reduced store payroll and other store expenses and overhead costs. The remaning $1.4 million represented our cost of goods sold, primarily through freight- and product-related costs. Looking ahead, we expect cost savings to be approximately$9 million in 2012.

Now I'll turn the call back to Maxine.

In conclusion, I want to restate my disappointment with our fourth quarter results. But I also want to be very clear that I'm excited about our future.

2012 is moving in the right direction. We think very strategically about our business, and are on track to meet our long-term goals. We're executing against several key strategic growth platforms that I will review with you. First I'll talk about our stores, and then I'll review our key marketing plan.

As it relates to our stores, Build-A-Bear Workshop was built on our experience, and going to one of our stores is a special occasion. We have a two-prong strategy to re-energize and build the definition appeal of our stores, and to maximize our productivity and profitability. As Tina mentioned, we'll close between 15 and 20 stores in 2012, as an initial phase to rightsize our store portfolio, primarily in multistore markets, where we've become overstored. These are strategic closures that will benefit the comp sales of remaining stores the market. We will also relocate select stores within existing malls, reduce their square footage, and increase productivity.

At the same time, we are investing in our company, as we build our first newly designed stores that feature a bold new look and enhanced experience. I'm very excited with the design, the culmination of nearlytwo years of intense work. While many other retailers are trying to create an experience to draw shoppers to their brand, we have always offered that and we will continue to lead in the interactive, experiential retail phase.

While our store base in North America will be leaner, with fewer stores and higher volumes and profitability,we will continue to grow internationally, in our company-owned stores in the UK, and through franchisees, both those already existingn and by adding new countries. In 2011, our franchisees, grew their store base by 25% net of closures, and they plan to add another 10 to 12 stores in 2012. Build-A-Bear has been on the forefront of international growth, and we are putting the support and infrastructure in place to continue this expansion.

On the brand building and marking front, we plan to leverage our data base, and more finely segment our customers, as we update and develop new products and experiences that will increase the lifetime value of our guests. In order to grow our business, we need to continually have new guests come into the brand and retain them once they've experienced our store. To attract new guests, we will enhance our marketing initiatives that focus on our experience and our brand. For the past 2.5 years, our marketing has been focused primarily on specific products and promotion, and we're rebalancing our messaging.

We're also intensifying our guest retention strategy -- our guests, kids and moms both, are passionate about the brand, as evidenced by our 2 million Facebook fans, our Bearville community, and our instore database and loyalty program members. We have specific plans to maximize engagement in and across each of these channels, including our loyalty program refresh that I discussed earlier. We recognize the changing demographics in the United States, and we have dedicated team members to improve our business in our most diverse markets, particularly in highly Hispanic areas. We are seeing positive results, and will continue to develop this platform.

And finally, we sell a lot of gifts, not only in the fourth quarter but all year long. The number one gift occasion for Build-A-Bear Workshop is someone's birthday. Guests that make coming to their store on their birthday an annual event, and we are using our own 15th birthday occasion to take this initiative to an entirely new level.

Build-A-Bear Workshop is a powerful global brand, one that kids love and moms trust. We're in a strong financial position to drive our growth and long-term strategy.

On a final note, I'm proud that Build-A-Bear Workshop was recently honored -- we were named to the Fortune 100 Best Companies To Work For list the fourth year in a row.

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

Thank you. (Operator Instructions). Our first question is from Sean McGowan of Needham and Company.

Good morning, first a clarification. And then a question. The clarification, Tina, I mean, Maxine, did you say if either of the movie promotions had met their targets that consolidated sales would have been up?

Yes.

Thank you. And Tina could you review some of other influences on gross margin were and give us more color on what the markdowns on these movie promotions cost, you can just generally talk on, and put takes on gross margin.

Sure, on a quarterly basis, Sean?

Yes, please.

Basically, our merchandise margin, our retail merchandise margins was down 150 basis points. And then the other 100 basis points was due to de-leverage of occupancy costs.

So, Shawn, we had to take some markdowns during the holiday season on Happy Feet -- or we promoted him pretty aggressively, the Chipmunks, not quite as aggressively. They did better, and are still selling -- and all of this is still selling in the stores by the way, but we have had to on the Happy Feet move, bring those down aggressively and have since the middle of December.

Can you give a sense of what the impact would have been if you had sold those products at an expected margin? Were there other factors that impacted the merchandise margin?

Honestly, the lack of business on those two products which were our key products for the holiday season, we put a lot behind them. We had the Happy Feet movie was six or seven years ago, a long time between them we have never had a bad penguin, and the Chipmunks movie had been very successful all the times we had run it before, so there was nothing to really indicate that that wouldn't have been good. And actually up until November, the beginning of November when we launched them, everything was in great shape for a wonderful quarter.

As we said, we've looked at it a million ways to Sunday, if either one of them had gone and made their plan, obviously, Happy Feet missed its plan by the most. Our other products did well, our core and proprietary products lived up to expectations, as best they could, because traffic wasn't wanting the movie products.

Okay, thank you.

(Operator Instructions).

Thanks, again, for joining us. We look forward to speaking to you again when we report our first quarter results in May.

That concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation.