Build-A-Bear Workshop Inc (BBW) 2012 Q1 法說會逐字稿

Greetings and welcome to the Build-A-Bear Workshop First Quarter Fiscal 2012 Results conference call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

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 remembers 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 questions during this one-hour call. Feel free to re-queue if you have further questions. Please note our call is being recorded and broadcast live via the Internet.

The earnings release is available on the Investor Relations portion on our corporate web site 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 in discussing our 2012 first quarter results. On our call today I will review our performance for the quarter and highlight the progress we've made on the priorities that we set at the start of the year. Then I'll turn the call over to Tina Klocke, our Chief Operations and Financial Bear, to preview our financial results in more detail. After my concluding comments, we'll open the call to answer the questions you have for us today.

We're off to a solid start in 2012, returning to growth in our comparable store sales and increasing our e-commerce and international franchise revenues in the quarter. We've improved our gross margin and continue to realize benefits from our expense savings initiatives.

While we had a loss of $0.06 per share, this is a considerable improvement over the loss that we reported in the first quarter last year of $0.12. We believe this reflects real progress towards achieving our number one objective, to increase shareholder value by profitably growing, and gives us confidence that our business strategies will continue to move us forward.

Additional details on the quarter's performance include getting our comp store sales back on the growth track with a 1.2% increase in consolidated comparable store sales led by a 3.6% increase in North America, where we had positive comps in each month of the quarter. While the quarter benefited from an early Easter holiday than 2011, our performance post-Easter gives us confidence that we are on track as we move forward. We now have had positive comp sales in three of our last four quarters.

On the e-commerce side, we've increased our sales for seven straight quarters, including a 9.1% increase this quarter excluding the impact of foreign exchange. Both North America and the UK delivered significant increases.

We continue to be in a strong cash position, ending the first quarter with $33.5 million in cash and no borrowings on our credit facility.

Now let me go into a bit more detail on our product and brand-building plan, a key platform of the growth strategies that we detailed in our last call.

Looking back at the first quarter, in January we drove business by maximizing traffic and redemptions from our gift card programs. We keyed into strong gifting product and messaging to deliver Valentine's Day and February. And in March we leveraged the Easter season with our watercolor bunny and chick and offered an Easter egg decorating kit as a gift with purchase.

We also had a strong response to our first-ever tie-in with the Girls Scouts, introducing a special bear in conjunction with their 100th anniversary. This partnership is a great fit with our core demographic, tween guests.

On the marketing front, we are attracting new guests to our stores with a renewed focus on brand advertising and an emphasis on special occasions as a reason to visit a Build-A-Bear Workshop store. We want 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.

As I mentioned on our last call, we had three notable events this quarter -- our promotion with McDonald's, rebalancing our advertising to speak to both product and the brand experience, and a refresh of our Stuff-for-Stuff loyalty program.

One of the highlights of the quarter was our fourth quarter promotion with -- our fourth promotion with McDonald's Happy Meals in North America. The promotion began February 10 and ran through March 8. Each of the Build-A-Bear Workshop Happy Meals in the United States included a coupon for a free mini tee for the Happy Meal animal, which drove traffic to our stores. To make it easy for moms to say yes, we included a coupon that could be used to purchase our latest merchandise. To further engage kids with our brand, there was also a code for our virtual prize in Bearville. To take advantage of the increased traffic, we extended our gift card up-sell promotion, which we believe will drive incremental visits throughout the year. We will market to the guests that visited during the promotion with targeted email and direct mail that showcases our product stories and promotional offers. We also kicked off the yearlong celebration of our 15th birthday, highlighting Build-A-Bear Workshop as the place to celebrate in order to increase special occasion visits. We are emphasizing our fun store experience and the emotion connection that is made between furry friends and their owners with our Friends Count campaign featuring the personal stories of our guests and the over 100 million stuffed animals that have been made in our stores. We launched new TV advertising in late February as part of the campaign with solid results and persuasion scores. Our guests have already posted over 2,000 of their own stories on our web site and it's been a strong platform to engage our Facebook community that now has over 2 million fans.

To increase our guest retention metrics such as shopping frequency and spend per household, we refreshed our Stuff-for-Stuff loyalty program this quarter. Now our loyalty members can earn rewards sooner and more often. For example, in North America, guests will get a reward every 50 points versus the previous 100-point threshold. The rollout of the program went smoothly and we continue to expect to realize initial benefits in the second half of the year.

We also remain on track with the other full-year priorities we detailed during our fourth quarter call. We will open our first store in our new design in September. We expect to improve our store productivity and profitability as we right-size our portfolio and we are on track with our international growth plans. In just a moment, Tina will give you more detail on these initiatives.

In the second quarter we continue to emphasize our proprietary product and brand marketing strategies, building on the positive momentum of the first quarter. As it relates to product, we kicked off the post-Easter season with a fashion rite floral-themed Enchanted Garden Collection. This past weekend we launched an Avengers costume collection in advance of the movie's release. This was a big hit across the board, but especially with boys. In May we launched the Farmers Market Collection followed by updates to our proprietary Small Frys line and the terrific under the sea theme, which is supported by one of our most popular gifts with purchase, a beach towel.

Another hot fashion trend has been Skecher's Twinkle Toes footwear. And we are building on our success with this line by releasing a late summer package to take advantage of back-to-school traffic that features Skecher's apparel and accessories tied to their next-generation Twinkle Toes shoes for girls and Hot Lights for boys. We'll also be introducing our exclusive Bear collection. We'll have a strong sports theme in our UK stores to take advantage of our traffic for the Olympics.

In summary, we made good progress in the first quarter and we believe we have identified the right strategies to allow us to continue our progress this year. We've improved in our fourth quarter comp store sales results. Through the end if April, which picks up all of the Easter switch, our comp sales were essentially flat on a consolidated basis. We have a sales increase in North America and are seeing significant improvement in our UK sales trend.

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. We were pleased to report improved first quarter results that included increased revenue, expansion in gross margin, and a solid improvement in our operating results as compared to the first quarter last year. For the first quarter total revenue was $96.4 million compared to $96 million last year. Consolidated net retail sales were $95.2 million, an increase of 1% compared to $94.2 million last year. Excluding the impact of foreign exchange, net retail sales increased 1.6%. Consolidated comparable store sales increased 1.2%, driven primarily by increased transaction value.

Our e-commerce business was up 9.1% excluding the impact of foreign exchange with a solid performance in both North America and the UK. International franchise revenue was $797,000, up 9.8%. We ended the quarter with 82 franchise stores, up from 63 last year. We expect our franchisees to open a total of 10 to 12 stores this year net of closures.

Our retail gross margin was 39.9% compared to 38.8% last year. The 110 basis point increase was primarily driven by the benefit of our cost savings initiative that was implemented last year, which led to lower packaging, warehousing, and distribution costs. These savings combined with leverage and fixed occupancy costs fueled by our positive comp growth more than offset increased product costs during the quarter.

On the cost containment front, we continue to expect cost savings to approximate $9 million in 2012. We will continue to strategically reinvest a portion of these savings to support our growth initiatives and to offset product cost inflation.

SG&A was $40 million or 41.5% of revenues compared to 43% in the first quarter last year. We realized $1.5 million in savings in store payroll and other expenses as a result of our cost reduction efforts. This benefit was offset by increases in our accrual for incentive compensation and $475 million non-reoccurring costs related to our minority interest in Ridemakerz. Included in last year's SG&A were $1.5 million expenses associated with our consulting projects. Excluding the non-reoccurring costs from Q1 and the consulting fees from the 2011 first quarter, SG&A as a percent of sales improved 40 basis points.

Pretax loss was $1.1 million compared to a pretax loss of $3.6 last year, an improvement of $2.5 million. In 2012 we had an income tax benefit of $116,000 compared to an income tax benefit of $1.4 million for the first quarter last year. Remember, in last year's fourth quarter we established a valuation allowance in all of our US deferred tax assets. Until this valuation can be released, we can not recognize the tax effects of changes in our deferred tax assets. This reduced our benefit and resulted in an effective tax rate of 10% in the 2012 first quarter compared to 38% in last year's first quarter.

Net loss was $1 million or $0.06 per share compared to a net loss of $2.3 million or $0.12 per share last year. This year's net loss included $0.03 per share in non-reoccurring costs related to our minority interest in Ridemakerz. The first quarter last year included $0.05 in costs related to our consulting project. Adjusting for these items, adjusted loss per share was $0.03 in 2012 compared to $0.07 in 2011.

Our balance sheet remained strong and we ended the quarter with consolidated cash of $33.5 million compared to $45 million at the end of the first quarter last year. We have no debt and no borrowings on our credit facility.

Capital expenditures in the first quarter were $3.8 million, primarily for store-related capital and IT upgrades, compared to $2.3 million last year. For the full-year 2012 we expect capital expenditures to be approximate $20 million to $25 million.

Depreciation and amortization was $5.4 million, down from $6.5 million last year. For the full year we continue to expect depreciation and amortization to be approximately $22 million.

At the quarter-end, consolidated inventory totaled $45.6 million compared to $39.5 million at the end of the first quarter 2011. Inventory per square foot rose approximately 15% following an unusually low level of inventory last year. On a two-year basis, which negates the non-comparability of last year, inventory per square foot declined 3.3% at quarter-end.

Now let me update you on our progress towards our objectives for our stores. We are on track with both prongs of the strategy -- to reenergize and build or destination appeal and to maximize our store productivity and profitability.

First, we are investing in our experience with plans to open our first newly-designed stores in September. We have been working on the bold new design and enhanced experience for nearly two years and are very pleased with the response and feedback that we have been getting from guests that engaged in our onsite prototype. One of our competitive advantages is our interactive environment and we will continue to lead in this space.

At the same time we are executing our strategies to improve the productivity and profitability of our existing store base. As we told you on our last call, this includes closing 15 to 20 stores this year in accordance with natural lease expirations and kick-out clauses, primarily in multi-store markets. These are strategic closures that will benefit the comp sales of the remaining stores in the market and are weighted in the back half of the year. We will also relocate flex stores within existing malls, reduce their square footage and thereby increasing productivity.

Outside of the US, we continue to see potential for growth both in our Company-owned operations in the UK and through franchisees. In 2011 our franchisees expanded their store count by 25% and we expect them to add 10 to 12 more stores this year net of closures.

We are pleased with the start of our second quarter and where we sit year to date now that all of the Easter timing has played out. Based on our enhanced product and marketing strategies, we expect a positive sales trend for the remainder of the quarter and improvement in our pretax loss for the second quarter.

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

Thanks Tina. Let me wrap up by saying that I'm pleased with the start to the 2012 fiscal year and with growth in total net retail sales and in comparable store sales, particularly in North America. I remain confident in our ability to continue the positive trends towards achieving our long-term sales and profit goals.

Let me also reiterate our objectives for this year. First, as Tina outlined, we are aggressively working on improving store productivity and enhancing our experience with the new store design. Second, we will increase shopping frequency, bringing new guests to our stores, rebalancing our marketing to speak to both product and brand, and then bring the guests to -- for return visits through retention strategies, including our loyalty program refresh. Third, we are reinforcing Build-A-Bear Workshop as the top destination for gifts, including the gift of experience that comes with one of our gift cards by capitalizing on our own 15th birthday to grow this initiative to an entirely new level. Fourth, we continue to realize benefits and efficiencies from our cost-savings initiatives. And fifth, we will continue to grow internationally through Company-owned and franchised operations. Nearly 40% of our store base is already outside of the United States and we are projecting this to be an ongoing growth opportunity.

In summary, I believe we have the long-term strategies in place to change the dynamics of Build-A-Bear Workshop, continue to grow our comp store sales and ultimately maximize shareholder value. We have a powerful global brand, one that kids love and moms trust. And we're in a strong financial position to execute our plans.

With that, I'd like to turn the call to the Operator to take your questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from the line of Sean McGowan with Needham and Company. Please go ahead.

Thanks. I had one question and then a follow-up. As we look back at the last final five or maybe even more years than that, the first quarter gross margin has wound up being either above the full-year average. That wasn't the case last year. So I was wondering if you could help us figure out if the gross margin reflected in the first quarter of this year is indicative of what you'd expect for the whole year or is it higher or lower?

Sean, it's Tina. Thanks for the question. I think that in the first part of the year, so the first half of the year, we'll still continue to see the savings in the packaging and distribution as a result of our cost-saving measures that we implemented last year. And as we continue to have comp store sales increases, you'll see the leverage on the occupancy. Again, that will be offset by some of the cost pressures we're seeing on the initial merchandise margin.

So is your expectation then that there won't be an increase in gross margin as the year goes on then?

I think it'll be a slight increase as we get through Q2 and then it'll start to maybe level off in Q3 and Q4 as we anniversary some of the cost savings in the packaging and distribution area and in transportation.

Okay, thank you. Then the follow-up is just could you help us with what the effect will be of net store changes? You talked about the 15 to 20 closings. What are the plans for openings and what do you think the net effect will be on the year?

We're still anticipating of the 15 to 20 closures that we'll open somewhere -- excuse me -- four to six stores just depending upon the real estate. We're looking at a few stores in the UK and a couple stores here in North America.

Great, thank you.

Thank you. Our next question is from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Hi, good morning. I was hoping you could break down your North American same store sales a little bit -- in a little bit more granularity between number of transactions, price, unit per transaction. Can you give us that data, please?

So basically the increase was all driven by an increase in average transaction value. Bags were relatively -- bags is units per transaction -- were relatively stable and we had a slight increase in transactions in North America.

Okay. And getting back to inventory, inventory is up 15%, but your payables down 9%. What would explain the difference there?

Again, I think it's timing and the receipt of when the inventory came in and some of the carryover that we had from fourth quarter.

Okay. And lastly, can you just describe the I think it was $475,000 hit from Ridemakerz? How is that -- what does that arise from and should we be expecting more of these to come in future quarters? Thanks.

Yes, we shouldn't expect any more in future quarters. When we initially made the investment in Ridemakerz, there was a put option by the initial group of people that started the company. And the put expired on April 30 and they exercised it in the first quarter. And it's -- it was outlined in our 10-K also.

Okay.

We don't anticipate any other further costs.

Okay. Okay. Great, thank you.

Thank you. (Operator Instructions). Our next question is from the line of Neil Waynor with Fox Hill Capital Partners. Please go ahead.

Good morning.

Good morning.

Maxine, can you just go over in a little bit more detail granularity the $20 million to $20 million plus CapEx, where it's going and how it's being spent over the year?

Yes, let me let Tina give you that. She's got the numbers right in front of her.

The majority of it will be for new store investments as we close stores and relocate stores and open the -- our new store design concept. We also have probably several million dollars in investment in just technology for the new store and also to enhance our back office systems that need upgrades.

So would you say three-quarters of it for new store investment and design versus a quarter for technology? Would that be kind of a good breakout?

I'd say it's probably, you know, one-third for the technology and two-thirds for the stores and technology encompassing all of the upgrades and things like that.

And so is this a one-time investment you think or is this something you think you'll need to continue next year?

Well, we roll out the new store design and redo existing stores, we'll continue to have that capital investment. You're always going to have upgrades to your technology infrastructure. But, again, some of it is things that we delayed over the last couple of years just due to capital restraints. So I think you'll see more of it will be spent on new stores. But we haven't really looked out past this year to see how many new stores in the new store design we'll be doing next year. We want to make sure we tweak the model, make sure it's the right store design for us.

Okay. So can you -- is it possible you can give us a kind of a sense of dollar amount what it costs for a new store design?

The new -- well, there's lots of things that go into a new store design. There's the whole redesign of the store, so there's architectural costs for something like that. There is new technology in the store that is interactive. That technology that is software developed for Build-A-Bear Workshop exclusively to work in Build-A-Bear Workshop stores to enhance our experience. It's part of the experience. And then there is the part to build the store. It's a prototype at this point, so each one is built uniquely. And then like our first 10 or 15 stores we built starting back in 1997 and then we take the good things and we mass produce them for expansion to other stores. And our plan is that we will convert all of the stores that we intend to move forward with over a relatively short period of time, not all in one year or two years, but probably within a three- to five-year period to the new elements of the store. They're meant to be able to be rolled into the new -- to an existing store and enhance that store because the last thing you want is the one store that you're doing that looks like a brand new store that has a fantastic new experience in it that it'll go up -- it may go up 50% of what it was before, but the other three stores in the community that you have that are the old store format go down 50%. That wouldn't buy you anything. So we really are looking at this on a market-by-market basis, as well as a store-by-store basis. But first that's -- the stores will launch in the fall of this year and then we will make those evaluations. We're very excited about it. It has a lot of very positive response from the kids that are using it and playing with it here in St. Louis. But we want to wait until we get it open in the fall and then make all of those determinations. But we're very excited about it and we're talking about these enhancements for our long-term future, not for one year or two years.

No, no, I understand that. So do you have a sense of a conversion of a store just generally what that might cost?

What what might cost?

The conversion to the new technology from an old -- from an existing store?

Well, we only have the initial cost that we're doing this year, but those were meant to be prototype costs. And so when we roll it out, we haven't yet decided what we're going to -- what's going to be successful, what we're going to keep, what we can value-engineer down, so we don't have an idea yet. That's why we're doing the stores this fall and we'll make those determinations from that store, those stores, and what we see we can do differently once we see it in action. I mean, that's the other thing, too. You have to see it in action -- what do the kids like, what causes any quagmires in the traffic flow. But so far we feel like -- we're hopeful that all of these elements will be able to be continued into the store, but we don't know what they'll cost on a roll-out basis yet. We haven't finished the actual prototype designs yet.

Thank you. The next question is from the line of Gerrick Johnson with BMO. Please go ahead.

Hey, I'm back. You touched on the London Olympics. Wondering what percent of your UK revenues actually come from stores in London, trying to get a sense of how the Olympics could impact things over there.

It's probably about 5% of our business, or London -- actual London-area stores, but I think that they'll be -- they could be larger during this particular time frame. But that's what they are on a normal basis.

Okay, great. And then on the new store prototypes can you give us a hint where these new -- these six remodels will be so we can check them out in September?

I'll give you the first hint. It's -- the first one's going to be in St. Louis, Missouri.

All right, we'll see you then, Maxine.

We're just finalizing leases and agreements, even though we're well on our -- well through the process. But we want to do each one of these with a big launch and a big announcement in the town because honestly, Gerrick, we're closing stores in some of these markets and so sometimes there'll be a store closed for two or three months while we build future store and we want to make sure that we're communicating properly most importantly to our guests so they know where to go during the interim and they know to come back when we open up our store. So we have a carefully planned-out marketing and media strategy, including the -- when we announce we're closing that store, we want to make that into a very worthwhile announcement and then when we're going to be opening it up again.

Okay, so you'll let us know when --

-- I will. I will. And we'll probably have more specific information for you on our second quarter call because we will want people to know about it. It's not like a secret. But we want to make sure that our guests know where to go shop in the interim. That's the most important part to us.

Okay, great. Thank you very much.

(Operator Instructions). Our next question is from the line of Neil Waynor with Fox Hill. Please go ahead.

Thank you for the follow-up. Just a question on the -- on your program with Major League Baseball -- do you anticipate rolling out any more ballparks or teams than you currently have and what do you think that opportunity is?

We carry all of the Major League Baseball teams merchandise in our local stores. So that is something that we've carried for I don't know, six or seven years now, maybe longer. We have a very strong relationship with Major League Baseball, so we carry uniforms, we carry t-shirts, sportswear, accessories under the Major League Baseball team in that each locale. But we have three stores right now, one in St. Louis, one in San Francisco, and one in the Nationals' stadium. And we are in constant contact with ballpark owners and teams to consider Build-A-Bear Workshop stores in those areas. But there are certain criteria -- number one it's attendance, number two it's the children that they attract to the game. And there are -- the space because there's lots of space constraints in a ballpark for anything other than food it seems. But anyway, we're continuing to talk to teams. They approach us all the time. And we have to make the appropriate valuations. But our stores this year are off to a great start.

Okay. Terrific. Thank you.

You're welcome.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Ms. Clark for any closing remarks.

Okay. Thanks, again, to all of for joining us. And we look forward to speaking with you again when we report our second quarter results in July. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.