Build-A-Bear Workshop Inc (BBW) 2013 Q1 法說會逐字稿

Greetings and welcome to the Build-A-Bear Workshop first-quarter fiscal 2013 results conference call. At this time all participants are in a 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, Allison Malkin of ICR. Thank you. You may now begin.

Good morning. Thank you for joining us. With me today are Maxine Clark, 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 your 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 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 statements.

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

Good morning, everyone. For the call today, I will discuss our first-quarter results and update you on our key product and marketing initiatives. Then Tina Klocke, Chief Operations and Financial Bear, will review the financial results and update you on our real estate optimization plan.

I am very pleased with the progress that we have made on our strategy and the impact that it is having on our business. We had strong comp store sales increases in both North America and Europe at 10.6% and 9.7%, respectively. This resulted in a 10.4% increase in consolidated comparable store sales. Our e-commerce grew 7% on a consolidated basis.

Even more impressive in the first quarter, we grew our total revenues by $8 million for an 8.5% increase, with 24 fewer stores this year versus last year's first quarter. All of this led to a profitable quarter, giving us a great start to the year.

I am also pleased to report that we have maintained our positive sales momentum moving into the second quarter. Breaking apart our year so far, January and February comps were up 4.9%, while March and April comps increased 15.7% which removed the impact of the shift in Easter. That gives us positive consolidated comp sales of 10.1% year to date through April.

Our results clearly reflect that our marketing, product, and store strategies are working and driving improved sales and profitability.

I want to discuss the key factors that contributed to our sales growth across geographies throughout the quarter and update you on our long-term objectives. First, we continue to shift the messaging in our marketing to brand experience and product from the previous product and promotion mix. We started this initiative in last year's fourth quarter and continued to realize a positive impact in the first quarter. In addition to the brand messaging, we have intensified our communications with moms, which included adding a flight of TV ads in the first quarter ahead of key Valentine's Day gifting period. We have had comp sales increases in North America in both quarters since we made these changes.

The marketing has increased the demand for the Build-A-Bear Workshop experience, which has also contributed to stronger gift card business. Since gift card sales are recognized when the cards are redeemed, the groundwork that we laid at the end of last year was critical to starting off the new fiscal year on a positive trend.

During last year's peak gift-giving period in the fourth quarter, we were able to increase the issuance of gift cards by 30%, with nearly 350,000 more gift cards in circulation on a consolidated basis. As a result, we realized higher sales and transactions in our first quarter as guests redeemed their cards.

We have continued to see growth in the issuance of new gift cards with a consolidated 35% increase in the first quarter, positioning us for continued growth and redemptions in future quarters.

We have also enhanced our gift card business by expanding our popular gift card up sell promotion, in which guests with a qualifying transaction can purchase a $10 or GBP10 card for half off. This has contributed to our improved results across geographies.

We began this year with a fresher inventory position versus last year, when we had significant carryover of holiday inventory. The combined impact of the marketing and quality of inventory allowed us to reduce promotional activity throughout the quarter. The promotions and discounts that we did use, including the gift card up sell that I just mentioned, were strategically focused on driving traffic and more than offset a strong McDonald's Happy Meal promotion that we ran in 2012.

In fact, in the quarter transactions grew 7.9% on a consolidated comparable store sales basis. As a reminder, we have the next Happy Meal promotion later this year in our fourth quarter.

In addition to emphasizing our brand, our marketing highlights key products to keep kids requesting visits to our stores. So far this year, we have had a good balance of licensed and proprietary products, something we continue to focus on in our merchandising. For example, our proprietary Valentine's Day pop and floral bunny for Easter sold well, as did the iconic My Little Pony launch that has fueled our post-Easter sales.

Other notable and culturally relevant products include the Thin Mints Bear, the second in a series in partnership with the Girl Scouts of America. An added benefit of this partnership is strong party business with Girl Scout troops.

We also had a limited-edition autism bear that had a charitable tie-in with autism organizations which has resonated well, particularly with moms.

Let me update you on other significant activity towards our long-term objectives. First, we are in the process of opening stores in our new design. The six stores already opened in our new format continue to generate significant sales increases of 25% on average in the quarter. We remain on track to open approximately 25 more stores of the design by the end of this year.

Next -- strategically closed stores to improve overall productivity and profitability. We closed 18 stores and transferred over 20% of the sales to other locations in the same markets as planned. We expect to close 35 to 40 stores in total in this fiscal year.

On the international front, we are focused on improving sales and profitability in our UK operations and expanding high-potential franchisees. In the UK, our results this quarter reflect the ongoing changes that we have been making in our product and marketing strategies. While we are pleased with the rebound we have seen in our business, which is up 7.9% year to date through April, we are still cautious of the overall economic environment in Europe.

As I noted, our primary focus with international expansion is to grow high-potential franchisees. We continue to expect our franchisees to open 8 to 12 stores in 2013.

Finally, we are focused on improving cost efficiencies. Our bottom-line results showed significant improvement but we have more work to do. As it relates to product margins, we were successful in reducing promotional activity versus the first quarter last year. However, our merchandise margins were impacted by higher product costs.

We have a new head merchant who has already made progress on sourcing and product costs. In addition, we are adjusting our merchandise mix. The impact of these changes is expected in the back half of the year.

We maintained our stringent control of costs and expect to realize cost savings of approximately $5 million to $10 million in 2013, which includes expense-reduction initiatives and savings from closed stores. In total, I am very pleased with our progress this quarter and remain confident that our strategies will result in improved long-term sales productivity and profitability, and drive increased shareholder value.

And now I would like to turn the call over to Tina to review our financial results in more detail.

Thanks, Maxine, and good morning, everyone. Our first-quarter performance included higher total revenues, with 24 fewer stores than a year ago, strong comp-store sales growth across geographies, and an operating profit. Our strategies are taking hold and moving us toward our goals, increasing long-term shareholder value.

The quarter's results included incremental costs and SG&A related to management-transition expense and store closings. Adjusted for these costs, first-quarter earnings rose significantly to $0.14 per diluted share from an adjusted loss of $0.03 per share last year. For the first quarter, total revenue was $104 million compared to $96 million last year, an increase of 8.5% excluding the impact of foreign exchange.

Consolidated comparable store sales increased 10.4%, driven by a 7.9% increase in transactions and a 2.5% increase in transaction value. By geographies, comparable store sales rose 10.6% in North America and 9.7% in Europe and remained strong on a year-to-date basis. Our e-commerce business was up 7%, excluding the impact of foreign exchange. Our retail gross margin was 41.5% compared to 39.9% last year. The 160-basis-point improvement was primarily driven by leverage in occupancy expense and decreased promotional activity, partially offset by higher product costs.

SG&A was $44 million, or 41.9% of revenues, compared to $40 million, or 41.6% last year. The dollar increase was driven by several factors. First, we had incremental costs related to management transition of $1.8 million and store closings of $600,000. Excluding these costs, SG&A, as a percent of revenue, decreased to 39.6%.

Second, SG&A increased as planned, with the additional investment in our marketing initiatives. As expected, this investment has driven growth in our total retail and comp store sales. A third factor was an increase in foreign-currency transactional losses. The translation of foreign currency into US dollars generally affects our sales more than profit, as sales and expenses are translated at the same rates. However, the substantial decline in exchange rates in the quarter led to approximately $400,000 in transactional currency losses related to foreign payable balances denominated in US dollars. This compares to currency gains of just under $300,000 in the 2012 first quarter, a swing of $700,000.

Our balance sheet remains strong. We ended the quarter with consolidated cash of $41 million, compared to $34 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 $4 million, primarily for store-related capital and IT infrastructure, comparable to last year. Depreciation and amortization was $5 million, down slightly from last year. For the full year, we expect capital expenditures to be approximately $20 million to $25 million, and depreciation and amortization to be in the range of $20 million to $22 million.

At quarter end, consolidated inventories totaled $38 million, compared to $47 million at the end of the first quarter 2012. Inventory per square foot declined 10%.

Now let me update you on our progress towards our objectives for our stores. In terms of our real estate optimization plans, we have made significant progress on our store closure initiative. During the quarter, we closed 18 of the 35 to 40 stores planned for this year. We expect to close 20 to 25 more stores in 2014 to reach our optimal store count of 225 to 250 locations in North America.

On an annualized basis in 2015, we expect a sales impact of $30 million to $35 million from the store closures; and overall store profitability to improve by $4 million to $6 million as we close stores and realize transfers sales to other locations.

We are working to make a strong base of stores even more profitable. Our top 200 company-owned stores had an average 20% unit level contribution in 2012. By 2015, we will operate fewer stores, but we expect our ongoing store base to be more productive and more profitable.

Our first-quarter results are indicative of the impact we expect our strategy to deliver over time. On an adjusted basis, first-quarter income rose significantly to $0.14 per diluted share from a $0.03 loss per share last year. Historically, as you are aware, the second quarter is our smallest quarter of the year and typically results in a loss. We remain confident that we are driving towards our long-term objectives of sustained profitability and increased shareholder value.

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

Let me wrap up by saying that I am pleased with the start to the 2013 fiscal year, with growth in total net retail sales, comparable store sales, and profitability. We are in the beginning stage of our multiyear turnaround, and I am even more excited to see every single one of our strategic initiatives working and driving towards our long-term sales and profit goals.

We have a powerful global brand that kids love and moms trust, and we are in a strong financial position to execute our plan. With that, I would like to turn the call over to the operator to take your questions.

(Operator Instructions). James Fronda, Sidoti & Company.

Just in terms of sales, do you think the sales growth was more related to product or store design? Or was it both?

Well, most of our stores are -- we only have six stores in the new store design, so they aren't making a significant impact on the total company yet. But product -- and also as we've discussed when we sold so many gift cards, the kids have those in their pocket, coming -- and those came from the marketing. So we have enhanced the marketing which says to a kid -- mom, I want to go to Build-A-Bear. Mom may buy them a gift card or bring them in to Build-A-Bear. The gift card is something that burns a hole in a kid's pocket, and so they have been spending them at a pretty high rate, which is great.

I guess you would expect that to continue, right? I mean, you said that is growing into the second quarter. It might continue into third and fourth quarter?

That's what we are hoping and working towards. All of our plans are in place to make that happen.

Okay. And I guess the autism-related bear -- is that significant in terms of the jump that you saw in sales for the first quarter? And I guess that is still somewhat of a long-term growth, right? Because that was just introduced this quarter?

The autism there was for the month of April, because April is autism month. So it was significant in the month of April, but it's not unusually significant to the quarter. We had very strong products all the way from Valentine's Day through Easter. Each of those products was incredibly strong this year, versus prior years, in terms of sell-through and full-price retail impact. And then we had My Little Pony right after Easter, which started off the second quarter very positively.

All right, thanks, guys. I appreciate it.

Jacob Ma-Weaver, Amici Capital.

Good morning. Very impressive quarter.

Thank you.

Just a quick question -- wondered if you could give everyone an update on the management transition and what sort of qualities you are looking for in your successor.

The Board is continuing to focus on the process of finding a successor for my position here at Build-A-Bear, and everything is moving along as planned. And I think that they have identified the key characteristics that are successful -- somebody with retail experience, somebody with a strong feeling for branding and children's retail and toys, and many other attributes, as well. So I think we are in a great position to attract a wonderful candidate for the future transition of the company.

Good to hear. And you also mentioned, I believe it was $5 million to $10 million in cost savings you anticipate for this year. I wonder if you could give us a bit more detail on where that will come from, or is it just from store closures?

It's primarily going to be across -- it will be across the board. There will be maybe 30% to 40% hopefully in the gross margin line, and the rest in SG&A as store closures happen. And also as we continue our stringent cost initiatives that we do, from a perspective of how we go do [RP's] and things for all of our services. So it will be 30%/70%, 40%/60% merchandise margin and the remaining SG&A.

Thanks and keep it up.

Thank you.

(Operator Instructions). Thomas Filandro, Susquehanna Capital.

Thanks, and congratulations for a good start to the year.

Thanks.

Could you guys just update us on average unit costing? What are you seeing in terms of labor product costing, and how should we think about the initial markup for the balance of the year, please?

Actually, I don't think our costs have been climbing a little bit every year, but I think what now is having a real -- looking at this much more globally and putting in a sourcing department, which we didn't have at Build-A-Bear; we were all sort of individually doing the sourcing. I think we are going to make strides in that, because we are really using strategic buying around this.

It is not easy in the toy business, because not a lot of people want to make these products. And also, not a lot of people want to put all the quality technical aspects into the business that they may not have if they were a clothing factory, per se. But so far, we have been getting -- actually, starting to get some really strong price decreases this year. It just won't be impacting us until the second half of the year. So we are really collecting all that.

We also had some price increases over the last several years that we really, because business was so difficult, we didn't take markups on products. We just said business is tough, and we were in such a promotional mode that we would take the markup up and then we would use a promotion to mark it down. But now that we have weaned ourselves off the promotional playground, we can establish stronger retails and maintain them rather than just going between markdowns all the time. So I think that our markup will be back up to our traditional levels by the end of the year, if not sooner, and then we will be on a steady street on our marketing.

We have a significant merchandise margin because we design and make all of our own products. So it has always been strong, but it has petered backwards a little bit in the last few -- end of last year.

Hey, Maxine or Tina, can you give us a little bit of -- maybe quantify a little bit on the basis point differential from maybe peak to where you think you can achieve your gross or IMU?

I think we could probably get, from a perspective of just merchandise margin, probably 50 to 100 basis points improvement towards the back half of the year. Does that help, Tom?

Yes, it does. And is there a longer-term opportunity to see several hundred, or is that at a point where you are getting close to sort of historic peaks? Or any perspective on that would be helpful.

I think we are close to historic peaks, and I think we want to make sure that we -- it doesn't mean that there isn't opportunity, because as you work with factories and you try to use other techniques in there too -- similar materials, just in different colors to make product -- that you can maximize margins a little bit more. But I think that we have had -- always had very high merchandise markups and merchandise margins, and so we want to make sure that we are always giving the customer the value for the money and not -- that's one of those things that has been sensitive, certainly during the recession. And it is still sensitive, but I think we are starting to see a little bit more room there.

And over time, our average transaction in between $35 and $37. So the higher every individual price goes up, we sell less units, but we still stay around the same $35 to $37. So we are starting to see an opportunity here to creep back up, and we are taking some markups along with it. As well as getting -- it's not just about getting cost decreases, which we are getting fairly significant ones, but we are also are working hard to make sure the customer enjoys the experience at our store. You know, that is the bears, the clothes, the shoes, the accessories, the sound. And we want to make sure that when they walk out, they are walking out with a great value for their money.

And just one follow-up, if I could. Any update on the party business -- how that has performed in the quarter, either as a percent year-over-year or penetration versus year ago?

The party penetration is reasonably stable, but it has been really good this year. Our Girl Scout bear has aided that dramatically. And especially -- we started the Girl Scout bear in February, so we increased our parties and our -- strongly in the first quarter, and that is continuing. It may level off a little bit in the second quarter, because last year we sort of pushed -- we had the better receipts on the Girl Scout bear in the second quarter than in the first quarter last year, so the parties were sort of forced into the second quarter. So we are a little bit cautious about second-quarter parties, but first quarter has been very positive.

And can you just tell us, Tina, what was the penetration, say, in 2012 on the party business?

I'm sorry, Tom -- the 2012 party business?

I'm just trying to get a benchmark on what the penetration of that business was overall. I think in the past, you had given that -- the volume as a percentage of the total in the past.

In all of our years, it has always been less than 10%.

Okay. Thank you very much. Best of luck.

Thanks, Tom.

(Operator Instructions). It appears there are no further questions at this time. I would like to give the floor back over to management for any concluding remarks.

Well, thank you again for joining us, and we look forward to speaking with you when we report our second-quarter results in July. Have a great week.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.