Build-A-Bear Workshop Inc (BBW) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Build-A-Bear Workshop second-quarter fiscal 2013 results conference call. (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, Ms. Malkin. You may begin.

Good morning. Thank you for joining us. With me today are Maxine Clark, Founder; Sharon Price John, Chief Executive Officer and Chief President 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 requeue 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.

And now, I would like to turn the call over to Maxine Clark.

Thanks, Allison, and good morning, everyone. On today's call, I'll open with an overview of our second-quarter and year-to-date performance, turn the call over to Tina to review financial details, and then pass the helm to our new CEO, Sharon John.

Our second-quarter results continue to show progress in our multiyear turnaround plan. Our key initiatives in real estate, marketing, product, and expense management are driving topline growth and improving our bottom-line results.

For the quarter, consolidated net retail sales increased by $1.4 million, while operating 31 fewer stores than last year. Our comparable-store sales grew by 7.3% on a consolidated basis, with an increase of 8.6% in North America and 1.7% in our European operations. This was the third consecutive quarter of comp increases in North America. E-commerce was up 5.2% on a consolidated basis.

We opened four additional stores in our new design and will continue to have same-store sales increases of over 20% in these remodeled locations. Retail gross margin increased by 180 basis points and we showed an improvement in our operating performance.

On a year-to-date basis, our consolidated comp-store sales are up 9%. The key factors that have driven (technical difficulty) include rebalancing our marketing to include more brand-building advertising, particularly on TV, and more messaging and communications with moms. We continue to gain efficiencies on our marketing spend by optimizing our investment during peak traffic and seasonal periods.

The brand-building ads have had a halo effect, continuing to positively impact our business in subsequent weeks and months. We also see a cumulative benefit as the messages gain higher awareness and recall with consumers over time. Our focus on brand building has gone hand in hand with reductions in promotions, which contributed to improved merchandise margin in the quarter.

Our product mix, both proprietary and licensed, have continue to resonate well with our guests. The launch of My Little Pony in particular was highly successful, and the team will continue to build on this product line throughout the year.

Our real estate optimization strategies are also working, with our store closures and store of the future remodels delivering the results we planned.

Given that this is my last call as Chief Executive Bear, I just wanted to add a few comments. I am especially pleased to welcome Sharon John as Chief Executive Officer and Chief President Bear. Sharon is uniquely qualified with her strong track record in the toy industry, as well as in children's retail, and we are delighted to have attracted her to our Company.

With our turnaround plans gaining traction, the timing is right for Sharon to step in and take Build-A-Bear Workshop forward. She has hit the ground running, adding great energy and fresh ideas, and the team is embracing the challenge of building our Company's future.

In the past several weeks, Sharon and I have worked closely together to complete the transition. It has been great fun for me to hear her perspective and to share our dreams for the future of the brand. I have tremendous pride in this Company and the team that has developed and nurtured our concept and brand, a brand that has become a favorite of families worldwide.

Transitioning companies from one CEO to another, let alone from a founder to an outside CEO, is never easy, but as important stakeholders, I want you to know that this transition has been very smooth. I have great confidence that Sharon is absolutely the right person to elevate the Build-A-Bear brand to new levels and drive the Company forward. As a Board member and as a large stakeholder in the Company's future success, I look forward to working with Sharon and the Board to achieve her goals for the Company.

Before we hear Sharon's comments, Tina will review our financial results in more detail.

Thanks, Maxine, and good morning, everyone.

For the second quarter, total revenue was $82 million, up $1.5 million while operating 31 fewer stores, an increase of 2%, excluding the impact of foreign exchange.

Consolidated comparable-store sales increased 7.3%, driven by a 5.3% increase in transaction value and a 1.9% increase in transactions. We had comp sales growth of 8.6% and 1.7% in North America and Europe, respectively. Our e-commerce business was up 5.2%, excluding the impact of foreign exchange.

Retail gross margin improved by 180 basis points to 36.8%. The improvement was primarily driven by leverage in occupancy expense and decreased promotional activity.

SG&A was $37 million, flat with last year. As a percentage of sales, SG&A was 45.1% of our revenues, compared to 46.1% last year. Included in this year's SG&A were $900,000 in management transition and store closing costs. Excluding these costs, SG&A as a percent of revenue decreased to 44%, an improvement of 190 basis points.

Adjusted net loss was $0.33 per share, an improvement from an adjusted loss of $0.46 per share last year.

For the first six months, total revenues were $186 million, an increase of 5.5%, excluding the impact of foreign exchange. Consolidated comparable-store sales rose 9% and included increases of 9.7% in North America and 5.9% in Europe. E-commerce sales rose 6.3%, excluding the impact of foreign exchange.

Retail gross margin was 39.4%, an improvement of 170 basis points compared to last year. The improvement was primarily driven by leverage in occupancy expense and decreased promotional activity, partially offset by higher product costs in this year's first quarter.

SG&A was $81 million, or 43.3%, a 40 basis point improvement from the prior year. SG&A includes incremental marketing expenses in the first quarter, as well as $3 million in management transition and store closing costs. Excluding the management transition and store closing costs, SG&A improved by 200 basis points to 41.6%.

Adjusted net loss was $3 million, or $0.19 per share, an improvement from last year's adjusted net loss of $8 million, or $0.49 per share.

We continue to have a strong balance sheet with consolidated cash of $28 million, compared to $26 million at the end of the second quarter last year. We have no debt and no borrowings on our credit facility.

Capital expenditures in the quarter were up slightly over last year, from $4.5 million to $5 million, primarily for store-related capital and IT infrastructure. Depreciation and amortization was $5 million, comparable to last year. For the full year, we continue to expect capital expenditures to be in the range of $19 million to $22 million and depreciation and amortization to be approximately $20 million.

At quarter-end, consolidated inventories totaled $48 million, up $1 million from last year. Inventory per square foot increased 11.5%. The increase in inventory supports our higher store sales volume and includes earlier receipts of new merchandise compared to the prior year.

Now let me update you on our progress to optimize our North American store base. One of the components of improving our productivity is to remodel stores in the new design. During the quarter, we opened the first four of approximately 25 locations planned for the year.

The stores in the new design continued to generate average same-store sales increases of over 20%. As the rollout continues, we are working to gain economies of scale and drive down the capital investments to build stores.

We also continue to strategically close stores and transfer a portion of the sales to other stores in the same markets. In the first six months of the year, we have closed 28 stores. We have retained approximately 20% of sales from the closed stores. We expect to close 35 to 40 stores in total this year.

We continue to focus on cost control and expect to hit our cost savings of $5 million to $10 million for the year, which includes expense-reduction initiatives and savings from closed stores. The savings are weighted in the back half of the year when we realize the full impact of this year's store closings.

And now, I would like to turn the call over to Sharon.

Thanks, Tina, and good morning, everyone. I'm pleased to speak with you today on my first call as CEO of Build-A-Bear Workshop.

For those of you who don't know me, I have more than 20 years of experience in the specialty retail, toy, and advertising industries. I have built a strong track record of success in positioning children's brands for growth at companies including Hasbro, Mattel, and Stride Rite.

Most recently, I was president of the Stride Rite children's group where I built a solid team and executed a strategy to streamline the business model and retail footprint. This resulted in industry-leading comparable-store sales increases, wholesale growth, and an improvement to overall profitability.

I joined Build-A-Bear because I believe in its tremendous potential, and I'm excited to use my skills to evolve the current strategies to return the Company to profitability and build a platform for sustained growth. In my first few weeks as CEO, I've worked with the executive team, field leadership, and store associates in a number of markets. The team has been open to new ways to think about the business and the future opportunities.

Although our sales trend has softened slightly in July, we believe we have the right initiatives in place and are intently focused on executing the balance of the year.

We are also beginning to solidify our strategies for the future. And I believe we have several key strengths from which to build. We have a successful brand that children of all ages adore and moms trust, one that resonates with consumers on an emotional level. We have a seasoned and passionate team, and the ongoing key strategic initiatives are showing positive results, including the rebalancing of our marketing to include more brand-building advertising; the store-closures initiative, which is showing overall sales transfer rates of 20%; and lastly, the remodeling of stores to the new design to drive improved productivity.

Looking forward, I believe we can enhance brand engagement and increase the lifetime value of our consumers. This includes increasing business with our most loyal guests, as well as driving frequency and value with other segments.

One initial action will be to re-emphasize our party business, which has both trial and retention benefits. We are effectively using data to positively impact our business and drive key strategic shifts, such as repositioning our marketing programs and developing the real estate optimization plans.

However, I believe we can improve our results on a broader basis by expanding the use of more robust data-driven decision making throughout the organization. We are exploring opportunities to increase efficiencies within our product development, sourcing, and distribution channels, while balancing the overall value proposition for our guests.

Most importantly on the longer term, I see the opportunity to further leverage the power of the Build-A-Bear Workshop brand and take advantage of our core competencies in infrastructure.

I am joining this Company at a time when the momentum is moving in a positive direction. The key initiatives that the team are implementing have improved sales trends and profitability and positioned us for the future. I look forward to updating you on our progress as we move forward.

And now, I would like to turn the call over to the Operator to begin the question-and-answer portion of the call.

(Operator Instructions). Jon Evans, JWest LLC.

(Technical difficulty)

James Fronda, Sidoti & Company.

Can you give us, I guess, any specific into what is driving the strong comp sales? I mean, anything in the product that you can talk about?

We have a strong selection of both proprietary products that are Build-A-Bear driven, as well as a very good array of core licensed products that have driven our sales this year, including, for example, our My Little Pony line, which was very, very strong for us.

We also have in the January time period, for the first six months, we enjoyed above-average gift card redemptions because of the work that the team had done in the December time period of the prior year to sell the gift cards. So that drove a lot of the first-quarter results as well.

Is there still, I guess, capacity for those gift cards to be redeemed in the next six months of this year?

Yes, and that will also be a plan, of course, for us to work against for the remainder of the year in driving those gift card sales. Clearly, they are good for us during the quarter, but they also pay off as we move into the first part --- first quarter of 2014.

Okay. And I guess do you think the reduced promotional activity you're seeing, do you think that's sustainable for the rest of the year? Or at least through the (multiple speakers) third quarter?

We think that we have some very strong both proprietary brand marketing plans, as well as plans against a number of different initiatives from My Little Pony additions of Twilight Sparkle, which will be out the 31st.

We also have Smurfs that's coming up. So we feel like we have the movie on Friday, and we have heavied up our advertising. So we feel really good about some of our brand initiatives going forward. We are prepared. If we need to do some selective promotions, we will. But for the most part, our objective is to continue to build upon the Build-A-Bear brand strengths.

Okay, thank you.

(Operator Instructions). Jon Evans, JWest LLC. (Technical difficulty)

Tucker Golden, Solas Capital.

Good morning and welcome, and congratulations on your new post.

I had a question regarding the franchise segment. In the past, I know that [fines] had disclosed an estimated potential for 300 franchise units globally. It seems like we're stuck a little bit at 90. I saw there were some openings, but also some closings. I wonder if you can provide any color there, and then just your view for the long-term potential.

And in relation to this, how closely you've considered whether or not it makes sense to evaluate converting the European stores to a franchise model and really focusing on the domestic operations. Thank you.

Tucker, first, thanks for the kind words. I'm going to let Tina answer the first portion about the franchise store count, and then I'll speak about the potential for us to change our model.

Tucker, we still believe that we have the opportunity for about 300 franchise locations. Again, we are not in China yet, which is a big opportunity for us.

But as you are well aware, the global economic situation that our world has been in has also impacted our franchisees. So while we are sitting at around 90 locations, they are good locations and they are producing favorable results for us. So I think as the economy gets better globally, we'll see that pick up.

We'll see as we hopefully enter China that that has lots of opportunity. We're not in India. There's several big countries that we still haven't sourced, and as we continue to look for the right franchisees, we believe that we'll be able to be in those countries in the near future and reach our potential of the 300 locations.

In terms of the model, for me, I've been here since June 3, clearly I'm going to be looking across the organization at different opportunities based on some of the basic outlines of strategy that I provided, which is inclusive of ensuring that we're building on and leveraging the strength of the brand and managing and leveraging our infrastructure and core competencies.

Right now, the franchise model does seem to be working for us in terms of it is providing positive results from a revenue perspective, so in the short term, we'll remain with the current model.

Okay, thank you. (Multiple speakers). That's helpful.

I'm sorry, Tucker. In the UK, we will maintain the ownership position, at least in the foreseeable future.

Okay. Is there anything structural there that would prevent the potential to consider franchising those stores?

Well, clearly there's opportunity, and we continue to re-evaluate what's the most beneficial business model for the Corporation.

As of this moment, again having only been here since June 3 and getting to know the UK organization and how it works with our team overall, we are in the early days of exploration on what would be the right business model for us.

But in the foreseeable future, we would expect to keep the UK in an ownership position and also continue to expand the franchise model selectively throughout the rest of the world where it's beneficial to us. Additionally, as I'm sure you know, it helps us cover our costs to have that organization.

Maxine, did you want ---

Just one more thing. You know, we have 60 stores there, so somebody -- our policy at least has been in the franchises to not divide up a country, to have one franchise dealer.

So you'd have to find somebody who would have substantial wherewithal and to get really experienced in running a retail business or sell the business, something like that. And I think that we have found that, as Sharon just said, leverage in our Company. We don't have a -- we don't duplicate our staff over there. We have a tremendous leverage, and I think with Sharon's initiatives we will have that business clicking really strongly and be a good stronghold for us in Europe for expanding our franchises in those countries that we are not in yet.

Understood, thank you. That's really helpful. And then, if we could just get a little more detail on the new franchise, which market -- in which did you grow and in which market did you give back some stores? I think they were 10 added and 10 closed, or something like that.

We've continued to expand in Germany, and then I think in a few select countries, they have reduced where their nonperforming locations have been. So it's not any one country; it's (multiple speakers) many different.

Got it, okay, thanks. Thanks again.

(Operator Instructions). Jon Evans, JWest LLC.

Sure. Can you just talk a little bit about the cadence you saw in the quarter from a comp-store basis -- or comp-store sales? And then, you said July was a little bit softer, if you could give us any more insight.

And then, the other question, the $5 million to $10 million that you said in the cost saves, can you split that up between COGS and SG&A? Those are my first two questions.

I'll take the cost savings first. We are looking at, and again primarily in the back half of the year, that about 60% of it will be in cost of goods sold and the remaining portion will be in SG&A.

And again, as you probably know, Easter switched from second quarter last year to the first quarter this year. So we did have some strengthening in the first quarter because of that, but remained fairly consistent through the rest of the quarter, from the May and June perspective. And then ---

Yes, on the comps in the quarter, as we mentioned in the call, the comp-store sales consolidated was 7.3%, and that's 8.6% in North America and 1.7% in Europe.

And the July softness that I mentioned is --- we are looking at opportunities, of course, to move that forward. Overall, it's kind of across the entire retail organization, but one of the things that we've done to buoy up that July opportunity is as of July 22, we actually heavied up our media. We have Smurfs coming, as I mentioned, and we've actually seen some positive early results of the Smurfs movie expectations on Friday, as well as the heavy up of TV, which is a balance between both Smurfs-specific advertising and our brand-driven advertising. Does that answer your question?

Yes, that's helpful, but I mean, I guess, so if you think about July so far, are you still positive or are you negative or can you give us any kind of insight? You just said it's come off from the pace that you had.

At this point, John, we really don't give monthly comps (multiple speakers). We report quarterly.

Got it. So if you take the $5 million to $7 million, the midpoint is $7.5 million, and if you take 40% of that, that's $3 million. So if we look at SG&A in absolute dollars, are you basically saying that you'd expect SG&A dollars for the year to be down $3 million year over year? Is that a fair assumption?

Yes, I think that's a fair assumption.

Okay, and then the rest is in COGS. Can you help us understand that cost save in COGS? Is that because you got cheaper rents? What is that, because I think you also have an initiative to buy better to increase gross margins, also? So can you maybe help us understand the difference between the two? Because one to me seems like a cost-savings effort where you're doing better on real estate or redoing stores, and the other one seems like it's you're buying better, and those seem like they are different, so could you help us articulate that strategy?

It is a combination of both of those. And the $5 million to $10 million is net year over year, so you're going to get some impact of the store closures, plus -- and as we said earlier in our first-quarter call that we were going to increase our marketing spend, so that is an offset. So closing store impacts, cost of the COGS it impacts, SG&A offset by some increases in marketing, and our transition costs as we've called out, as well as store closings.

So from -- I would say probably from a perspective of cost of goods sold, the relationship between closing stores and improvement in true retail margin is probably 50-50.

And then, could you maybe help us think about if you're successful in your strategy of buying better and putting this team together of improving gross margins over time? Can you help us understand the opportunity you think to improve your retail margin?

We haven't really given that guidance per se from a margin perspective. But we do believe that we have the opportunity long term to get into double-digit operating profit -- return to double-digit operating profit, as we had been in the past.

But again, as you know, this year and next year are transition years for us from a perspective of our store closings and remodels that we have embarked on for the last 18 months. And we do -- when we get a slightly positive comp, we do leverage our occupancy costs, which are primarily fixed. Those are the warehouse and rent and things like that. So as we continue to have the positive comps, we will get some of that leverage back, too.

Got it. And then, the last question I would have for you is, can you give us a roadmap of where you expect to be from a store base of the new concept stores? So in other words, if we are --- next year in 2014, can you give us a sense of where or what percentage you hope of the store base would be of the new stores?

And then, the other question I would have is when will you give us the productivity difference in the new stores on a four-wall basis? You've said that they're producing 20% better kind of sales, but I'm curious what kind of return that they're producing better, so can you help us understand (multiple speakers)

Again, the first store has just been opened not even a full year. It's about 10 months at this point in time. So again, so that's one store. So as we continue to progress and get more information, we'll update you on that. We just don't have enough information.

And we believe that our goal, from a store-count basis, that in North America that will be 225 to 250 stores, once we're through all of the transition of closing stores.

We also believe at this point that we'll -- we remodeled six stores last year. We're going to remodel 25 stores this year, and we believe the opportunity for next year is 20 to 25, and that is about where we have left off from that perspective, as far as going out. So the opportunity could be 50-plus stores in this remodeled format.

However, we believe we also have the ability for modular, moving some of these specific items that we put in the new stores, like the Hear Me station, that we can move in other stores and not have to do a complete remodel.

And again, we are working on engineering and driving our costs down in the new stores. So far, we are pleased with their performance and we're on target to hit our pro forma payback, which is two years or less, which is back to historic. As we were opening stores in the early 2000s, we were paying back our stores in less than two years.

Okay, thank you.

(Operator Instructions). Tucker Golden, Solas Capital.

You touched on operating leverage and warehousing costs. I was curious, at what utilization rate or what capacity rate is your DC currently running?

The DC is running at probably about 75% capacity, and again, that's going to fluctuate during peak inventory times. It's going to be more productive in the back half of the year as we're building inventories for the higher sales volume.

Do you get close to full capacity there during the year?

Not at this point.

Is it under consideration that you might -- with the store base, the owned store base, being reduced, is it under consideration that you might want to explore options there, whether it's bringing in another partner to share the facility or somehow becoming more efficient in that area?

Of course, and we have continued to look at all opportunities to leverage the warehouse, whether it be another business partner expanding the Web business because our Web store -- our Web fulfillment center is in the warehouse also. So we continue to look at all of that.

Terrific. Okay, thank you.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Sharon John for closing remarks.

Thank you for joining us today, and we look forward to speaking with you when we report our third-quarter results in October.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.