Build-A-Bear Workshop Inc (BBW) 2013 Q3 法說會逐字稿

Greetings and welcome to the Build-A-Bear Workshop third-quarter 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 Sharon Price John, CEO, and Tina Klocke, COO and CFO.

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. This way we can get to everyone's question during this one-hour call. Feel free to re-queue if you have further questions.

Please note 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 risk 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 Sharon Price John.

Thanks, Allison. Good morning, everyone. On today's call I will begin with an overview of our third-quarter results, provide a few fourth-quarter highlights, turn the call over to Tina to review financial details, and then we will take your questions.

As outlined in this morning's press release, in the third quarter we delivered consolidated comparable-store sales growth of 6.4%. This marked our fourth consecutive period of comparable-store sales growth in North America and our third consecutive increase in Europe. We also expanded gross margin by 360 basis points and had a $3 million improvement in operating performance, reducing our pretax loss to $1 million compared to last year's third-quarter pretax loss of $4 million.

We attribute these results to increased discipline of expense management, improved leverage and occupancy costs, and a balanced merchandise offering integrated with marketing which allowed us to reduce overall promotional activity compared to last year.

Specifically, we saw solid performance in Build-A-Bear Workshop proprietary core animals and fashions while driving new licensed introductions. The launch of My Little Pony animals and accessories performed well across geographies and the launch of products featuring the popular singing group, One Direction, was especially successful in the UK.

This compelling product offering, plus refocused marketing, allowed us to reduce a number of discount-driven promotions. As an example, we successfully eliminated our all-store $29.99 bundle promotion that we had run in the third quarter for the past four years in North America.

Looking ahead, we have a solid plan in place to capitalize on the fourth quarter. This year's holiday theme is Twas the Fun Before Christmas and was strategically developed to encourage kids and families to experience Build-A-Bear Workshop during the holiday season.

In support of the concept, our product line features Wishes Santa, which is designed for children to insert their wish list from Christmas along with a heart as a part of our signature ceremony that occurs at the Stuff Me station. This positions our stores as an ideal preholiday family destination.

To round out our holiday lineup we have proven multi-generational holiday favorites including Rudolph the Red-Nosed Reindeer and Frosty the Snowman. A significant portion of our annual marketing spend occurs in the fourth quarter. We have an integrated plan to support the Twas the Fun Before Christmas theme that features a combination of brand and product messaging, including national television reaching both kids and moms throughout the holiday season.

Driving our gift card program is another important component of delivering the quarter. We intend to expand gift card sales by emphasizing the Build-A-Bear Workshop gift of experience as an ideal and easy gifting solution. We are integrating gift card-specific messaging in our national marketing, including TV and print, and elevating are suggestive selling into the service model across all channels.

We are focused on adding mobile POS to our top gift card stores to deliver speed and convenience of purchase. Not only is growth in gift card sales important for the fourth quarter, it positions us well for the start of 2014.

Additionally, we are pleased that McDonald's, for the fifth time, will feature Build-A-Bear Workshop mini-plush in their Happy Meals starting November 15 and running through December 12. This marketing initiative is expected to reach approximately 20 million consumers in North America. The McDonald's Happy Meal program have consistently driven traffic and sales to our stores and provided new guest trials.

Our strategy to rebalance our marketing program, improve our product offering, reduce discounts and promotions, and optimize our real estate have been driving consistent improvements in our results, enabling us to establish a foundation to deliver our stated objective of sustainable, profitable growth.

I am pleased that the third quarter and the first nine months of the year have advanced our objectives. Build-A-Bear Workshop is a powerful brand, one that kids love and moms trust. Going forward, we will leverage the strength of the brand and build on our core competencies and infrastructure to deliver results that increase shareholder value.

Now I would like to turn the call over to Tina to review our financials in more detail.

Thanks, Sharon. Good morning, everyone. For the third-quarter net retail sales were $84 million while operating 31 fewer stores. To put that in perspective, the 31 fewer stores resulted in 10% fewer operating weeks in the quarter while our net retail sales declined less than 1%, excluding the impact of foreign exchange.

Consolidated comparable-store sales increased 6.4% driven by a 6.2% increase in transaction value and a 0.2% increase in transactions. By geography comparable-store sales rose 7.6% in North America and 2.3% in Europe. Real estate optimization strategies drove approximately 30% of the comparable-store sales increase in North America in the quarter with the balance coming from organic growth in our base.

E-commerce business was up 1.1%, excluding the impact of foreign exchange. Retail gross margin was 40.1% compared to 36.5% in last year's third quarter. The 360 basis point improvement was primarily driven by decreased promotional activity and leverage and occupancy expense.

SG&A was $36 million, down slightly compared with the third quarter last year. SG&A was 42.2% of revenues compared to 42.5% last year. Included in this year's SG&A were $600,000 in management transition and store closing costs. Excluding these costs, SG&A was 41.6%, an 80 basis point improvement versus last year.

Adjusted net loss per share improved to $0.05 from $0.25 per share last year.

For the first nine months net retail sales rose to $267 million while operating 31 fewer stores, compared to $259 million in the first nine months last year. Again, to put this in perspective, the 31 fewer stores led to a 7% decline in total operating weeks in the first nine months of the year, while net retail sales rose 3.4%, excluding the impact of foreign exchange.

Our consolidated comparable-store sales rose 8.2%, driven by a 4.5% increase in transaction value and a 3.7% increase in transactions, and included a 9.1% increase in North America and a 4.6% increase in Europe.

Real estate optimization strategies drove approximately 20% of the comparable-store sales increase in North America in the first nine months with the balance coming from the organic growth in our base. E-commerce sales increased 4.7%, excluding the impact of foreign exchange.

Retail gross margin was 39.6% compared to 37.3%. The 230 basis point improvement was primarily driven by decreased promotional activity and leverage and occupancy costs.

SG&A was $116 million, or 43% of revenues, including $4 million of management transition and store closing expenses, compared to $114 million, or 43.3%, last year. Excluding these costs, SG&A was 41.6%, a 140 basis point improvement versus last year.

Adjusted net loss was $4 million, or $0.23 per share, a solid improvement from last year's adjusted net loss of $12 million, or $0.74 per share.

Turning to the balance sheet, at quarter end consolidated cash was $14 million compared to $22 million at the end of the third quarter last year. We had no borrowings on our credit facility at quarter end.

For the first nine months capital expenditures were up slightly from last year at $15 million, primarily for store-related capital and IT infrastructure. Depreciation and amortization was $14 million, down slightly from last year.

For the full year we continue to expect capital expenditures to be approximately $20 million to support the refresh and repositioning of our stores and investment in infrastructure. Depreciation and amortization is expected to be approximately $20 million.

Consolidated inventory at quarter end totaled $57 million compared to $55 million at the end of the 2012 third quarter. Inventory per square foot increase 12.1%. The $2 million increase represents a combination of timing of receipt and additional inventory to support our fourth-quarter sales plans.

Now let me update you on our progress to optimize our North American store base. Our real estate optimization plans are a key factor in establishing a foundation to deliver sustainable, profitable growth. We continue to strategically close stores and transfer a portion of sales to other stores in the same market.

In the first nine months of the year we have closed 34 stores and have retained approximately 20% of their sales on average in other locations. We expect to close an additional 10 to 25 stores in fiscal 2013 and 2014. We also continue to renegotiate leases to improve our rent structure.

As we renew leases, we have updated select stores in our new design. During the quarter, we remodeled five existing locations and opened in three new locations to give us a total of 19 newly remodeled stores. As we continue to remodel stores, we are working to gain economies of scale and drive down the capital investment needed to build the stores.

We have also downsized stores as a part of our initiative to improve overall store productivity. Organic sales growth, combined with our store closure, remodel, and downsizing activity, have driven a 12% increase in sales per square foot in North America for the first nine months compared to last year.

We will opportunistically open stores, including four pop-up locations this holiday. This is a cost-effective method of validating select markets during our highest productivity months of the year. We expect to operate these stores for six months to evaluate their long-term potential.

We expect to achieve approximately $10 million in net cost savings for the year, the high-end of our original stated objective. Approximately 60% of the savings will be realized in gross margin and the balance in SG&A.

Now I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions) James Fronda, Sidoti & Company.

Good morning. Could you discuss I guess a little more in detail what is causing the strong comp growth? You think it was specifically related to the My Little Ponies products or are the other products doing well as well?

James, I think that it is a combination -- this is Sharon. It is a combination of things. As we said, we have a balanced product offering of proprietary Build-A-Bear products that are driving the sales, as well as some licensed products including My Little Pony and, as we mentioned, One Direction. We are very pleased that it is a balanced approach as well.

Okay. Did you record any decent gift card sales during the quarter, or that is primarily during the fourth quarter?

We have actually improved our gift card sales over the first nine months as well.

Okay, all right. That is all I had. Thanks, guys.

Jack Ripsteen, Potrero Capital Research.

For next year as you look out what kind of expenses do you think you could drive out of the middle of the P&L as you shrink the store base?

Thanks, Jack. It is Tina and I would say on a go-forward basis we will continue to look at our supply chain from the point where we manufacture the product in China, all the way to where we take it into the store. And so we are embarking on that.

So we believe that there is some leverage that we can find there, whether it be the product make-up, whether it be transportation, how we do things. And so we think there will be some expansion in that area, but also as we continue to close stores and have the benefit of a full year of those store closures, we should see improvement in not only that piece of the gross margin but also in SG&A.

In terms of SG&A, last year it was about $165 million. I mean can that come down to like $150 million with this new store base? Just generally speaking how much is left to come out of that?

I think from that perspective it is the cost to operate the store from a salary perspective, payroll perspective, and other supplies and that type of stuff. So I think there is some room there and as we get deeper into the store closings we will come back to you all with a target number that we think we can hit.

Jack, this is Sharon. On that front, we are doing a complete supply chain effort right now. We are looking at taking costs out on every link of the value chain and we will be driving some value engineering as well into the product lines. But just, as you know, that takes a while for it to flow through.

We might be able to see some improvement in SG&A before we are able to see some improvement on the COGS.

Okay. I was just kind of curious, because obviously you are shrinking the store base, but you want to transfer those sales, but you still have to spend a certain amount of SG&A dollar towards marketing. So should we see some improvement? Is there way to grab some efficiencies there as well, even though you are still trying to achieve the overall branding and marketing campaign?

Yes, there will be efficiencies over time. We are transferring, as we said, on average about 20%. There is some marketing expense associated with that on a one-time basis to communicate to the consumers that we are more familiar with the store that is closing to ensure that they understand that there is sometimes a newly-imagined store being opened near them or to tell them to go to a different store in their location, near their location. Generally within five or 10 miles.

So that expense is in there that won't be an ongoing expense, but we also see that we might have some opportunities with more elevated and integrated marketing to have a little better [A-to-S] over the course of time.

If I look back at like a Q4-to-Q4 comparison that is coming up at one point in, like say, 2011 I think the SG&A was $42 million and you had roughly the same sales. Then the next year it jumped to $51 million. I'm just trying to discern what is the right number, because clearly the sales were about the same but the SG&A was almost $10 million higher.

Yes, that was a process I think which was a good process for the Company to go through rebalancing the marketing communication, which included brand marketing and product marketing. Some of that brand marketing was inclusive of advertising to moms in a more robust manner, and moms' TV is a little more expensive than kids' TV.

But I think over the course of time now we are really learning what that right balance is, and as I say, I am hopeful that we will have a better A-to-S as we go forward.

One of the things that we are doing with the Twas the Fun Before Christmas campaign, for example, is ensuring that the communication points are the same from moms to kids. We are pulling everything together throughout all touchpoints to the consumer, so that again elevated an integrated approach really drives generally some deficiencies in the process.

So it would be safe to assume that that $50-ish-million is kind of the high-water mark and we wouldn't expect to see that going forward?

I would certainly hope so. I mean it would be relative, of course, if we continue to drive sales. My dollars will go up and my A-to-S will go down (multiple speakers) yes.

Right, but you are closing -- so even if you improved sales you still are sort of flat, right, on revenues? So to pick up the leverage that would have to come down.

There should be some leverage there, sure.

Okay, great. Thank you very much.

Tucker Golden, Solas Capital.

Good morning. I had a question about the balance sheet. So if we look at the cash position versus about a year ago, see it has declined $8 million or $9 million. It seems to me that you're basically spending all your EBITDA -- no more, no less -- on various capital initiatives, the store remodels, systems. And it looks like working capital really accounts for the vast majority, if not all, of that reduction in cash.

So was wondering if you could just go through the items there. It looks like receivables are over $10 million. They have never been that high in my memory.

Inventory and payables smaller moves, and I think you explained in the release that you are making a small incremental bet on the fourth quarter and so maybe that is why inventory is a little higher per foot. But really receivables is the big one that sticks out to me, which is -- would just like to understand why that kind of sucked up $6 million of cash over the last year and whether we can expect that to come back and see the kind of year-end cash balance back at that $45 million level it was last year or hopefully better?

Sure. Tucker, it is Tina. To answer your question about cash and the receivables pieces, as you highlighted, a portion of it is the increase in inventory. The other portion is as we build these stores we get tenant allowance, construction allowance from our landlords and so that is the portion that we need to collect as these stores are completed.

Since we only built six stores last year and we are on the path to do 25 that is going to increase that. But that will go down by the end of this year, beginning of -- in the first quarter of next year.

The other piece is, as we have highlighted in our 10-Q, we have a dispute going with the customs authority in the UK in that in order to continue to go through the process we had to make a deposit, or we put it on the books as a receivable, and that totals about $2.5 million. As we proceed through that, the hearings and that, we should -- we will either have to pay that or we will get it back. It just is part of the overall.

Okay. So maybe $2.5 million from this customs dispute and the other kind of $3 million, $4 million from tenant allowances kind of being higher than last year?

Right, right. And then the couple million in inventory and then the capital is slightly higher, and so that balances with really the change in cash.

But, again, remember this is our low point. Q3 is always our low point as we build inventories and as we head into the holiday season. And that we will have -- we will be pretty close to our same cash as last year at the end of this year as the sales come in, gift cards come in, and the like.

Yes, I just wanted to confirm that the change versus this point last year was not permanent. Thank you.

Okay, great. Thanks.

(Operator Instructions) [Joey Baum], [Delta Incorporated].

You guys are doing a great job helping Build-A-Bear realize its real value as a business, but closing unprofitable stores will only get you so far. Can you give some more details on how you are planning to help Build-A-Bear realize its growth prospects?

Okay, Joey, yes. This is a multifaceted approach to returning to sustainable, profitable growth. So the real state optimization program was a necessary part of this. We realize that the closure of the unprofitable doors is only a portion of the solution and that is why it is not the only part of what we are doing.

As we mentioned, we are rebuilding the marketing program by rebalancing the communication and ensuring that we are branding as much as we are driving products. We are, at the same time, reducing our promotional activity and discount activity because we know the strength of the brand.

When you really back away from it, though, and recognize what is going on with the store closures, we still are having growth. The whole water level is rising because we are having organic growth from the stores on the comp -- for our comp base it's 70% from the organic doors versus the newly remodeled doors.

So it is not just the closure of the doors that is helping us, it is everything that we are doing to drive the brand overall. It is a combination of driving the top line as well as improving our bottom line by closing unprofitable doors.

Okay, thank you very much.

There are no further questions in queue at this time. I would just like to turn the call back over to management for closing comments.

Thank you again for joining us today. I remain confident in our business prospects as we enter the final quarter of the year. The strategies we have implemented have led to improvements in our comparable-store sales, margins, and profitability, and we expect to build upon our progress during the holiday season and into 2014.

We look forward to speaking with you when we report fourth-quarter results in February.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.