Build-A-Bear Workshop Inc (BBW) 2014 Q2 法說會逐字稿

Greetings and welcome to the Build-A-Bear Workshop second-quarter 2014 results conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to 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 Sharon Price John, CEO, and Tina Klocke, Chief Operating Officer and Chief Financial Officer. On today's call we will begin with Sharon's discussion of second-quarter results and the progress the Company continues to make on its strategic initiatives. Tina will follow with a more detailed review of the financials and then we will take your questions.

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 questions 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 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 will turn the call over to Sharon John.

Thanks, Allison. Good morning, everyone, thank you for joining us today. I am pleased to report that our disciplined approach to the execution of our stated strategies led to our sixth consecutive quarter of improved operating performance. And for the first six months our Company has delivered pretax income of $1.3 million, an increase of over $7 million versus the prior year, marking the first time since 2008 that we have been profitable at the halfway point of the year.

As noted in this morning's release, historically the second quarter is our smallest in terms of revenue, which made it even more important to stay focused on our primary goal of improving profitability. We delivered on our goal of profit improvement. Although consolidated comparable store sales decreased by 4.9%.

Last year's second quarter was buoyed by a strong launch of Build-A-Bear's first My Little Pony collection and had a 7.3% comp increase. Therefore our strategy for this year was to leverage the benefit of the Easter shift and to anniversary the young girls business that had been driven by My Little Pony.

As planned, we delivered positive comparable store sales in April with a solid performance from our proprietary Easter lineup. And for the quarter in total, we improved key operational levers that are more in our control by increases in dollars per transaction, units per transaction, average unit sell-in price and consumer conversion.

However, traffic was a challenge, in part due to the lingering effects of the first-quarter weather patterns which caused some school vacations to be canceled and the school year to be extended in many markets throughout the second quarter. This can have a particular impact on [experience with] children's retailers, including Build-A-Bear, as our traffic benefits when kids are out of school.

Also, we made a strategic decision to eliminate a gift with purchase promotion that had been repeated for a number of years. This promotion and its supporting marketing had historically driven significant traffic but did not deliver a profitable return. This decision was consistent with our ongoing strategy to shift from promotion driven marketing to brand building.

Our plans to anniversary the My Little Pony launch and counteract the potential traffic impact of the elimination of the gift with purchase promotion included: the addition of the Disney Palace Pets collection, a series of royal pets tied to Disney Princess franchise targeted to the young girl consumer base; and the launch of a series of products tied to highly anticipated movie releases supported by integrated marketing programs.

Disney's Palace Pets is a relatively new concept for little girls introduced by the popular app late last year. This product collection is an important part of our assortment for the year; however, the second-quarter brand build was slower than planned.

As Disney has continued to grow awareness of this brand, we have elevated our partnership marketing with them and the sales have gained momentum. We will continue to drive the collection, which includes the introduction of new Palace Pets characters in the back half of the year.

The movie partnerships were with Marvel's Amazing Spider-Man 2 and Captain America, The Winter Soldier as well as DreamWorks' How To Train Your Dragon. Inspired by the popular Marvel properties, we created a proprietary line of themed superhero bears which extended our historical costume only offering for the first time.

We integrated the expanded product launch into a broader marketing campaign associated with our 11th annual Huggable Heroes program which recognizes charitably minded kids. Additionally, we partnered with the USO and their Every Moment Counts campaign. This broadened marketing approach moved us beyond the concept of traditional heroes and it enabled us to celebrate superheroes, everyday heroes and military service heroes.

The campaign resonated emotionally with our guests and generated over 80 million media impressions, created awareness and drove high product demand, particularly with boys and adult affinity consumers which contributed to the products selling out in advance of the movie release date.

The Spider-Man bear is already back in stores with strong ongoing demand and the replenishment of the Captain America bear will be in stores this fall timed strategically to take advantage of the September DVD release.

Late in the second quarter, we launched Toothless the Dragon from How To Train Your Dragon 2. Product demand was high as consumer response was broader than expected, reaching across key demographics including girls, boys and adult affinity guests.

Because of the rapid sell-through, we immediately put an action plan in place leveraging our robust social media network to communicate directly with consumers. And for the first time at Build-A-Bear, we provided an opportunity for guests to sign up to be personally notified when Toothless is reintroduced in October prior to the DVD release. In addition to fulfilling the growing wait list, we are projecting continued demand for the balance of the year.

Clearly, we are starting to demonstrate that key high-impact product launches combined with our ability to execute elevated marketing programs, gives us an opportunity to drive consumer awareness and product demand.

Looking forward through the balance of the third quarter, and back half of the year, we are well-positioned with a powerful lineup of hot licenses, proprietary concepts and holiday offerings introduced in a strategic cadence supported by our new integrated marketing approach.

In fact, for the month of July, our comparable store sales are on a positive trend across geographies, driven by a balanced offering of Build-A-Bear core products and new licensed launches, further validating that we have the right strategies in place to continue to improve profitability and grow comps.

Specifically, in early July, we added freshness to our offering of Hasbro's My Little Pony line with new characters which have sold well, including a collector targeted Web exclusive pony retailing for $35, a new pricing threshold for Build-A-Bear animals.

We continued to gain momentum in July with the introduction of the full lineup of Nickelodeon's Teenage Mutant Ninja Turtles. The launch is having a major effect on our overall business with a very strong response from boys, girls and adult affinity consumers and has continued to build as we approach the movie release date in North America on August 8.

Notably, the enhanced partnership that we have received from both Hasbro and Nickelodeon, including exclusive digital content available only on our website, further demonstrates our evolution from traditional license arrangements to elevated marketing relationships. We expect both of these properties to continue to fuel sales throughout the year.

As mentioned, in September we then have the return of Captain America Bear and in October we bring back Toothless the Dragon timed with both of their DVD releases.

I'm also excited to announce that in November, we will be expanding our ongoing Disney partnership with the addition of a new collection featuring exclusive plush tied to the movie Frozen which continues to be extremely popular. And of course we will have a full lineup of proprietary Build-A-Bear products and licensed properties specifically for the holiday season.

In conclusion, this quarter's results reflect our commitment to our stated strategies and the progress that we are making toward our goal of sustained profitability as we evolve our business model to leverage the strength of the Build-A-Bear brand and drive future growth.

I am confident that we have the right strategies in place and that we are building the processes, tools and the team to continue to drive improvement and further increase shareholder value. Now I will turn the call over to Tina to review our financials in more detail.

Thanks, Sharon, and good morning, everyone. Our second-quarter pretax results were in line with both internal and external expectations. As noted, for the first six months of the year, we generated pretax income of $1.3 million, an increase of over $7 million from last year. This is the first time in six years that we have had a pretax profit through the first half of the year.

Net retail sales were $75 million with 10 fewer stores in operation at quarter's end compared to $80 million in the prior year. On average approximately 16% of sales from closed stores transferred to other remaining stores, consistent with past closures. Consolidated comparable store sales declined 4.9%.

A decline in-store traffic contributed to an 8.3% decrease in transactions partially offset by an increase in average transaction value. We improved the key operational metrics that are more in our control including dollars per transaction, units per transaction, average unit selling price and consumer conversion.

By geography, comparable store sales declined 4% in North America and 8.1% in Europe. Excluding the impact of foreign exchange, e-commerce sales decreased by 4.3% with a continued improvement in profitability. Retail gross margin increased by 220 basis points to 39%. This was a result of a 360 basis point improvement from expansion in merchandise margin and reduction in distribution costs partially offset by deleverage of fixed occupancy expenses.

SG&A was $34 million or 44.6% of total revenues compared to $37 million or 45.1% of net revenues. Management transition and store closing expenses were $900,000 in the second quarter last year. Excluding these costs in 2013, SG&A as a percent of sales was 44%. While sales declined, expansion in gross margin and lower expenses drove a $2 million improvement in pretax loss compared the same period a year ago.

Net loss was $4 million or 0.25 per share compared to a net loss of $6 million or $0.38 per share in the second quarter last year. Adjusted net loss was $0.25 per share, an improvement from a $0.33 loss per share in the second quarter last year.

For the first six months, total revenues were $174 million, a decrease of 8.6% excluding the impact of foreign exchange. Consolidated comparable store sales declined 3.4% and included a decrease of 2.8% in North America and a 5.5% decrease in Europe. E-commerce sales declined 7.2% excluding the impact of foreign exchange with continued improvement in profitability.

Retail gross margin was 41.6%, an improvement of 220 basis points compared to last year. This increase was driven by a 300 basis point improvement in merchandise margin partially offset by deleverage of fixed occupancy expenses.

SG&A was $72 million or 41.2% of total revenues including $400,000 in management transition and store closing expenses. This compares to $81 million or 43.3% of total revenues including $3 million in management transition and store closing expenses in the first half of fiscal 2013. Excluding these costs in both periods, SG&A improved 60 basis points to 41% of total revenues in the first half of fiscal 2014.

Pretax income was $1.3 million compared to a pretax loss of $6 million in the first six months of fiscal 2013. Adjusted net income improved to $0.06 per diluted share from an adjusted net loss of $0.19 per share last year.

Turning to the balance sheet, at quarter end consolidated cash was $42 million, up $14 million from last year. This is primarily attributable to our improved profit performance in the first half of 2014, decreased capital spend and the timing of payments for inventory and rent. We had no borrowings on our credit facility.

Consolidated inventories totaled $43 million compared to $48 million last year. Inventory per square foot decreased 6.7% reflecting the timing of in-transit inventory. Capital expenditures were $3 million primarily for store-related capital and IT infrastructure. Depreciation and amortization was $9 million.

For fiscal 2014, we continue to expect capital expenditures to be in the range of $12 million to $15 million to support selected store updates and opportunistic openings, as well as the ongoing investment in IT infrastructure. This includes the opening of six to eight pop-up stores in advance of the holiday season.

We continue to expect depreciation and amortization to be approximately $18 million. As a reminder, our fiscal 2014 ends January 3, 2015 and includes a 53rd week versus last year's 52-week year.

In summary, by staying true to our strategy and focusing on brand building programs, we delivered solid improvement in gross margin, operating performance and our bottom line, leading to our sixth consecutive quarter of improved results. We believe our initiatives position us to continue our progress towards sustained profitability in the second half of the year and longer term.

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

(Operator Instructions). Steph Wissink, Piper Jaffray.

Thank you. Good morning, everyone. Tina, I wonder if I could throw out a couple of housekeeping questions and then, Sharon, a question for you. Curious on the comp leverage points in the model now that you have extracted some of the costs and lowered the overall store base.

And then if you could help us just navigate the tax rate for the year? It seemed like the below the line items were where we were off a bit on the loss per share estimates. If you could help us just reconcile as we think about the back half, how we should be modeling the tax?

And then Sharon for you, really intrigued by this notion around kind of social media and leveraging your followership base, as well as some of the affiliate marketing and partnerships. Could you talk a little bit about the margin potential as you see building into some of those leverage points, as well as some of the anticipated traffic improvements from some of the license partnerships into the back half? How we should thinking about the next couple of quarters. Thank you.

Okay, thanks. I'll take the question first and then hand it over to Tina. Okay, Steph? Thanks for the questions.

Yes, on affiliate marketing partnerships and social media, one of the things that we feel that we have an opportunity with is that social media impact. I believe that we have noted a few times that we have a very robust quality program that includes 4.4 million active loyalty members. And the consumers, given our high emotional brand, are very involved and engaged in our brand on a number of different fronts from Facebook, Pinterest, etc.

So being able to activate against that as a part of a more integrated marketing program can be a key for us particularly as our consumer base shifts to more of the millennial mom. And who, as you know and have heard from many marketers I am sure at this point, are really natives to that entire environment.

So that piece of the puzzle is actually a much more efficient way to market. It is cost-effective. It is very poignant. It is in the moment. It keeps your marketing dollars pretty liquid up until you need to spend them versus the other types of media from direct mail to television where often you have to make commitments far out and you might be uncertain of your actual need to push the media given the sales of the product. So we can't really activate that in a very efficient manner that can actually aid in our (inaudible).

I think on the affiliate marketing partnership, it is really -- it's kind of this concept of when a number of different entities are saying the same thing you get more leverage. It is a classic one plus one equals 10 kind of approach. And when you elevate to partnership, that really what it means is there is a give-and-take.

Our partners see us as a value as well as we see them as a value. That value lies not only in but certainly partly in the fact that we do have this very loyal consumer that we can reach directly and speak to them in a very unique way, particularly given that the products that we offer that represent their brand, that we offer them in a way that it is the only place that you can experience it.

You can come in and make a very special Spider-Man bear and it is only place that you can do that where he has the spider webs all over him and he is very high affinity to that young boy and an experience that they look forward to having.

So, we feel like that approach that we've just now started to activate against, as you saw and as I sort of explained in the second quarter against Spider-Man, Captain America and Toothless, gives us a lot more latitude in a much more efficient way to drive consumer demand. And frankly in this quarter it drove consumer demand beyond what our supply was.

And what we have to do is learn where those levers are and what the opportunity of the -- untapped opportunity still is when we hit all of those levers at the same time. Does that make sense, Steph?

Yes, that's very helpful. Thank you.

Okay. Tina?

Good morning, Steph. Traditionally we've just needed a slightly positive comp to leverage our SG&A and leverage our fixed occupancy expenses. And you can see that in past quarters that we have been able to leverage when we do have that slightly positive comp.

Related to the tax, just a reminder that we are in a full valuation allowance on our US taxes. And so, any tax expense during a quarter is related to taxes that are paid in jurisdictions other than the US when we don't have an offsetting benefit. And we at this point expect our full-year tax rate to be somewhere in the range of 15% to 20%.

Okay, thank you. I will jump back in queue.

James Fronda, Sidoti & Company.

Hey, guys, how are you? Just on I guess the Disney and the Nickelodeon products, are there any significant license fees, licensing fees associated with those? Would that hurt margins at all?

There is a royalty associated with the use of the licensed products.

Okay. And where does that -- that comes out of sales or that is part of cost of goods?

Yes, it is a part of cost of goods. And what we tend to do, because in traditional terms the payment of a royalty should be expressing the added value and the innate brand awareness of the property that you're paying a royalty for. So comparatively, it is built into our margin and we are able to generally charge a slightly higher price for licensed properties.

Okay. All right, so it would not affect the margins either way I guess. If you are able to sell it at a higher price, correct?

It fits into our overall objective of what our margin strategy is.

Okay. And the continuation of --.

It is not margin [degrading] if that -- it's not margin [degrading].

Right, right. Okay. And I guess just in terms of franchise closers, I mean the previous strategy I thought was to expand those, but are those going to continue to close I guess for 2014 into 2015?

Yes, the franchise expansion strategy which we've spoke about is not only the rights -- part of that is the right sizing first of our franchises that we currently have, but also the expansion of franchises partnerships into new countries and territories.

So for example, the announcement of Turkey would be a franchise expansion that we announced last quarter, but in the meantime, some of our franchises are going through not a dissimilar situation that we in North America went through in the last two years of a need to do some real estate optimization.

Okay.

So you're going to see some puts and takes in our longer-term franchises. But at the same time, as we have started to right the ship in the North American side, we are getting a lot of interested parties on potential expansion into new international countries and territories.

Okay, all right, thank you guys.

Gerrick Johnson, BMO Capital.

Hey, good morning. I understand the impact on store traffic from the vacation schedules being shifted, but e-commerce is down a little bit. Is that impacted by vacation schedules as well? And what explains that decline?

Yes, no Gerrick that would not be impacted by vacation schedules. The comps on our e-com specifically are compared to a period from first half of last year where we were still in a highly [promotive] mode on e-com.

So about midyear last year, somewhere in the back half, around the back half shortly after I arrived, we looked at our e-commerce business and put a strategy around it that was inclusive of it not just being a clearinghouse but being more of a brand building consumer facing entity.

So we are taking out a lot of the promotions on the e-com front that has negatively affected the comps. But we are now -- have been significantly increasing profitability over the past few quarters.

Great. And then third quarter looks like that is a pretty tough comp. What are we comping against there? Marketing campaign, changes, more Pony, what else is in there?

We had some good proprietary product through that time period as well as My Little Pony continued to do quite well through that period, you are correct.

Okay, thank you.

Alex Furhman, Craig-Hallum.

Great, thanks, guys. Really amazed to see the phenomenal gross margin here in spite of the continued traffic weakness. And I am wondering as you think about the merchandise assortment and specifically the licensing goods here, I mean it seems like a lot of retailers, including some of the vertically integrated retailers, are having a lot of success with top brand licensing partners.

And the hard part of that is obviously getting the partnerships. And you have got partnerships with all of the top brands here, I mean Spider-Man, Teenage Mutant Ninja Turtles. These are top brands. Demand for a lot of this product seems like it has been more than you would have anticipated. I mean is this a big kind of focus that changes some of the merchandising direction? Is this the catalyst that can get comps actually back into growth mode?

And then I am wondering maybe more probably if you think about distribution, I mean e-commerce, obviously that is not a huge channel for you. And like you said, that have been very promotional in the past. I mean does having the inherent brand awareness and tapping into the brand awareness of the Spider-Man fan and the Teenage Mutant Ninja Turtle fan, I mean does that change the thought of e-commerce? Does that get more people coming into that channel?

And then similarly internationally, I would think having partnerships with a lot of those top brands would also cause you to have more awareness right off the bat as you think about international markets. So with all that cash on the balance sheet, a lot of that held out of the country, I mean is there any thought to maybe taking an approach out of the country -- especially now with a more broad licensed assortment of top brands, is there any thoughts of maybe going with more of an in-house capital approach there?

Oh, that is interesting. But first I want to just make some comments on some of the earlier pieces of what you said. Yes, we are excited about some of these partnerships and what we have done and the partnerships that we are creating in the value add that is being created on both sides of the relationship.

The interesting piece is that you are, you are correct, e-com does have a broader and more significant role when you think about some of these licenses. Particularly as it relates to a consumer segment that I mentioned a lot in the script which the adult affinity consumer who often times isn't as excited about the making of the product. They just want the product.

And we are seeing some interesting off take. I mentioned one particularly which was an exclusive, a Web exclusive My Little Pony, where we have actually been able to break what has been a historical animal price point of $35. And it seems to be absolutely no pushback on that. So it opened up an entirely new space for us.

On that front though, I just want to be a little cautionary that -- we are not in the business of just becoming a licensed stop -- a place for only licenses. But I do, because we have just incredible opportunity for not only the creation of our own proprietary concept in lines that we need to learn how to market and drive ourselves, but also just our classic bears are still a big driver and most of our top five products are still just the classic and in some cases entry-level price point core product line.

So I don't want to misconstrue that the licenses are just everything about what we are doing. But it has been where we have been able to create some of the early successes, if you can think about driving business to the point of selling out, a success, but driving successes with this integrated approach.

On the international side, you have a terrific point. That it gives us a foray into new markets that may not be as aware of Build-A-Bear out of the gate to put some of these licensed properties that do have high awareness in our windows, in the upfront area, use it in our advertising to drive trial.

And on the capital side, we are still going to stick with our franchise approach for now. But that is interesting to think about the insight that you had there.

Great, well thanks for the insights there and looking forward to seeing the new product as it rolls out in stores.

Thank you, Alex.

(Operator Instructions). Clay Kirkland, Intrepid Capital.

Hello, good morning. Actually you just answered a couple of my questions. But while I have you here, can you give any more color on what is driving the positive comps so far in July? Whether it is traffic or pricing, some of the new launches you have out? Just any color on that would be great.

Absolutely. So we mentioned in the script that the key new product launches are creating a lot of buzz for us and a lot of opportunity with My Little Pony and Teenage Mutant Ninja Turtles. But interestingly, we believe that some of the positive comps out of starting, it almost kick started almost on the first day of July, is the fact that kids finally got out school.

So what is interesting as well is when we look at our four lever model right now of traffic, conversion, UPTs and DPTs, we are positive on all fronts through July. So we have been able to not only maintain those improvements in key metrics that I mentioned that we have increased through the first half of UPT, CPTs and conversion and AUR. But now with that buoy of traffic it is really starting to show up in our comps.

Okay, makes sense. All right, well that was all I had. Thank you very much.

Steph Wissink, Piper Jaffray.

Thank you. Just a quick follow-up, Tina, on the transference of sales when you do close some of your stores. Can you talk a little bit about -- I think you said 16% that has been tracking pretty consistently. Any efforts around building awareness in those markets where you are online only or where you may be exiting a lease and still trying to retain some business in your e-com channel?

Yes, I think, Steph, that is just part of the overall integrated marketing plan. And as we identify where the consumers are shopping -- their shopping patterns are. Also keeping in touch with them and leveraging our database to communicate with them to make sure that they are still are aware of all the promotions and the products that are coming out. That 16% has been fairly consistent throughout since we started closing stores.

Okay, thank you.

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

Thank you for joining us today and we look forward to updating you again on third quarter.

Thank you, this does conclude today's teleconference. You may disconnect your lines at this time and have a great day.