Build-A-Bear Workshop Inc (BBW) 2015 Q2 法說會逐字稿

Greetings and welcome to the Build-A-Bear 2015 second-quarter fiscal earnings 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. You may begin.

Good morning, thank you for joining us. With me today are Sharon Price John, CEO; and Voin Todrovic, CFO. For today's call, Sharon will begin with a discussion of our second-quarter results and the performance against the key priorities we identified at the start of the year. Voin will review the financials and then we will take 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. Members of the media who may be on our call today should contact us after this conference call with your 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 I turn the call over to management, 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 factor 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 Sharon John, CEO.

Thanks, Allison. Good morning, everyone. Thank you for joining us today.

The second quarter of fiscal 2015 marked our 10th consecutive quarter of improved operating results with an increase in consolidated comparable-store sales of 8.7%, a 450 basis point expansion in retail gross margin, a pretax loss of $400,000 versus a pretax loss of $4 million last year, a net loss of $0.04 per share compared to last year's net loss of $0.25 per share.

In the second quarter, we had positive sales in all regions driven by an increase in dollars per transaction, units per transaction, and an uptick in traffic. With consistent focus on our primary objective of sustained profitability, we delivered pretax income of $6.6 million for the first half of the year compared to $1.3 million in 2014. This is the highest pretax profit at the six-month mark that we have reported since 2007.

We feel confident that these results are primarily due to our disciplined management of the business and the changes and upgrades that we have made across the Company including organizational structure, processes, reporting systems, and skill sets. The evolution of our product development and planning processes exemplify the impact that strategic change can have.

As you may recall, last year at this time we were experiencing stock shortages on important new product launches that were supported by elevated marketing programs. We had begun to demonstrate our potential to drive consumer awareness and demand for new launches. However, we underestimated our inventory needs and had not yet developed the ability to effectively chase hot products.

We made changes in our planning approach in preparation for fourth-quarter 2014, which included increased initial purchase quantities for select key stories while improving methods to react to the best-selling items. We have continued to improve our processes, which positioned us to optimize this quarter's high impact launches such as the Minions line.

Also recall that in 2014, we restructured the product and marketing organization into consumer segment teams to support our strategic focus on four main consumer groups: older girls, younger girls, boys, and the over 12 gifting and affinity consumer. We believe this integrated, consumer-centric approach to developing products, enhanced by elevating storytelling marketing, is creating a more consistent pipeline of concepts.

With this approach, the consumer is more inclined to want to experience the full offering of the marketing promise, which has helped us deliver higher metrics such as units per transaction and drive retail prices at select proprietary products to be on parity with licensed properties.

As a reference point, in the second quarter in North America, our units per transaction reached their highest levels since 2008, and our average unit retail reached its highest level ever.

The long-term objective of this integrated approach is to orchestrate a consistent cadence of new introductions for each of the consumer groups balanced with a combination of our own intellectual property and license partnership. We work on a multiyear horizon to plan this cadence of launches based on seasonal events, new film properties, character events, and the creation of new concepts.

Also, we now assess the impact and value of an entire product story including accessories, sounds, and outfits, not just the stuffed animals, to measure our success. With this in mind, the key collections that drove our positive results in the second quarter, by consumer segment, were -- for our younger girls segment we continue to provide and they continue to respond to our popular collection of Hasbro's My Little Pony products with the most recent introduction, Princess Luna leading the way.

For our boys segment, Marvel's Avengers line continued to post strong results even after the Age of Ultron movie release. We featured a team Avengers marketing message and offered a promotion that encourage the purchase of multiple superheroes along with the lineup of must-have costumes, accessories, and sounds, achieving an average transaction value of over $70, which is significantly higher than our norm.

The most popular collection for older girls was our new proprietary property, Promise Pets, which was successfully introduced at the beginning of the quarter. The product line is supported with a free mobile app that enhances engagement, and provides play beyond the plush.

The pets have an attachment rate with accessories or apparel of almost 90%, and the users have engaged in over 350,000 play sessions on the app, evidence that the marketing story is resonating with our target.

New puppies and kittens will be intermittently introduced through the balance of the year. As mentioned, our collection of Minions had a high impact on our sales in the period. In advance of the release of Universal Studios' film, we launched the line in May and saw sales build throughout the balance of the quarter.

The Minions and their signature add-ons including gibberish sounds delivered nearly 5 units per transaction, approximately 20% higher than our second-quarter average. The product performed across geographies and appealed to all segments including the over 12 affinity consumer.

Additionally, our basic furry friend offering, which also appeals across all consumer segments, continued to deliver the highest unit volume of any stuffed animal category. In fact, because of the balance offering of basic proprietary and licensed products, our analysis indicates that we would've achieved a positive, consolidated comp in the quarter even without the Minions.

As we have stated, during 2015, we intend to evolve from an objective of sustained profitability to sustained profitable growth. As a part of this disciplined approach, we have articulated our MORE x 4 times for business plan that specifies continuous improvement and initiatives as well as strategic expansion opportunities including: one, more places.

On the forefront of our continuous improvement efforts in real estate is the introduction of two new store types -- a break frame specialty store model we are calling the Discovery design. And the first ever true outlet concept for the brand.

In mid-July, we opened the first store in our Discovery format in Salt Lake City, Utah. The format was developed to increase productivity and optimize spatial planning while featuring our refreshed brand look. The design provides a visual focal point highlighting one of our most unique selling propositions: the stuffing process.

We have literally moved the stuffing experience, which includes our signature heart ceremony front and center with the development of an impactful seven-foot tall circular stuffer. We will celebrate the opening of our first in-place remodel in the new format on September 1 in our Mall of America store, one of our most popular tourist locations. This is a long-overdue update of this flagship door.

We are value engineering components of the store as we move from concept stage to a standardized model. We will use the cost-reduced version of the Discovery format for new stores and to systematically update existing stores over the next few years since the majority of our doors have not been meaningfully touched in over a decade.

Separately, as we have noted, through our data-driven cohort strategy, we identified store groupings such as tourists and outlets that tend to over index on key metrics. Therefore, we developed a model to offer a true value-oriented merchandise assortment initially targeting outlet centers located near kid-centric tourist destinations.

Our first outlet format store opened in July in Rehoboth Beach, Delaware, and we plan to open six more stores in the back half of the year in North America and in the UK.

In addition to driving incremental top-line sales, we expect this approach to form an important link in the management of our product lifecycle.

Also of note, in light of our strategic exit from our Fifth Avenue location in New York City, we recently opened a store on the ground floor of the Empire State building in order to continue to serve our established clientele as well as the tourists in this high-impact market.

Additionally, due to the closure of FAO Schwarz, where we had a shop-in-shop, we partnered with the Toys R Us Corporation to quickly relocate to their Times Square store.

We are also pleased to announce that we will continue our shop-in-shop presence in select Macy's stores during this holiday season. This year, we expect to open at least six locations versus five in 2014.

On the strategic expansion front, we plan to leverage the improvement in our Company-owned stores to restructure and extend our international footprint. Select franchisees have started to apply our successful real estate approach including opening pop-up stores to assess long-term potential and adding shop-in-shop with key partners.

For example, in fall 2014, our franchisee in Mexico partnered with that country's largest high-end department store Palacio de Hierro to open a shop-in-shop within one of their locations. Since opening, the store has exceeded expectations and we expect this franchise to open at least three Palacio de Hierro stores in the balance of the year. Across all countries, we expect our franchisees to open between 10 and 15 nontraditional stores in fiscal 2015.

Two, more people. In this category we are focused on driving continuous improvement in the execution of our stated segmentation strategy to appeal to potential new consumers. We have improved our delivery of integrated [processing] and marketing stories and developed concepts that reach all four of our consumer segments on a simultaneous and more consistent basis.

With this in mind, I want to share some highlights from several important introductions for the third quarter. First, on July 24, we launched our initial Star Wars Classics collection which targets our boy consumer as well as a very passionate over 12 affinity segment. We successfully built anticipation for this property with an online exclusive presale of Stuff Your Own Chewbacca and an I Am Your Father Father's Day promotion with solid sales ever since.

For our younger girls segment, this week we introduced MGA's Lalaloopsy characters corresponding with Lala's fifth birthday celebration. And for the older girls, we will be continuing to drive awareness for the recent introduction of our own innovative Honey Girls collection that I will highlight just a moment.

On the strategic expansion side, this fall we expect to introduce Build-A-Bear Workshop Sports Central, a reimagined approach to optimizing our numerous sports licenses which span all major sports leagues and include many major universities. We will create a branded destination within our stores targeting the over 12 affinity and collector segment.

IT system upgrades will enable us to offer endless aisle e-commerce option allowing consumers to access to purchase any product while in any store. For example, a consumer will soon be able to purchase a New York Yankees bear even if they're actually shopping in one of our stores in New England.

Three, more products. One of the ways that we have focused on the continuous improvement of product offerings is via the development of features that enhance our furry friends stories such as mobile apps designed to extend the play beyond the plush. We believe this approach, which couples the tech mindset of our core kid consumer with elevated marketing, is contributing to the increases in both our units and dollars per transaction as well as elevating engagement with our brand overall.

As an example, as just noted, we kicked off an integrated marketing campaign to launch our new older girls property with the uniquely Build-A-Bear twist called Honey Girls. This collection expands our play beyond the plush approach with a multimedia experience that includes an app, music from a Grammy award-winning song writer and high quality CGI videos. The back story has a girl empowerment theme as the Honey Girls who share a common love of music discover that they are better together versus competing against each other in a talent show.

In less than a month, there have already been 1 million views of the animated video of the Honey Girls performing their theme song on YouTube, which is an important platform to interact with our older girls segment.

We expect to drive our strategic expansion into products beyond the plush via an outbound licensing program designed to sell Build-A-Bear branded merchandise in complementary categories. We've recently completed agreements in the confections, snack food, e-cards, and premium children's apparel category. An offering of brand derived costumes as featured in the recently released catalog from Chasing Fireflies, a company which designs and manufactures high-end clothing and novelties for children.

Four, more profitability. During the quarter, as previously noted, retail gross margin expanded 450 basis points and pretax profit improved by $3.5 million, cutting our losses to $400,000 as we make continuous improvement in areas such as value engineering and supply chain management. We are updating key systems including our merchandise planning tool which we expect to further improve our product planning and support the advancement of our consumer segment and store cohort strategy.

On the strategic expansion front, we will be upgrading our POS system in the back half of the year, and expect to realize enhanced capabilities moving us closer to an enterprise selling solution.

To date in the third quarter, our comparable-store sales are positive and while we will provide more detail on the fourth quarter on the next call, I would like to share some of our exciting plans that give us confidence that we will be well-positioned for the balance of the year.

First, we will add a collection tied to Star Wars: Episode VII -- The Force Awakens as well as a line of Frozen Fever products which will update this highly successful Disney property. We will also have a tie-in with the upcoming film, The Peanuts Movie that is being released in November. We will bring back one of our perennial holiday favorites with The Grinch and his dog Max and we will introduce a new character to expand on the success of our proprietary Merry Mission Reindeer story that was introduced in 2014.

We will also be featured in approximately 20 million McDonald's Happy Meals from November 27 through December 24, a highly popular promotion that historically has driven meaningful traffic to our stores.

In summary, in many ways, today we are new organization with a new leadership team, new structure, new processes, and a disciplined focus on our strategic plans. The impact is evident in our results with our 10th consecutive quarter of improved operating performance, our 10th consecutive quarter of enhanced retail gross margin, our fourth consecutive quarter of consolidated comparable-store sales growth, and our highest level of profitability at the six-month mark since 2007 with the largest and typically most profitable half of the year still ahead of us.

We believe we are positioned to continue to deliver on our stated objective of sustained profitability while establishing the groundwork to evolve to our goal of sustained, profitable growth.

Now I'd like to turn the call over to Voin to review our second-quarter financials in more detail.

Thanks, Sharon, and good morning, everyone. For the second quarter, net retail sales for $80 million compared to $75 million in the prior year, driven by improved comparable store sales partially offset by $1.6 million negative foreign-exchange impact that was not material to our bottom line.

Consolidated comparable store sales rose 8.7%, driven by an 11.9% increase in dollars per transaction partially offset by a decrease in the number of transactions. By geography, comparable-store sales rose 6.5% in North America and 18.2% in Europe.

Our comparable store sales were above the low single-digit guidance we provided in early June as the month benefited from stronger-than-expected reaction to some of our lead stories. We also saw increased traffic partially driven by kids being out of school this year as opposed to last year when many schools lengthened the year to make up for snow days.

Excluding the impact of foreign exchange, e-commerce sales increased by 11.4%. Retail gross margin increased by 450 basis points to 43.5%. This was a result of a 240 basis point improvement in merchandise margin and distribution costs. We also saw 210 basis points of leverage on fixed occupancy expenses.

SG&A was $36 million or 44.4% of total revenues compared to $34 million or 44.6% of total revenues last year. SG&A in the second quarter this year included a net $300,000 in management transition costs and currency gains. Last year, SG&A included management transition costs and foreign currency losses of $300,000. Adjusting for these items in both quarters, SG&A as a percent of total revenues was 44.7% compared to 44.3% last year.

Higher sales and expansion in gross margin offset the increase in SG&A bringing net loss of $600,000 or $0.04 per share compared to a net loss of $4 million or $0.25 per share in the second quarter last year. Adjusted net loss was $1 million or $0.05 per share, an improvement from an adjusted net loss of $0.24 per share in the second quarter last year.

For the first six months, net retail sales were flat at $172 million as improved comparable-store sales were offset by the negative impact of the one-week calendar shift due to the 53rd week in fiscal 2014 and a $3.5 million negative foreign-exchange impact that was not material to our bottom line.

Excluding the impact of foreign exchange, net retail sales increased 1.9% compared to the first six months of 2014. Consolidated comparable store sales increased 5% and included increases of 2.7% in North America and 15.7% in Europe.

E-commerce sales rose 9.9% excluding the impact of foreign exchange with continued improvement in profitability. Retail gross margin was 45.2% an improvement of 360 basis points compared to last year. This increase was driven by 320 basis point expansion in merchandise margin and reduction in distribution costs with remaining improvement attributed to leverage on fixed occupancy expenses.

SG&A was $73 million or 42% of total revenues including $1.5 million in management transition costs and foreign-exchange losses. This compares to $72 million or 41.2% of total revenues including a net $300,000 of management transition costs and foreign-exchange gains. Adjusting for these items, SG&A was 41.1% of total revenues in both periods.

Pretax income was $6.6 million compared to pretax income of $1.3 million in the first six months of fiscal 2014. Year-to-date income tax expense was $420,000 with an effective tax rate of 6.4% primarily comprised of foreign and state taxes as we still have a valuation allowance on our domestic deferred tax asset. We continue to expect to reverse the remaining US valuation allowance in fiscal 2015. However, for modeling purposes, we suggest that you use no tax expense or benefit this year.

Adjusted net income improved to $0.41 per diluted share from $0.06 per diluted share last year.

Turning to the balance sheet, at quarter end consolidated cash was $42 million consistent with quarter and last year, driven by net income improvements and offset by increased capital spending and share repurchase activity. In the second quarter, we utilized $6.2 million to repurchase 373,000 shares. At quarter end we had $800,000 remaining on our initial $10 million authorization. In July, our Board authorized a new $10 million share repurchase program giving us $10.8 million of total availability. In the second quarter, we had no borrowings on our credit facility.

Consolidated inventories totaled $50 million compared to $43 million last year. This represented an increase of 17.5% on a per-square-foot basis compared to a 6.7% decrease last year. This year's increase was driven by a combination of factors including stronger inventory position of key products stories, the timing of purchases to support third-quarter product launches, and the overall reduction in square footage.

Capital expenditures were $6 million primarily for IT infrastructure and store related capital. Depreciation and amortization was $8 million.

For fiscal 2015, we continue to expect capital expenditures to be in the range of $20 million to $25 million to support store updates and openings as well as the ongoing investment in IT infrastructure. We continue to expect depreciation and amortization to be approximately $16 million to $18 million.

We currently expect to end the year with six more stores than last year, finishing 2015 with approximately 330 stores which includes 11 stores upgrading in the Discovery format by end of the year.

In summary, by staying true to our stated strategies, we delivered solid improvement in revenues, gross margin, and our bottom-line results leading to our 10th consecutive quarter of improved performance. Through the first half of 2015, our pretax profit of $6.6 million is an improvement of $5.3 million from last year. This is the highest level of pretax profit that we have achieved at a halfway point in the year since 2007.

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

(Operator Instructions) Steph Wissink, Piper Jaffray.

Thank you. Good morning, everyone, congratulations on a great quarter. Sharon, a question for you just on the store format. A bit of a bigger picture question, but can you talk a little bit about some of your pro forma assumptions on the Discovery store? I know it's new, but you mentioned value engineering and just kind of moved to standardizing that package as you roll across some of your other stores. So if you could talk a little bit about that, that would be helpful.

Then maybe the same question on the outlets. I think you also referenced that this would be beneficial to your product lifecycle. So should we think about those stores as truly end-of-life products as well as some of your initiatives?

And then I'm going to throw another one in here just out of curiosity, it sounds like your franchisees are adopting some of the strategies that you've been laying out? I'm just curious if there's been a change in terms of the corporate outreach and partnership with your franchisees over the last year to two years? They are starting to come into line with some of the bigger strategies that you are putting in place. Thank you.

Yes, sure. On the store format front, you know whenever you redesign in a more comprehensive way, this is really the first comprehensive redesign that we've had since the beginning. There are some costs associated with that complete redesign. And that's going to show up in your first few doors, particularly if you redesign something as fundamental as a stuffer.

We sort of threw out the old box model and wanted to create some in-store theater as we believe that it would be beneficial in terms of just pulling people into the store. It would be a tool for us not just a part of the process but a marketing tool for us.

So those first few doors, although comparatively expensive to where we are going to be, we still have a two-year horizon on the payout because they are actually -- the first stores are about on par with where we ended up on the average doors of the Store of the Future. So, we are starting at a comparable point with where we were with the Store of the Future and we are now starting the cost reduction process.

Some of the reasons why that's less expensive is because the Store of the Future was based more on technology, a lot of high-tech under the surface that costs a lot of money and also had a lot of break fix on it that when we went back to the basics on how we thought the consumer wanted to interface, basically the fact that we are more tactile was one of the things they loved about us. So we expect to get that down pretty quickly. I think we had mentioned we'd have 11 stores in the Discovery format before the end of the year. By the time we get 2016, we should be in a pretty decent cost-reduced version on two or three different formats, inclusive of a flagship Format that some of you guys are going to see when you go up to the Mall of America on September 1. It's over the top with two stuffers all the way down to how do we just touch the door minimally so that it looks like it's still in the concept and the format with new colors. And some smaller version of the stuffer.

So there will be a lot of different costs specifically associated to the potential volume of those stores.

On the outlet side, that's a completely different look and feel. It's a much less expensive approach and a very fresh way on how we merchandise. We actually change the store flow. You don't pick your animal first and then go to through this process the same way with all the animals at the front. We've merchandised in stories, which is pretty interesting, and it's great to kind of watch the way that consumers shop through this.

It does give us, the way we built the format, a way to use it as an end-of-life cycle for a lot of the products that we have but will also feature at full price big stories up at the front of the store on what we call the rolling bear bin up very close to the front of the store to attract consumers.

And the first, and this is just one store right in Rehoboth, but we are seeing a lot of value purchases but Minions and Honey Girls are also being sold in these stores as well, which is pretty exciting.

On the separate question on the franchise front, we are approaching the franchises in a different way. We are rebuilding just like we are with a lot of our own processes here, and internally we're rebuilding processes to be better partners with our franchises.

And, additionally, it's very difficult when you have a franchise model if the mother ship is not performing well. Clearly, the franchises are going to do within the realm of the contract what they want to do because they don't believe that the strategy is working based on the experiences that they are seeing in the mother ship. But as we've turned the page and become now in our 10th consecutive quarter, as you've noted, of improved operating results, they are looking to us and we've had a lot of robust meetings, a lot more, I think, productive processes put in place. And of course, they now want to participate in a lot of the choices that we are making from a real estate strategy perspective all the way to a marketing strategy perspective in a way that isn't just compliant but excited.

Very helpful, thank you.

Greg McKinley, Dougherty.

Well, you introduced us to a number of what seemingly are important Q4 branded properties. I wonder if you could just give us a little more color on them. Maybe help us better understand what you're doing exactly with McDonald's. How broad of an assortment are we talking about when we're talking about The Peanuts and Frozen Fever and Star Wars and Grinch?

And then are there any unique costs associated with these launches that we should be aware of?

Yes, I shared basically what we were doing for the balance of the third quarter and then give you guys sneak peeks on some exciting news that we have for the fourth quarter. Going from the third into the fourth is the Star Wars collection from the classics into the Ep VII. And that Ep VII is big news for the fourth quarter. We are really excited about that. We expect that to span not only across our boys business but have a high appeal to the affinity consumer.

So that's one of those that comes along every now and then in the toy industry and you generally look forward to it. And so we'll build a good in-store presence for that and we already have a lot of good signals, particularly from our Chewbacca sales that we have a good opportunity in front of us.

On your second question about Frozen, it's the Frozen Fever update. They have had -- they dropped a kind of a mini film that provided new costumes, new look, new storyline, and so we're building products that is reflective of that. It'll be about the same size in terms of the SKU count as our previous Frozen line. But we believe that and as our sales have continued to be robust on Frozen, we believe there's still a lot of interest in the Frozen line and that a nice refresh during the fourth quarter could give us some uptick. We are comping Frozen from last year so having a new -- something new to say to that consumer is an important part of the portfolio management.

The Peanuts film, it's a classic product that again when you think about what the Peanuts people are doing in terms of reigniting this incredible generational brand for little kids, for the kids' market, it's right in our sweet spot when you think about it. It will appeal to the affinity consumer, the collector consumer, and with the reintroduction of it, the film in this really precious CGI look, we expect as they do that they'll be some uptick of course with the sales against kids.

And it's a different type of consumer, again, thinking from a portfolio management perspective from the other two properties. So it gives us a nice array of products that appeal to any type of psychographic on top of all the different demographics of boys and girls and the collector consumer.

We've done Grinch in the past. He lends himself to a Build-A-Bear format. He's big and furry, and his heart grows three sizes too big so the story line really fits with who we are, and we are going to push into that into the heart ceremony in a way that we haven't in the past.

When was the last time you had Grinch?

I can look. It's like two or three years ago, maybe four. And it has -- it's always, when we bring it out it's successful. People look for it, they are excited when it comes out. One of the things that we're doing this year with Grinch that's different is we've always just offered Max the dog where he ties the antler to his head, if you know Max.

Yes.

Oh, yes. He's going to be a stuff your own as well. And in the past he's just been a sidekick purchase. So that's pretty exciting news for us as well.

And we're actually most excited about the reintroduction of our own Merry Mission, overall marketing story, we use that Merry Mission story as an overlay to everything that's happening in the store at the holiday, all the marketing will be wrapped up in a Merry Mission story. The reindeer were very successful last year. If you recall, you could pick your own reindeer, name your reindeer, one of the classic reindeer. We are introducing an exciting new character that I'll share with you some more details about that later on. In all of this, the Christmas story will be wrapped up into this McDonald's program as well.

Are there any unusual costs? No. There's certainly royalties associated with the licensing program but as we have discussed in the past, we for the most part price that in and it makes -- and now particularly that we are pricing on parity with a lot of our programs such as our reindeer program last year, which priced on parity was Frozen, it's not a margin story. For 10 consecutive quarters we've expanded our profitability and at the same time our license as a percentage of sales has grown slightly still in that $30 to $40 range but it's bigger than it used to be. So that's not -- we don't look at licensing as margin degradating per se. We look at it as a part of an active and successful portfolio management approach to business.

But that McDonald's business, not only do they bring marketing power to us because they advertise the fact that Build-A-Bear is going to be in the Happy Meal during this timeframe. The coupons have a long life. We'll continue to see benefit from that into the first quarter of 2016 based on previous year's experiences with the McDonald's coupon.

And interestingly, Build-A-Bear has a very unique approach to driving the consumers right back to retail. In fact, what you get when you go get your Happy Meal is a little mini stuffed animal and a coupon not only for a marginal discount to come in to Build-A-Bear but to get a t-shirt for your mini bear. So the kids come back in and once they are in with that other coupon, it's burning a hole in their pocket, there's usually some transactions that go on.

Interesting. Okay, thank you. Anything noteworthy to comment on regarding -- you seem to have a lot of success late Q4, early Q1 on gift cards. How long of a tail does that have, and is that still impacting the traction you're seeing in the business?

Yes, we use our gift card business as a strategic, additive part of our total portfolio. Again, we have a number of types of gift cards. There's your standard gift card, of course, that the sales increased significantly during the fourth quarter. Most of our gift cards are redeemed within 30 to 60 days. Almost 90% of them. We have a very high usage rate for our gift cards.

The interesting piece about our gift cards and why they are valuable to us, specifically, is they are usually redeemed at about 60% higher than the face value of the gift card. We also use gift cards in what we call the Bear Buck$ upsell to drive subsequent traffic within a certain timeframe, like, well, in a high traffic time, let's say Easter, we might buoy that with the Bear Buck$ gift card knowing they'll probably come back in the next 30 days, which is usually, for example, in Easter a windows back and sometimes be a little more light on traffic.

Thank you.

(Operator Instructions) Alex Christensen, Craig Hallum Capital Group.

Hi Sharon, hi Voin, great quarter. Really impressed but what you guys put out this quarter. I had a couple of questions with regard to Star Wars and what you're looking at there. I saw that Chewbacca kind of a collectible feel, appealing to over 12s. How much of that collection is going to be geared towards kids versus the over-12 category? What kind of opportunity do you see especially on the collectible side? And is there -- how inelastic do you see that market for over 12s?

We really design our products with kids first in mind. And the collectors are attracted to the fact that we do that. So you know, Chewbacca, although readily appealing to people who remember the first Star Wars movies, he's absolutely fantastic for a little kid. He's bigger on scale than our other bears as a Wookiee would be, and he's just furry and fun and I think that he'll appeal across the board.

We also have a jacquard Star Wars bear with the Star Wars logo all over it that you can dress in a number of different costumes that will also appeal to both collectors and kids.

So in this particular case, we are designing kid first but with high appeal to the collector base, keeping the collector in mind as a filter. Almost like not doing anything that would dissuade a collector versus designing for a collector and with the kids second. And that's pretty exciting, we're seeing a lot of activity both from the collector market as well as kids buying Chewbacca and the Star Wars bear.

So we expect to see an appeal across the board. You know, for example Toothless from How To Train Your Dragon all last year also designed with a kid in mind first but ended up 40% of its sales were to the over-12 collector. And Minions designed specifically with kids first, 30% of the sales of Minions were to over 12.

What's interesting about it is it brings new people into Build-A-Bear, we believe that that is additive traffic, new consumers, people that would have otherwise not considered Build-A-Bear and that's good for us.

Well, that's really interesting. Then just a little follow up on your Empire State Building store. What are the early results that you're seeing if can share anything with regard to what -- how that is working out. What kind of should we be thinking about in terms of cost savings as opposed to the previous store there, and I guess similar to the switch to ToysRUs from FAO Schwarz?

Yes, well we look at New York City, given how important it is not just from its base population an opportunity but from the immense traffic and tourist traffic that visits New York, as a holistic market. And for the last 1.5 years, particularly since we knew we were going to step out of Fifth Avenue, we've been looking at how to think about Manhattan particularly and provide the right amount of stores in the right places to meet the consumer demand in New York.

Empire State building given that it is in a tourist location, and it's an iconic building and this is a tourist location the kids happen to go, felt like a great place for us. We are very pleased with the early results even though it was opening before I could put this new round stuffer in there. We may go back and retrofit it at some point. But it's gotten off to a fantastic start. We are very pleased. But at the same time it's not just about the Empire State building. It's about a solution for Manhattan and that of course includes the uptown option of the Time Square -- not quite uptown but Time Square option where we have now the location inside of Toys R Us.

Interestingly, the Toys R Us location, and this surprised us a bit, is performing if we annualized it at a higher level than the FAO store and we were pleased with FAO. So the traffic, just the sheer numbers that walk through that Toys R Us in Times Square is driving measurable business.

And based on our experience with FAO and Times Square, which were open at exactly the same time and you know they're just a few blocks away, they both rose at the same time -- FAO went up even after we closed Times square and then FAO went out, you know shut the doors.

We, although Harold Square at Macy's is so close to Empire, we don't expect to see any negative impact because of just the sheer population in tourists. So, we haven't completely figured out what our upside opportunity in Manhattan is, but it seems like every time we open a new door, almost a matter how close it is to the other, it's additive business.

On the second part of that question, well, Fifth Avenue was not a profitable door so these are profitable doors. So it's going to be better.

That's great, thank you.

James Fronda, Sidoti & Company.

Could you just I guess discussed little more on that comp growth that you saw in Europe and what was the main factor? Was that Minions or was there something else involved in that that made that so large?

The mix of sales in the US and North America often not that different. Consumers have a lot in common. So when we talk about our total business would have been positive even without Minions, that's inclusive of the UK. Yes. But what's driving the UK a little bit on why they are outpacing North America right now is many of these management and distribution and flow changes that were just now getting traction in the US, we started in the fourth quarter and the second half of last year.

So we're kind of ahead of the curve with the UK on improvement in flow and merchandising and even service model. So hopefully, we'll be able to pick up some of the things -- best practices and moving them over to the US.

That's one of the reasons why we now have a new COO, Chris Hurt who started recently. Very excited. His job is to get the US and the North American market moving at the same similar pace hopefully as the UK.

Okay, thank you.

Greg McKinley, Dougherty.

Thank you. Is there any update you can provide us as it relates new franchise markets that you're looking at?

Well, we're still in the early stages of reinventing our franchise process. I think we've mentioned on previous calls that not only are we looking at different markets but we are looking at different models.

So, for example, in Denmark in January, we -- that particular franchise we actually now own and operate. The Tivoli Gardens location, which is their flagship door in a major tourist location and it's our store not a franchise store. So it's really a case-by-case basis on what we're doing.

But we think there are possibly some new approaches, creative approaches, to how we expand internationally and what the format of the franchised business looks like. And we certainly believe and have had quite a few discussions on the fact that Maxine, the founder, said many times that a hug is understood in any language. This brand, this concept translates into almost every country. So we haven't optimized there. So we'll be sharing some stuff fairly soon.

Okay, thank you, and then you had made in your prepared comments, outbound licensing. Can you remind us which particular categories you have inked deals on and what are expectations financially for these types of things?

Sure. We have currently inked deals on confections, snack food, e-cards, children's apparel and costumes. And we're in the middle of a lot of other discussions. So we're still in the early stages.

If you know the Chasing Fireflies catalog, it just dropped. It's a premium children's brand. We have a really adorable packaging there of Build-A-Bear costumes for kids. They're high-end costumes for Halloween. So that's the first really the first thing that's out there other than some confections that are available in our own stores. And if you visit a Build-A-Bear, I encourage you to pick up a Build-A-Bear cookie, they are awesome. They are birthday cake flavored for a reason. It's actually great tool for us for creating a full solution for some of our birthday parties when moms want a snack as well as a bear. But you'll start to see some things that are a little more material as we move forward but revenue for the licensor is usually a quarter lag for revenue for the licensee.

So even with some sales possibly of the cookies and the Chasing Fireflies in the back half of this year, we won't see any of that and it will be pretty nominal until we gain some traffic and we won't see it until 2016.

Thank you.

Ms. John, there are no further questions at this time. Would you like to make any closing remarks?

I just want to thank everyone for joining us today, and we look forward to updating you on our third-quarter results.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.