Build-A-Bear Workshop Inc (BBW) 2016 Q2 法說會逐字稿

Greetings and welcome to the Build-A-Bear Workshop second-quarter 2016 results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Good morning. Thank you for joining us. With me today are Sharon Price John, CEO, and Voin Todorovic, CFO. For today's call, Sharon will begin with a discussion of our second-quarter results and highlight our performance against the key priorities we outlined as we began fiscal 2016. Voin will review the financials and guidance, 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 requeue 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. Any 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 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.

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

Thanks, Allison. Good morning and thanks for joining us today. As expected, 2016 is shaping up to be a tale of two halves.

In the first half, we anticipated and experienced the bumpy road of lost productivity due to closing and reopening a number of stores to update them to our now proven and more effective Discovery store format, while simultaneously rolling out critical IT upgrades across the Company to improve our efficiency. As we have shared, given the historically comparatively smaller financial impact of the first two quarters of the year, we consciously chose the first half to make these much-needed investments in the Company, whose real estate and infrastructure requirements had been largely ignored for almost a decade.

Although we still have some key investments to make in the third quarter, we are pleased to report that we have completed most of the planned work for 2016, and we are focused on delivering the important back half of the year, namely Q4, driven by a fresher, stronger, more diversified, and more productive fleet with an improved IT infrastructure across the Company. With this, we expect our investments in this important evolution of the Company to begin to reap returns in the second half of the year, particularly in the all-important fourth quarter and beyond.

Reflective of our planned investments, pretax loss was in line with our second-quarter guidance. Notably, these results included a $0.5 million negative impact from currency losses due to the remeasurement of our balance sheet, driven by the sudden decline in the pound versus the dollar at quarter-end.

Some details of the second quarter include an expected consolidated comparable sales decrease as we anticipated the impact of last year's strong Minions launch. Specifically, consolidated comparable sales decreased 8.6% following an 8.8% increase in last year's second quarter, reflecting our planned positive two-year stack.

Our stores that have been remodeled in the Discovery format had an average sales increase in the quarter, as they continued to outpace the heritage stores on a near double-digit basis, with stronger performance on key metrics. Consolidated comparable e-commerce sales increased 11.7% following an 11.4% increase in the fiscal 2015 second quarter.

Merchandise margin increased 10 basis points, which represents the 13th consecutive quarter of margin expansion. And pretax loss totaled $6.2 million versus $438,000 in last year's second quarter.

In addition to the negative impact of $0.5 million of currency exchange, the second quarter included expenses of approximately $1.7 million related to planned investments in the evolution of our real estate portfolio, including the rollout of Discovery stores and updates to critical IT infrastructure. Expenses were also impacted as we continued to establish a foundation for further international expansion, including China, and as we systematically evolved our talent pool to support the execution of our strategic plan.

Given the results to date, we are confident that these investments are essential to advance our overall strategy to deliver sustained profitable growth in the future. As a proof point, on an annual basis we expect to see an uptick in total revenue and the fourth consecutive year of pretax profit improvement, with growth of 15% to 25% excluding the impact of foreign exchange.

Also in the quarter, we advanced other key initiatives of our More strategy, which is focused on having more products reach more consumers in more places with more profitability.

In more products, for our older girls segment we launched a new proprietary property, Horses & Hearts Riding Club. As with many of our other Build-A-Bear proprietary launches, Horses & Hearts is posting higher than average dollars per transaction by our ability to command price parity with other licensed products combined with our own ongoing improvements in integrated and marketing and merchandising, which we believe is driving add-on purchases. In fact, the average North American dollars per transaction for our proprietary collections -- including Honey Girls, Promise Pets, and Horses & Hearts -- was over $80 compared to our average DPT for the chain of $45.21, which is already at an all-time high for the second quarter.

An important marketing element for the brand in key product lines designed and developed by Build-A-Bear has been the creation of opportunities for consumers to participate in Play Beyond the Plush through digital engagement. This digital engagement, ranging from watching Honey Girls music videos, playing games, or viewing our very popular Bearville Alive YouTube episodes, has continued to increase, posting almost 40 million digital interfaces to date.

On the inbound licensed front, we launched a number of properties in conjunction with feature films premiering in the quarter, via our new Now Playing marketing campaign designed to support historically strong movie collections including refreshed versions of Captain America and Teenage Mutant Ninja Turtles, while introducing collections for new movie properties like Finding Dory and Ghostbusters. We also continue to build on our success with Star Wars and Nickelodeon's popular program Paw Patrol by rolling out new characters. Although these offerings in total contributed positively to our overall business for the quarter, together they were not able to overcome the impact of the unusually broad consumer appeal of last year's Minions collection.

Separately, as it relates specifically to the outbound licensing effort of the Build-A-Bear brand, we have now secured a wide array of product categories and expect the new toy line developed by Spin Master, called the Build-A-Bear Workshop Stuffing Station, to launch in the second half of the year in the US. Products are already available online and are scheduled to be in big-box and toy retailers supported by national TV advertising during this holiday season.

On the more people front, we continue to expand our appeal to the teen-plus consumers by offering a broad base of relevant licensed products such as a make-your-own Pikachu, a Pokemon character that we released last holiday in celebration of the brand's 20th anniversary. Sales have gained momentum since the recent launch of Nintendo's highly publicized Pokemon Go augmented reality game, which includes select Build-A-Bear stores as apparent Poke Stops.

In the back half, we will be adding a new character to continue to feed off of this innovative gaming platform. In addition, we also offer an exclusive online Pikachu bundle to separately drive our e-commerce sales.

Speaking of e-comm, as a part of our stated objective to profitably build our online business, through a combination of repositioning the business model, upgrading the interface, and improving the fulfillment we have now delivered eight consecutive quarters of consolidated e-commerce sales growth with continued margin expansion. As we have previously noted, the teen-plus consumer segment tends to overindex for online shopping and pop-culture products like Pikachu.

We believe our impressive offering of location-specific properties like major league and college sports, and our expanded gifting selection, also have high potential for growth as we actively add new purchasing capabilities and options for our Web-savvy consumers. Given that, in addition to the continuous improvements we have been making to our e-comm and mobile sites, we are currently rolling out endless aisle ordering and delivering options across the US chain in conjunction with other critical POS upgrades. This new capability expands options for consumers to make online purchases, such as completing an e-comm exclusive product transaction, purchasing a micro-distributed sports licensed product, or ordering a customized embroidered bear for home or gift delivery from any store location. We expect to begin to realize initial benefits of this new competency in our traditionally strong gift business in the fourth quarter of this year.

In regard to more places, we have been keenly focused on improving and diversifying our real estate portfolio by: updating an aged fleet into our proven Discovery

format; leveraging temporary percent-of-sales-based leases to validate locations and results before committing to long-term, traditional leases; creating the infrastructure to profitably expand our international presence; and opening new locations beyond traditional malls, such as our first-ever value-oriented outlet format, our permanent and temporary shop-in-shops malls, our traditional tourist locations, and temporary event locations.

The successful new Discovery branding has now been rolled out in a number of configurations, allowing us to expand into and take advantage of a variety of retail opportunities, advantageously supporting our strategy to diversify the portfolio. To that end, for the first time we have developed a highly effective kit of parts with a variety of store fixtures and stuffer designs that can be used to easily accommodate a wide range of store sizes and physical layouts for both temporary and long-term opportunities across geographies. As a part of this effort, we are leveraging our new presence in China to source fixtures, supplies, and other equipment as we drive down the capital cost and expenses. This best-in-class approach is opening up new and emerging expansion opportunities, from movie theaters to cruise ships to new countries, that we can now take advantage of comparatively quickly with a lower investment per location.

In addition to driving down remodel cost and continuing to perfect the Discovery format and service model, we have also been able to more effectively assess the potential success of new retail locations by opening temporary stores to validate the results before we commit to longer-term leases. With this strategy as a backdrop, we anticipate to have up to 10 new locations this year in the temp-to-perm model which are primarily in traditional locations where we have a market gap.

Other news on our retail growth front include: the celebration of the grand opening of our first owned and operated store in one of the largest and fastest-growing markets in the world, China, in Disneytown at the Shanghai Disney resort. While early, we have seen promising traffic levels and growing interest as we are introducing our unique brand of experiential retail to a whole new range of Chinese consumers for the first time, potentially enabling further development of the market through new partnerships like franchising.

The addition of a number of new royalty-generating locations from our international franchisees later this year, which has been driven by our improved business model and new Discovery fixed strategy. The planned expansion of our outlet stores in a few select high-volume outlet centers using the learnings from our first year of our value-driven outlet strategy, which is designed to both drive incremental sales and provide a tool to better manage our inventory lifecycle.

The launch of our first Build-A-Bear Workshop at Sea as part of a new experiential wholesale arrangement with Carnival Cruise Lines, with expectations to have a presence on 10 ships by the end of this year. The planned expansion into new, nontraditional event-driven retail spaces to opportunistically leverage the excitement of some of our amazing movie property launches in select AMC theaters to test-market later this fall.

And the planned reopening of our seasonal shop-in-shops during the holiday sales period with Macy's and expansion into Gaylord Hotels ICE! events, where we expect to grow from one to four locations.

Of course, all of these new retail sites are or are planned to be in our new Discovery branding. As a reminder, our Discovery stores that are in our Discovery store format stores have continued to deliver very strong results with a significant increase on key metrics including traffic, units per transaction, and dollars per transaction, resulting in a sales lift of almost 10% compared to heritage stores.

We ended the quarter with 31 Discovery store locations and expect to have 50 to 55 doors by the end of the year through either new stores, remodels, or temporary locations. Notably, the quick turnaround on the AMC and Carnival opportunities was made possible due to the development of a new multipurpose fixture and mini-stuffer designed for portability and small spaces from our kit of parts. These are great examples of the innovation and flexibility we are building into our thought process to achieve future growth and diversify our real estate portfolio by expanding our presence into more places for more consumers, to have the one-of-a-kind branding experience that only Build-A-Bear can do.

On the more profitability front, we continue to implement new processes, streamline procedures, and add important IT capabilities to enable us to deliver our stated goals.

As we move into the back half, we have scheduled a strong lineup which includes our popular core product line, our own proprietary properties, and new licensed collections from our best-in-class partners. Just last week, we added an exciting new proprietary property designed to appeal across ages and genders called Monster Mixters, which is a new way for consumers to personalize their own plush. Mixters allows consumers to make their own adorable monster by adding arms and legs that feature an assortment of fun colors and patterns to the monster's body.

For our younger girls segment, we have strong initial results with our reimagined Disney Princess Bear, featuring a golden light-up crown. We also redesigned our Princess costumes and fashion sets reflecting Disney's new Dream Big girl empowerment position on this historically successful evergreen property.

For older girls, we expect to launch a new offering in conjunction with the highly anticipated film, Trolls, which will open in November in the United States. We are thrilled that Build-A-Bear will be participating in DreamWorks' multilevel marketing campaign that includes an unveiling in early October. With that in mind, we are also excited to share that the Trolls movie will be the first property for Build-A-Bear at AMC theaters when the film premieres.

For boys and the teen-plus consumer we continue to expect Star Wars to play an important role throughout the year as the line is updated with new offerings including Kylo Ren Bear, as we build up to the release of the next film in December of 2016.

We expect to cap off the holiday season by introducing the next chapter of our historically successful Merry Mission proprietary offering, which appeals to a broad consumer base. As you may recall, we had strong sales when we originally introduced the Merry Mission reindeer collection and an exclusive Play Beyond the Plush app that virtually brought the characters to life in the fourth quarter of 2014. We enhanced the story in 2015, adding a snowy white Glisten reindeer character who was, impressively, the number-one selling item for last year's fourth quarter.

We are planning to once again build on the success with the introduction of two new characters along with an exciting update to our fan favorite, Glisten. With Merry Mission we expect to further solidify Build-A-Bear Workshop as a holiday tradition and destination, with a new, fully integrated marketing program and TV campaign for the season.

From a quarter-to-date performance perspective, given that the Minions movie hit theaters on July 10 of last year, the first few weeks of July have had tough comps. We have now reversed the trend and have started to regain some positive consolidated comps, which we expect to continue through the remainder of the quarter.

As you recall, we have planned flat to slightly up comparisons for the total quarter. Note, however, that our original estimates included the potential of Trolls sales at the end of the third quarter. As I mentioned, as a part of the partnership and in conjunction with DreamWorks' multilevel movie launch marketing program, we have delayed our set date to early October to coincide with their activity.

We expect this decision to create an overall positive impact for the property at Build-A-Bear for the year. However, it will push all of the 2016 Troll sales into the fourth quarter, adding some pressure on third-quarter comps. Nevertheless, because this is simply a quarter shift in sale, we continue to plan slightly positive comps for the year.

We strongly believe we have consistently proven the sustainability and viability of the Build-A-Bear experiential retail business model by delivering three consecutive years of positive comp sales and profit improvement. We have proven that, despite macro traffic trends, we can build our base business while executing a fresh retail concept that is actually driving traffic and increasing our sales.

We have proven that we can profitably expand our retail footprint in new locations beyond malls. We have also proven that we can profitably grow our brick-and-mortar business and our e-commerce business simultaneously.

Finally, we are showing traction on our ability to leverage and monetize the brand beyond its previous boundaries with new license categories beyond plush. Given that, we continue to believe our strategies are moving Build-A-Bear to achieve our long-term goals of sustained, profitable growth.

The back half, particularly the fourth quarter, has historically been our largest and most profitable of the year, and we believe we have a strong and balanced offering including new licenses, proprietary concepts, core products, and holiday offerings for all of our key consumer segments.

Our Discovery stores continue to outpace heritage stores, and we are expanding and diversifying the real estate portfolio. We remain focused on executing our initiatives as we evolve our business model to leverage the power of the Build-A-Bear brand.

Finally, as previously announced, the Company continues its exploration of a range of strategic alternatives. As you are aware, this could take many directions and there is no assurance that this exploration will result in any strategic alternatives being announced or executed. We continue to be limited as to any additional comment on this topic as the process unfolds, unless and until our Board of Directors determines that further disclosure is appropriate.

Now I would like to turn the call over to Voin.

Thanks, Sharon, and good morning, everyone. Second-quarter results were in line with our guidance. Total revenues reflected a consolidated comparable sales decline against a difficult comparison of the prior year's second quarter as well as temporary store closures due to significant remodel activity to our Discovery store format. We completed 13 remodels in the second quarter and continue to see significantly higher sales from our Discovery format stores versus our heritage stores.

Another positive is our continued increase in merchandise margin, which demonstrates the ongoing strength of our product development, planning, and pricing strategies. In addition to expanding our Discovery format stores, we also advanced our initiatives to grow revenue from diversification of stores beyond malls and develop new income streams through outbound license agreements. We expect these programs, along with easy comparisons, to position us to accelerate sales and operating income in the second half and, more significantly, in the fourth quarter.

Separately, as many of you are aware, approximately 20% of our annual sales are generated in the United Kingdom. As such, the sudden and sharp decline in the British pound versus the dollar at quarter-end, driven by the outcome of the UK referendum in late June, had an effect on our second-quarter earnings and we expect further impact to our previously stated full-year guidance that I will discuss shortly.

Continuing with the details of our second-quarter results, consolidated comparable sales decreased 8.6% following an 8.8% increase in the second quarter last year, which was in line with our expectation for a two-year positive stack. Comps in North America and Europe declined 8.3% and 10%, respectively.

Our comparable sales reflect a 4.8% increase in dollars per transactions, offset by a decrease in overall transactions. Importantly, transactions in our remodeled North American and UK Discovery stores are significantly higher than in our heritage stores; and these stores on average had a 0.6% increase in sales versus last year, which compares very favorably to our overall 8.6% decline in total comp sales. We expect comps sales to benefit as we open more Discovery format stores and these stores come into our comp base.

Net retail sales decreased $6.4 million or 7.9%. Excluding the impact of foreign exchange, this represented a decline of 6.4%. The decrease in net retail sales is primarily attributable to the decline in consolidated comparable sales and store downtime due to remodel activity during the quarter.

Retail gross margin contracted 130 basis points to 42.2%, reflecting a 10 basis point expansion in merchandise margin offset by deleverage of fixed occupancy costs on lower sales.

SG&A was $37.1 million or 49.3% of total revenues, compared to $35.7 million or 44.1% of total revenues last year. The $1.4 million increase in SG&A was the result of unrealized currency losses due to the remeasurement of our balance sheet driven by the significant weakening in the British pound sterling. The increase also reflects investments in new business initiatives, international expansion, the timing of marketing expenditures, and costs associated with the review of strategic alternatives.

Store preopening expense was $1.2 million, primarily due to the second- and third-quarter openings of our new and remodeled Discovery format stores. Our second-quarter pretax loss totaled $6.2 million, which included $1.7 million in business expansion costs and $500,000 impact from currency losses due to the remeasurement of our balance sheet.

Income tax was a benefit of $1.9 million compared to a tax expense of $200,000 in the second quarter of 2015. In line with our expectation, net loss was $0.28 per share, compared to a net loss of $0.04 per share last year.

Turning to the balance sheet, at quarter-end cash and cash equivalents were $10.2 million and we had no borrowings under our revolving credit facility in the quarter. We ended the quarter with $55.5 million of consolidated inventory, representing a 10.1% increase over the prior year. The majority of the $5.1 million increase is the build of inventory to support the introduction of new product stories, new revenue channels, and new locations in the back half of the year. We are comfortable with the composition of our inventory as we enter the second half of the year, which is historically our largest and most profitable period.

Turning to guidance. Our objective for 2016 continues to be focused on the transition from sustained profitability to sustained profitable growth. For fiscal 2016, we have adjusted certain of our stated expectations, mainly in consideration of the recent fluctuations of the dollar to the British pound.

We now expect: total revenue to increase in the low single-digit range compared to the prior year; consolidated comparable sales to increase in the low single-digit range for the full year; and positive consolidated comps in the back half of the year, which will be driven mainly by fourth-quarter performance, particularly given the negative 5.6% comp in the fourth quarter last year. Additionally, we expect revenue in the back half to benefit from: 15 to 20 more stores versus the fourth quarter last year; the strong lineup of key stories that Sharon mentioned; and the initial contribution of royalty income related to our outbound licensing.

From a profitability perspective, on a GAAP basis including the impact of foreign exchange, we now expect pretax income for fiscal 2016 to grow by 10% to 20% compared to the prior year. Excluding the impact of foreign exchange, we expect pretax income to grow by 15% to 25%. The negative impact of foreign exchange is currently estimated to be in the range of $1 million to $2 million for the fiscal year, inclusive of the $500,000 recorded in the second quarter.

Specific to the third quarter, we expect total revenue to be down primarily due to the negative impact of fluctuations in currency exchange rates, with additional headwinds from the closure of two multimillion-tourist locations that were in our fleet last year at this time. From a guidance perspective, we currently expect third-quarter GAAP pretax income to be between $1 million and $3 million.

Additional considerations for the second half include: SG&A dollars to be less than last year, even with an increase in store count and higher total revenues resulting from lower marketing expense as we shifted investment to the first half of the year; a reduction in duplicative costs inclusive of third-party fees, due to efficiencies gained from infrastructure investments and process improvements; and the overall level of preopening costs, as the majority of the expenses for our new stores were incurred in the first half of the year. In fact, preopening expense for the second half of the year is expected to be flat with the prior year and approximately 50% lower than preopening expense during the first half of the year.

In regards to the fiscal-year tax rate, we currently estimate an effective tax rate of approximately 34%. Again, the unexpected movement in British pound exchange rate is also impacting the mix of earnings between different tax jurisdictions, which will pressure the tax rate versus our previous expectations on a full-year basis.

We anticipate ending the year with 345 to 350 stores, with 50 to 55 stores planned to be in the Discovery design. This is above our original expectation of 300 to 345 stores.

We don't expect the increase in store count to impact our previously stated capital expenditures range of $25 million to $30 million, due to our ongoing ability and efforts to drive down the store buildout costs. Depreciation and amortization continues to be expected in the range of $17 million to $19 million.

Thanks for your time this morning. We will now turn the call back over to the operator to take some questions. Operator?

(Operator Instructions) Gerrick Johnson, BMO Capital Markets.

Good morning. The Discovery stores, how are they comping against themselves? So the ones that reformatted last year, how are those performing this year relative to themselves?

And also, how many stores -- I guess it was 13 stores that were down in the quarter. Are those stores included in the same-store sales calculation, or are they excluded?

And my last question. You started one comment saying despite macro trends. So can you just talk about the macro trends that are affecting you right now? Thank you.

Sure. On Discovery, we don't have any Discovery stores that are comping themselves yet.

First store was opened in Q3 last year.

So.

And the 13 comp stores that you mentioned -- the 13 remodeled stores, they are not part of our comp numbers.

Yes. And the macro trend question is just simply referring to what's going on in mall traffic overall over the last three years.

Okay. That was quick. Thanks.

No problem. Thanks, Gerrick.

Steph Wissink, Piper Jaffray.

Thanks. Good morning, everyone, and thanks, Sharon and Voin for all the additional color. Just curious, Sharon, on your comments regarding quarter-to-date. Sounds like the first couple of weeks were a little bit more difficult on the comparison, but that you've seen a positive trend here over the last couple of weeks. Can you just talk a little bit about some of the performance maybe by brand or category where you're seeing that step up?

Then also just help us appreciate the timing shift with Trolls. I want to make sure we fully understand what you're suggesting in terms of the comp impact Q3 and Q4 by that couple of weeks shift.

Yes. As I mentioned, the Minions movie actually hit theaters July 10 of last year, so we were still -- our comparisons were still pretty tough through the first two or three weeks of July. Minions then started to decline significantly as a percent of our overall sales, so we now through the balance of the quarter have much easier compares.

A lot of our different programs are working. I mentioned many of them. Some of our proprietary properties, as well as Paw Patrol is working quite well for us right now; Star Wars is working quite well for us; the new Disney Princess Bear is working quite well.

We like to see it hitting on all of those key consumer segments. That's when we generally have the best opportunities. So that's a younger girl, a boy, and a younger boy/girl mix with the Paw Patrol. So we're pretty pleased with our lineup as we go through the rest of the quarter.

On the Trolls impact, we had planned on setting that Trolls line probably toward the end of September when we first laid out our comp plans and shared our expectations on positive and negative comps in January at the ICR meeting. We still expect to see slightly positive comps; we just now have to believe that that will affect the range of positivity from pushing the Trolls into the fourth quarter.

It's still the right decision. It's through a relationship and partnership with DreamWorks, who has been great. They have a very powerful marketing plan lined up for this really exciting movie. The trailers are amazing, and our product looks terrific, and we want to be able to fully take advantage of that partnership.

So overall, we believe it will not affect the total sales of Trolls. It will probably improve the total sales of Trolls. It's just a quarter shift.

Thank you. And Voin, just a couple for you. The first is with respect to the UK. I know you're changing your pretax growth outlook based on currency. But is there any change in the cadence of business there, based on what you've seen, in terms of the volatility in the currency?

So far what we have seen, really we haven't seen a material impact to our business as a result of Brexit. We are seeing just the impact as it relates to currency and it's creating some volatility, just like for everybody else.

But we are trying to mitigate some of that exposure. We're looking at different options, how we can further mitigate some of those challenges, either through pricing initiatives or looking at the ways to hedge some of our positions that we have outside of US.

And Steph, it's actually --

And then last one --

Steph, it's actually already started. We've already made a few pricing changes in the UK. Just easing up some pound prices at some natural breaks.

And is that both on owned and licensed properties, Sharon? or is it just your capabilities on (multiple speakers)?

Yes, yes. We went across our natural price banding and eased them up a pound here and there.

Final question is just on the balance sheet, working capital, looking at inventory levels. Can you just talk about the composition of that inventory on the balance sheet? What you're seeing in terms of the deployment of that either into your new store remodels, or where we should think about that inventory being focused.

Yes, as I mentioned, we are making some strategic investments as we are expanding beyond retail, like thinking about the Carnival Cruise and like having some inventory for our wholesale business that's growing. We are expanding our product lines as well as we are going to be building our store count.

We expect to continue to make some of these investments in Q3 as well, to get ready for Q4. But by the end of the year, we are expecting to be on par with last year on per-store inventory levels by the end of the year -- at the end of Q4.

Thank you. Best of luck, you guys.

Jeremy Hamblin, Dougherty & Co.

Hi, this is David Burdick on for Jeremy Hamblin; thanks for taking my question. Regarding the Pokemon, it was obviously a big coincidental hit. But it seemed like locations sold out pretty quickly.

How soon can the product be replenished? And then what actions do you plan to take to respond to the craze?

Yes. Pokemon, we were very fortunate to be already in a relationship with Nintendo with our Pikachu and Pikachu bundle, and we have benefited from the Pokemon Go craze.

The sellout wasn't even, so where -- you may have been in a store that was a Pokemon Stop, which sold out very quickly. But we have started to pick up the sales of Pokemon across the board, and we are seeing some stockouts.

We have been on the chase for Pokemon since we saw it hit, and we are replanning as quickly as possible. Additionally, as I mentioned in the remarks, we're adding a new character and that it had already been in the pipeline, and we will be able to get that in before the end of the year.

Okay, thanks. Then just jumping over to the Discovery remodels. Q1 you noted that it was about a 12% sales lift from the old heritage stores, and now this quarter you mention they're coming in at about 10%.

I guess, now that more Discovery models are coming into the system, what should we expect in terms of a sales increase long-term?

Based on these early indications, what we have on the stores that we have opened, we are seeing similar growth as we've seen in Q1 and Q2. We would expect on all these stores that we continue to remodel into a Discovery format to see the similar growth rates once they start anniversarying each other. We just don't have enough history, and we are going to start getting some of that, late Q3.

Okay. Then looks like 2016 number of remodels will come in at the high end of your guidance. Just looking at into 2017, should we still expect around 50 remodels? Or is there a chance, given their success, this could be accelerated?

We really haven't shared anything about our capital plans into 2017. Clearly when we work with the Board and make those decisions, the success of the Discovery stores as well as our ability to continue to push down the costs of each of those subsequent stores that we are building will be a big part of the consideration set.

But we're very excited and feel good about the to-date performance of Discovery and feel like we have a tremendous solution, on not only how to evolve the business model and the in-mall experience but also this model with the flow and the excitement and the stuffer translating into non-mall areas, tourist areas, and nontraditional areas. So actually there's really not a place that we put it from a concept perspective and that it isn't working.

So, we're looking forward to being able to continue to both remodel and build new locations with the Discovery format in the future.

Okay, thanks. And then just one last one. There's 31 Discovery stores right now, expect about 50 to 55 on the year. How much of that will come in Q3?

Probably most of the remodels are going to be done in Q3. Some of the new stores that Sharon talked about, temp-to-perm, some of that's going to be late Q3, early Q4.

Okay. Okay, great. Thanks.

Yes, right. Most of our temp-to-perm stores, when we're trying to assess a new location with a percent-of-sales lease, and we really try to get at least two of our big seasons under our belt. So we would -- we want those to open before the holidays, before Christmas. We like to run them at least through Easter. We often sign up the lease for a year to get a full assessment so we have really great information going into the negotiation.

Okay, great. Thank you.

Greg Pendy, Sidoti.

Thanks for taking my call. I guess just looking at the Discovery stores, you say on average they were up, I guess, 0.6%. But if I'm not mistaken, now you've done some mall locations like Mall of America, maybe some flagship locations like Myrtle Beach. Within the Discovery format are you finding maybe more success in the malls or more success in the tourist locations?

Well, like I was just mentioning on the -- with the previous question, this particular format seems to work in different types of locations. If I thought about -- tried to provide you with some information on where they are slightly over-performing, they'd slightly -- they actually have a greater impact on stores that were already good for us, which is amazing.

So the Mall of America store has been a very powerful remodel; and the other one that you mentioned, which is Myrtle Beach, also a very powerful remodel. But they have positive impact in more of a traditional type mall place like Christiana in Delaware, for example.

Okay, thanks. Then maybe I could just get one follow-up. Just on the tax, longer term I understand there's a lot of noise in getting the tax up to 34%. But what do you think your normalized tax rate over the long-term, once this stabilizes would be?

Well, I would expect it to be like closer to what we had previously, in low 30%s. But again with some of these changes in the income that we are getting from different tax jurisdictions, and especially the unexpected impact of the British currency devaluation -- impacted us significantly -- so I think those things as they get more normalized, we would expect to be in those low 30%s.

Okay, thank you.

(Operator Instructions) Mark Rosenkranz, Craig-Hallum Capital Group.

Hey, great. Thanks for taking my questions. Just real quick on me, you opened the call talking about the productivity loss related to reopenings. Could you just walk us through what's the typical ramp time to where you see, after a reopening, where you get to normal levels?

Yes. We talked about this in the past. Typically when we do these remodels it takes us 8 to 10 weeks before the store opens, so we have some downtime. In other cases, if we are able, we are trying to preserve the top-line sales by opening a temp location. In a lot of the cases we are able to do that stuff, but sometimes we are not able to secure the location or the economics for a temp location may not make financial sense and we will pass. But typically it's 8 to 10 weeks.

Okay, great. That's helpful. And then last question for me. Just wondering if you could discuss the China opening a little more in Disneytown. You mentioned some potential new franchise opportunities. Just any observations you're seeing in terms of big markets you're going to be looking at in the next couple years internationally?

Yes. China, very exciting for us. We actually are in some initial conversations with quite a few potential partners on the franchising front.

The store is very exciting, and the park is amazing. So we have -- we feel very good about the decision that we've made, particularly given that we're working with a long-term partner of ours, Disney.

On the additional expansion front from an international perspective, we have a great partner in Germany, KFG; they're a best-in-class retailer and children's clothing manufacturer. We are working with them to expand into other European countries from a -- and that's a big potential for us, to take a known partner and start to move into new countries.

As we mentioned on a call sometime ago, we had already expanded their rights into Austria and Switzerland. We should be opening in Switzerland soon.

We have also started to take another one of our important franchisees, for example, our Australian franchise, and we just expanded their rights into New Zealand. So that's our first goal, is to take known entities, partners that are working well with us, and help them build into new countries.

And then we are looking at the next tier of opportunistic expansion in countries that -- there are large countries that we don't have a presence in, that are stable. But I'd rather not mentioned those specifically right now as we're not in any sort of contract.

Okay, great. Thanks for taking the questions.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Sharon Price for closing remarks.

Thanks for joining us, guys. We really appreciate your time this morning and we look forward to speaking with you when we report third-quarter results.

This concludes today's conference. Thank you for participating. You may now disconnect your lines.