Welcome to the third quarter 2008 Build A Bear Workshop, Inc. earnings conference call. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Molly Salky, Director of Investor Relations.
Good morning everyone and thank you for joining us for review of our results for the 2008 fiscal third quarter. With me this morning are Maxine Clark, Chairman and Chief Executive Bear, Scott Seay, President and Chief Operating Bear, Tina Klocke, Chief Financial Bear and [Dory Krueger], Managing Director of Strategic Bear Planning. In a moment I'll turn the call over to Maxine to provide her comments on the quarter and Tina will follow with additional comments on our financial results.
At the end of our remarks we'll open the call up for your questions and Maxine, Scott, Tina and [Dory] will be available to respond to your questions. Members of media who may be on our call today, should contact us after the call with their questions. We ask that you limit your questions to one question, this way we can get to everyone's questions, but please do re-queue if have further questions.
Please know that our call is being recorded and broadcast live via the Internet. The earnings release is available on our investor relations website, and a replay of both our call and webcast will be available later today in the investor relations portion of our corporate website.
Before we get started, just a reminder the 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 our 2007 Annual Report on Form 10-K, filed with the SEC, and we undertake no obligation to update or revise any forward-looking statement.
Now, I'd like to turn the call over to Maxine Clark for her comments.
Thanks, Molly and good morning everyone and thank you for joining us to review our third quarter results. I think everyone's aware of the significant challenges all retailers face in the third quarter – declining mall traffic, hurricane disruptions to stores and consumers across the Gulf Coast and Florida, and the ongoing fear and uncertainty related to the financial crisis.
In the midst of this turmoil, while not losing sight of our long-term growth objectives, we're using this highly extraordinary time to provide our guests with a break from the day-to-day malaise, and bring some relief from the economic news.
I'll discuss our problems and begin today in detail in a few – our programs, excuse me, that begin today in detail in a few moments. In these challenging times, we remind ourselves that while our business may be more sensitive to some other retailers and downturns in the economy, it is also more responsive to upswings.
In good times and challenging times, a fundamental strength of our company remains our strong store model, which has the ability to deliver profits and positive cash flow, in a wide-range of economic climates. Our stores are highly productive, generating above-average sales per square foot and positive cash flow. That is still the case today.
But we know too, that we provide an outlet for over-stressed families to provide children with a fun and interactive experience that lets them escape from the pressures of the outside world, and that is needed now more than ever. In our call today, I'd like to give you some details on how we are responding to the current economic turmoil, what product and programs we've put in place to celebrate the holiday season this year, and finally, how we are investing in the long-term staying power of our brand.
Before moving to these topics, I'll take a few – I'll make a few comments on our European business, which again this quarter, delivered impressive growth in revenue and net income. European revenues grew 38% to $19 million in the third quarter and swung from a third quarter loss last year of $500,000 to a profit of $500,000 this year. And the business performance metrics all point to improving fundamentals in our stores in Europe.
In the quarter, we achieved a higher number of transactions, a higher average transaction value, an increase in the number of in-store parties, an increase in party sales as a percent of total revenues, and improved payroll expense leverage all while maintaining very high guest satisfaction scores.
On a year-to-date basis, revenues from European operations have increased 43% to $51 million and the operating loss has been reduced from $4.4 million last year to $600,000 in 2008. We opened our 50th store in the UK in September in Cambridge and will open a new store later this month in the new Westfield London Shopping Centre, a new premium mall in East London built as a new architectural landmark of London.
The $3.2 billion centre offers over 1.5 million square feet of retail, restaurant and leisure facilities, with an estimated reach to over 2.7 million people. We are excited for our brand to be part of this landmark development. Our continued positive performance in Europe, in contrast to many other retailers there, is supported by our unique store experience, growth of in-store parties, and improvement in SG&A costs through better payroll expense management, in addition to our growth and brand awareness.
On the merchandise side, our expanded football uniform assortment further taps into a culture that is fanatical about their soccer clubs, and our tie-ins to such famous brands as Little Kitty and Hannah Montana, help us reach a very trend-conscious young guest.
Now, let me turn to the topic of how we're responding to the unprecedented and economic turmoil we are faced with. During the third quarter, we took several steps to better position our company in the current environment and for the long term.
First, in was our decision to discontinue the friends 2B made concept. While the concept had a strong appeal to a subset of Build-A-Bear Workshop guests, generally girls between the age of three and ten, we realized that to take the concept to the next level would require additional investment of both financial and human capital.
Given the current economic environment, we concluded that keeping our focus on Build-A-Bear Workshop brands and in our Build-A-Bearville virtual world was the right course.
Another step taken during the quarter was the routine renewal of our bank line of credit. During the renewal with US Bank, our long-time banking partner, we took the opportunity to utilize our asset base, including our company-owned distribution center, to achieve several benefits.
We increased the seasonal line to $50 million and the non-seasonal line from $15 to $40 million. We lowered the interest rate on the line and put in place less restrictive financial covenants. While we have not used the credit line since 2003, this available credit, combined with our debt-free balance sheet, provides us with a solid foundation to weather the difficult times.
I'd like to also update you on the several cost initiatives that have been progressing through the year. These efforts are aimed at aggressively managing expenses and eliminating non-essential activities and expenses in order to preserve our gross margin and SG&A margins.
Last quarter we discussed modifications to our North American store management staff. The new structure better aligns store management resources with store sales volume, and reduces the fixed cost components to store payroll, thus allowing flexibility, control payroll costs, lower overall cost per hour and additional scheduling flexibility.
Today, this management staffing model is in place in about 180 stores, with about 60 more stores transitioning to the new model. We expect to complete the transition by the end of the first quarter of 2009 and when fully implemented, expect annualized payroll savings in excess of $500,000.
Also meaningful are transportation and warehousing cost reduction efforts in the majority of our stores. With outbound transportation, we've transitioned from dedicated truckloads to shared less than truckload or LTL model. We began testing the concept in late 2007 and rolled the change through 2008, completing the transition during the third quarter. With now approximately 210 stores in the U.S. on this system, we'll begin to see the maximum benefits of LTL distribution in the fourth quarter.
The primary benefit of the LTL model to Build-A-Bear is the sharing of fuel costs. LTL deliveries spread the cost of distribution in diesel fuel surcharges across all users, thus gaining economies of scales for us, so in this current environment with diesel fuel surcharges up about 40% during the quarter, we've achieved significant cost avoidance. We estimate that by using the LTL model our per delivery costs are about 25% lower than would have been used using dedicated truck transportation.
And we continue to focus on other store related expenses, including store travel and store maintenance and non-store expense. We have set a goal to reduce by 10% this year, primarily through elimination of non-essential positions at our central office and reductions in outside services.
Finally, our evaluation of real estate continues. We're currently analyzing all store leases in North America that expire in 2009 and 2010. This renewal process gives us the opportunity to reevaluate each market and take a new look at how it is structured, and changes that have taken place over the past ten years and changes anticipated in the future – changes in demographics, mall conditions, perhaps new malls in the market and the size of our store space.
Due to this process, we expect that some leases will be renewed, some stores will be relocated and other leases will not be renewed. Further to this real estate valuation, are a number of stores with lease kick-out clauses in 2009 that allow us exit our lease obligation if store sales are not reaching a pre-determined level.
In these reviews, we balance the cost of exercising the kick-out clause, which includes the write-off of non-depreciated store assets and repayment of any unamortized tenant allowance, the potential for store sales improvement and the impact of the store performance on overall cost and leverage. We make every effort to work with our landlords to achieve profitability in the stores; however we do expect to exercise our lease exit options appropriately on a case-by-case basis.
And now for our holiday season outlook and plans. We always look forward to the holiday season and this year, despite the economic turmoil and election year rhetoric that has negatively impacted consumer psyche across the globe, we are enthusiastic, yet realistic, about our plans. This is an unprecedented time in all of our lives and at Build-A-Bear Workshop, we are employing a revolutionary, rather than evolutionary, approach to our guest offerings this holiday season.
Unlike any other time in recent memory, I believe we could all use a little Christmas this year, and we could use it now. We believe this is the time when our guests need us and a time when a stuffed animal and a fun family experience, can help escape a fear that people feel about the economic future of our country. Families want some relief and they want to make life-long holiday memories for their children, grandchildren, nieces and nephews.
Moms, in particular, have cut back dramatically on their spending, reworked schedules to conserve gasoline, and made other sacrifices due to the economy. Frankly speaking, at this point they're worn out by negativity and just want to get back to having some family fun. Moms are determined that their families will have a holiday that is warm, memorable and focused on traditions. Build-A-Bear Workshop offers a shared experience that fits her budget, is appealing for many on her gift list, and is back to basics, nostalgic, fun family experience.
Build-A-Bear Workshop has had negative comp-store sales ahead of other general retailers, so we have been examining our business very closely and speaking with our guests in order to take actions to improve our business. We believe we have several revolutionary actions in place for holiday that are even more important, now that the economy is in crisis mode on a wide scale basis.
While we've have always had animals starting at $10 since opening our first store in 1997, our research showed that we are perceived to be much more expensive. During the summer, we tested modifications to our advertising that switched out the last ten seconds of our brand spot to include a message that Build-A-Bear Workshops has animals starting at $10 every day.
We found that this was news to many existing and potential guests, and a very strong message which had a very positive impact in the markets where the test media ran. So we built this learning into our holiday plan, taking a close look at the value proposition we offer our guests, and ways to increase our value in the current consumer environment.
Starting today, our assortment will have an expanded offering of animals priced at $10. And in the first week of November, we'll expand our line of $12 animals. Our assortment will now include six animals at $10, and soon, four animals at $12 in total. These ten animals make up about 1/3 of our total assortment, and today's purchases include the additional benefits of access to our on-line play space at Build-A-Bearville.com and perks associated with our loyalty club membership that they did not offer in 1997.
Another revolution in our holiday season plan is the launch of our first completely company-developed holiday storybook, plush characters and animated webisodes. The story chronicles the adventures of a brother and sister duo, Hal and Holly Moose, and their uplifting Christmas adventure. We've added a new entertainment component in the holiday tradition. Our first character development book and series of six animated webisodes, brief two-minute vignettes, that will begin airing on Build-A-Bearville on November 6th.
A webisode will launch each week and as a series, will reveal the story of Hal and Holly's Christmas adventures. Both our book and webisodes build on our brand's entertainment offerings and leverage a unique point of difference for our company – the fact that we have both real-world and virtual world experience platforms.
In addition, Hal and Holly will have their own micro sites, which will have viral components to develop the characters fully. Hal and Holly Moose are priced at $18 each, and when you purchase both for $36 the 52-page book is free. We last offered a non-licensed holiday animal at $18 in 2002. This is a tremendous value for our guests.
Our third revolution is the opportunity that our investment in Build-A-Bearville gives us, as an entertainment platform and unique position, as the only company with real-world stores and virtual world site. We continue to be pleased with the growth of Build-A-Bearville.com. The site awareness and engagement continues to grow. Over six million on-line characters have been created since the site's launch.
In mid-September, we launched our junior cyber guide program, our expanded on-line version of the Cub Advisory Board that I created when I started Build-A-Bear Workshop. In just a few short weeks, we have over 60,000 qualified members. We continue to view the virtual world as a huge opportunity for our brand, for entertainment enhancements to the platform are nearly unlimited.
We believe that there are many real-world benefits for our stores, but we also see opportunities to monetize Build-A-Bearville in unique ways. Our first initiative is the sale of $10 Bear Build game cards. These game cards provide the player with 10,000 Bear Builds to spend at Build-A-Bearville.com and a virtual transportation option in the virtual world, like a hoverboard, a propeller hat, or a segway-like transportation.
Bear Builds are the virtual world community's on-line currency, and can be spent on virtual clothing, accessories, and even décor for on-line cub condo houses. These cards will be sold in our stores and other selected third-party outlets where our store gift cards are sold. This is our first step towards the direct generation of revenue through the virtual world. Our site is free and will remain that way, but we do see ways to monetize some highly desirable options in addition to the sale of game cards.
The virtual world is still very much an emerging play space for kids. How we ultimately monetize this platform will likely be by a combination of add-on experiences and spaces, virtual goods and added value options per purchase. What is certain is that as a real-world retailer, we have options that other strictly virtual world companies do not have.
We also told you in our past calls that we were examining our marketing and looking at ways to make it work harder for our investment dollars. In our review, all options were on the table. Every program we have had to earn its place. The advertising test that we ran this summer showed us that we had even – we have revolutionary opportunity to communicate the affordability of our brand with existing and potential guests.
When presented with the value messaging, they heard and saw our brand in a whole new light. We have reworked all of our TV advertising for holiday and will include several new components this quarter. For the first time, I will personally speak to our guests in our TV ads. Our customers are very real to us. I receive hundreds of letters from guests and emails each week. I chat with visitors in Build-A-Bearville.com and listen and respond to what guests have to say.
Given this personal connection, we determined that the best way to communicate our message this holiday, was to take a face-to-face approach. My message in the ads is that we can all use a little Christmas right now, that Build-A-Bear Workshop is a place where families can a fun, affordable, and unforgettable experience together, starting at just $10, and that we believe the simple things in life, like the hugs of a teddy bear, should be within everyone's reach.
Another change this holiday is that we will weigh our advertising slightly more heavily towards national women's TV versus last year's fourth quarter. We believe our holiday messages will most specifically resonant with moms.
Finally, the holiday season is about gift giving. We have always had a significant gifting component to our business, between our Bear Buck$ gift card, including our successful gift card up-sell holiday program, and bears that are given as gifts. This year, we are focused on communication about the gifting options that Build-A-Bear Workshop offers for every budget. Our channel-neutral approach will make gift purchasing on the web an easy transaction and provide clear choices for every personality on your gift list.
We believe we can gain incremental gifting business during the highly competitive holiday season by promoting a side of our business that has always been strong at this time of the year. In addition to these aggressive activities, we'll continue to do what we are known for, including regular animal launches, such as the introduction of our first stuffable and huggable turkey.
The turkey is a very limited offering and for the first time, we will offer the turkey and accessories for pre-sale, exclusively to our loyalty program members, which provides a large audience of seven million guests a collectable product ahead of non-program members.
Also available in stores on November 1st is Chilly Cheeks Penguin, priced at $18, another Build-A-Bear Workshop product developed. And later in the quarter, Hello Kitty will return for an encore performance on December 5th. There will always be something new happening at Build-A-Bear Workshop this holiday season.
In these unprecedented times, we are holding true to our core values, so we will always focus on giving back in a reasonable way. In the spirit of giving a little Christmas now, we jump-started our support to the U.S. Marine Corps Toys for Tots program. This year our program kicks off on October 25th, when we invite guests to visit a store in the United States and Puerto Rico, to make a furry friend for free, which we will donate to Toys for Tots.
We will provide drop-off points for toy donations to the charity as well, partnering in other ways throughout the season. We are also supporting our literacy and education platforms through the sales of our virtual world Bear Build game cards, through a partnership with DonorsChoose.org, an on-line education, not-for-profit organization.
With a purchase of the game card, we will also offer for a limited time a donation gift card that guest can apply to any of 50,000 public school classroom projects across the United States. This makes the game card purchase a win-win on many fronts.
On the third-party licensing side of our business, we have new products available to continuing a new partnerships. Our award-winning DS game from the Game Factory, is still selling strong and our new game for Nintendo Wii will be in stores starting this week. Williams-Sonoma will also offer a three dimensional teddy bear cake pan and decorating kits in their U.S. and Canadian stores, starting on October 24th. And from now on, all licensed products going forward include a free virtual world gift.
I'll complete my portion of the call with a few final comments. While it's difficult to predict consumer behavior in such a volatile environment, what we are certain about is the importance of connecting with our guests during this extraordinary time. Our holiday plans put in place strategies we have never used before. Our plans are aimed at staying as connected as possible to our guests during a time when the economy puts pressure on discretionary spending.
We're using product collectability, value pricing, frequent shopper incentives, increased TV advertising to encourage both existing and new guest visits. With these strategies in place for top line growth, we also continue to work aggressively to eliminate costs and expenses for bottom line results.
Again, a fundamental strength of our company is our strong economic model, which has the ability to deliver profits and positive cash flow in a wide range of economic climates, which we expect will be the case this year as well. Our debt-free balance sheet and flexible capital structure, gives us enormous benefit in today's environment.
While our third quarter share repurchases were modest as we took a conservative approach to the use of cash, we have approximately $31 million remaining available in our repurchase program and we will continue to view repurchasing shares as a use of excess cash flow.
And now I'll turn the call over to Tina for her comments.
Thanks, Maxine and good morning everyone. I’ll provide additional details related to our 3rd quarter financial performance. As Maxine discussed earlier, our European operations delivered a strong performance in the third quarter, ending the quarter with 53 stores in Europe. We continue to estimate our chance will ultimately be about 70 stores in the UK and Ireland.
Plans in 2009 are to add two additional stores in the UK. The decline in the third quarter total revenue of $2.6 million was driven by the decrease in North American comp store sales. The decline was partially offset by new stores open in the last 12 months and an increase of comp store sales in Europe.
Total revenues include international franchise fees which increased 5% to $982,000 compared to the 2007 3rd quarter. During the quarter franchisees opened two stores, the ninth store in Japan. And the ninth store in South Africa and ended the quarter with 60 stores. There were no store closings in the quarter.
We expect franchisees to open approximately 10 new stores this year net of closing. The pace of store expansion and international locations continues to be highly dependent on the availability of the right real estate location for our stores which in many countries can take time to identify and negotiate.
Through additional oversight of our North American operations we continue to work hard to improve the performance of our existing base of franchisees. This oversight is not only includes real estate but extends to inventory planning, marketing programs, store operations and training.
Full year revenues from franchisees are targeted at approximate $4.5 million, up from $3.6 million in 2007. For licensing revenues we remain on track for revenues of approximately $2.4 million, down slightly compared to last year.
Our gross margin rate in the 3rd quarter was 40%, compared to a rate of 43.3% last year. The decline in gross margin was primarily attributable to the lack of leverage on fixed occupancy cost in North American operations. And partially offset of improved occupancy cost leverage in Europe.
Within the gross margin rate the consolidated merchandise margin was slightly positive. Consolidated distribution and warehousing cost as a percent of revenue increased modestly. As an increase in North American Warehousing and distribution cost were impacted by higher diesel fuel surcharges.
During the third quarter the SG&A expense margin increased 40.6% compared to 38.8% last year. The margin increase reflect higher North American store payroll as a percent of revenue. And higher cost of maintaining our multiple websites, including Build-A-Bearville.com. Partially offset by lower advertising expense.
The 2007 third quarter SG&A margin included cost associated with the review of strategic alternatives totaling approximately $460,000 pre tax. With regard to store pre-opening these expenses are lower in the current quarter versus last year.
For the full year preopening expenses are estimated at about $2.6 million. A decrease versus 2007 full year preopening expenses of $4.4 million, reflecting the lower number of store openings planned this year in North America and Europe on a per store basis. Pre opening costs are slightly lower than last year. We’ve identified the charge related to the Friends2BMade concept closure in a line on the income statement titled store closing. The charge in the quarter of $2.9 million pretax primarily consist of non-cash impairment of store assets.
Over the next several quarter we will finalize the location closure plans with our landlords and recognize the remaining cost of closing the concept as they become reasonably estimateable. The remaining charge $1.9 million to $2.3 million pre-tax will be recognized in the 4th quarter of 2008 through the 3rd quarter of 2009. These remaining charges include lease obligation fees, requiring cash, potential unsold inventory liquidation, a non cash item and other estimated cost associated with location closing, primarily cash.
Moving down the income statement interest income declined as we are experiencing lower interest rates compared to last year. The effective tax rate in the 3rd quarter was 40.2% compared to an effective rate of 37.8% last year. For the full year we anticipate an effective tax rate in the range of 35 to 36%.
The lower diluted share comp in the 3rd quarter reflects the impact of our share repurchase program. During the 3rd quarter we took a conservative approach to the use of cash as we monitored the overall economic environment and used cash to build our holiday inventory.
During the quarter we repurchased approximately 89,500 shares using $700,000. Year-to-date we repurchased and retired approximately 1.7 million shares using $14.1 million, and approximately $31 million remains available to repurchase under a $50 million authorization.
Now for a couple of comments on the balance sheet. Cash spending on capital items in the 3rd quarter was $5.7 million down from $11.4 million in the 2007 third quarter, primarily due to fewer store openings this year. Year-to-date our capital spending totaled $20.4 million compared to $33 million at this time last year.
We expect full year spending to come in at the lower end of the $25 - $30 million range. Depreciation and amortization remains on track for approximately $30 million for the full year. As we discussed last quarter our plan for 2009 includes opening approximately six stores.
Our capital spending plan is targeted at about $17 million which includes capital related to converting a selected number of Friends2BMade locations to expand the Build a Bear Workshop locations. And at this time depreciation and amortization is targeted at approximately $35 million in 2009.
We ended the quarter with a consolidated cash balance of $27 million compared to $17 million in cash at September 29, 2007. We did not utilize our line of credit during the quarter. Our consolidated inventory at the end of the quarter stood at $47.7 million compared to $54.5 million at the end of the 2007 third quarter.
On a per square foot basis excluding inventory and our web store and nontraditional locations, inventory per square foot declined about 19% to $51 per square foot at the end of the third quarter down from $63 at the end of the last year’s third quarter.
We’re comfortable with our inventory level and with the allocation of our inventory across our product line. We continue to manage our inventories aggressively as we monitor sales trends, new product introductions, and marketing programs in order to maintain our lean and clean inventory levels.
With regard to the fourth quarter, fiscal 2008 includes the 53rd week which is the last week of December. Also of note is the growth with the experience so far this year in our European operations which is the business that is seasonally heavy in the fourth quarter, historically generating over 40% of manual sales in the fourth quarter.
Before concluding I’d like to spend a couple minutes reviewing our frequent shopper program. How we account for the program and how we periodically make adjustments to the deferred revenue obligation. Our frequent shopper program benefit is for every dollar spent the guest earns one point and receives a $10 gift certificate upon reaching 100 points.
An estimate of the obligation related to the program based upon historical redemption rates is recorded as deferred revenue and a reduction of net retail sales at the time of purchase. We review the redemption rate and assess the adequacy of deferred revenue at the end of each quarter.
We periodically adjust the deferred revenue based on our review. Adjustments are generally made no more often than semi-annually in order to allow for time for definite trends to emerge. We made adjustments to the redemption rate in 2005 and 2006 and adjustment to the deferred revenue comp in 2006 and 2007.
While we made no changes in the third quarter we will take a comprehensive look at the frequent shopper program after fourth quarter. Because we anticipate that during the holiday season certificates will be more important than ever to our guests.
This concludes our prepared remarks. Now I’ll turn the call back to Molly.
Thanks Tina and Maxine. And now we’ll open the call up to your questions. Maxine, Scott, Tina and [Dory] are all available to answer your questions.
(Operator Instructions) Your first question will come from [Tracy Cogan] – Credit Suisse.
[Tracy Cogan] – Credit Suisse
Thanks. Good morning, everybody. I was wondering if you guys could talk a little bit about trends by month and maybe give us a sense for how some of those product launches like High School Musical Bear and Hannah Montana performed relative to your expectations? Thank you.
We don’t report on sales by month, but I will tell you that product launches have been very successful this past year, particularly High School Musical and Hannah Montana have been very strong and have, in some cases, exceeded our expectations. We’ve been – we actually went back in and reordered both of those products and intended to – I know you’re not just talking about those, but just to focus on those for a moment.
We have backup materials and just in case it did exceed our expectations, and it did, we decided to extend those products into the first quarter of 2009 where we originally had planned to have them in and out by the end of 2008, but they have been very successful, and have also been very successful in Canada and the United Kingdom.
In terms of products that you’re asking about, are you talking about the things that we measure today, or are you talking about things that we’ve launched in the past? Okay. Oh, if you have any further questions about that, Tracy, why don’t you get back to me and we’ll talk about it specifically.
Your next question will come from Sean McGowan – Needham & Company. Please proceed.
Sean McGowan – Needham & Company
Yes, can you talk about any benefits that you’re starting to see already, if any, from lower fuel costs, you know, directly related to transportation?
Obviously the diesel fuel costs are slightly ahead of what we see at the gas pump today. It has come down slightly, but at a peak we were almost 50 plus percent in fuel costs during the summer. We’ve seen that drop to the low 40’s. We continue to watch them as part of what we watch on a weekly basis and we’re working very closely with our vendors on that. One of the other reasons for the LTL program is exactly that, so we share that cost with other providers.
Your next question will come from Brad Leonard with BMO Capital Market.
Brad Leonard – BMO Capital Market
Hi. What was the strategic review costs? Were any in the Q3 in the year-to-date?
In year-to-date 2008, no.
(Operator Instructions). Your next question will come from Mike Smith – Kansas City Capital.
Mike Smith – Kansas City Capital
You didn’t really talk too much about Build-A-Bearville and how you’re trying to integrate that into your business. Can you give us an update on what’s going on there as to how many members you have? How many people use them on a daily basis and that sort of thing?
Yes. Actually it’s integrated so much into our business on a daily basis. I’m sorry if I wasn’t clear on that. We have over six million characters that have been made by our guests in Build-A-Bearville. That’s not necessarily a measure of how many people use it every day, and there are different scores that are measured on the Internet that we actually don’t publish because those are highly competitive information.
But we are finding, because of some of the things that we have put on the website, like daily prizes and new launches every week, something new coming on on Build-A-Bearville that may not come out in our stores. There’s always gifts that you can pick up if you click on this or you click on that. But our entire merchandizing program, everything that we do at Build-A-Bear Workshop in our stores is integrated online. So, if we’re having a launch of a product, like High School Musical or Hannah Montana, it’s always featured on line.
In terms of those particularly we created a whole new theater, had new dance moves, had new costumes, all kinds of things that could be tied to that. Right now it’s Halloween and Fall in Build-A-Bearville.com and there is a tremendous amount of activities in costumes and new – we decorated the barn. Kids are playing on there all the time, lots of activities.
And our entire Fall program especially the ones developed around our new characters Hal and Holly Moose is developed for activity online, including a new world that you’ll be able to – I use world in the abstract, but it’s a new place you can go to that will be open starting the day after Thanksgiving where you can go and see what’s going on there and it’s tied very much to our story book and the animated activities are on their website also.
So, you’ll be able to go and see the animated story webisodes that will take you to the story, and by the end of that, the series, each week there’ll be a new one. You put it together, you’d almost have a TV-type animated feature. So everything we’re doing now, including the Bearvilles that we talked about and some new things that we’re developing has a context on Build-A-Bearville. And, also, [Dory] might be able to speak a little bit more to some of the traffic and customer findings that we’re having about time spent.
Yeah, actually, we’ve seen significant increases in the time spent as people are engaging and engrossed in the world. So that has increased significantly on a per-visit basis, and that’s one of the metrics that’s important to us. So, we’re really working on increasing the awareness, driving conversion in our stores so that we get to the maximum traffic that we can, and then increasing the engagement.
Because if people engage, we are finding that it does give us a chance to let them know what’s happening in our stores and drive that traffic back into our stores, so really starting to get the beginnings of those synergies that we were expecting when we launched the site initially.
Our next question will come from Derek Johnson – BMO Capital Market. Please proceed.
Derek Johnson – BMO Capital Market
Good morning. Can you tell us what total international sales growth, as well as international comp store sales growth would have been in local currency?
We describe our comp store sales in local currency. So, in Europe it was 8.2% increase this quarter.
On a comp basis.
Your next question is a follow-up question from Sean McGowan – Needham & Company. Please proceed.
Sean McGowan – Needham & Company
I just wanted to revisit for a second the fuel question and then ask another question about Europe. Scott, on the fuel if the prices of the fuel stayed where they are right now, I would imagine in comparison it gets easier as you go forward, so are you expecting to see a significant benefit in the coming months?
Well, there still hard to judge. The fuel prices are dropping – they dropped again this morning, but we do hope to see that. It all really depends on how – we are slightly head of what you’ll see at the gas pumps. When we had our drop, we probably had it a month ago to start seeing it come down and still dropping. But it’s in the low 40s still. So, that’s still much higher than it was last year.
But the LTL was really the model, and the reason we went to that model was to share those costs and to kind of take some of that leverage away from just being on fuel cost surcharges for – so we can concentrate on the regular trucking costs. But we’re still seeing it in the low 40s. So until it drops below to the mid to low 30s it’s still above last year. So, it’s still an issue.
And your question will come from Brad Leonard – BMO Capital Market.
Brad Leonard – BMO Capital Market
The answer to my last question was inaudible. I did not hear that on the strategic review, and then my follow-up question would be the stock buy back here. We’ve got $27 million in cash. You’re going to spit off a bunch of cash in Q4. You have the benefit of now having a dramatically lower stock price from even 30 days ago.
The valuation is getting to a point where you’re marginally training above a reasonably estimated year end cash balance. You have the change to take on dramatic amount of stock I think if you want to, and that’s the only benefit about being waiting is that you’ve got a rock bottom valuation. So, I guess I’d like to hear Maxine’s thoughts on that and what she has to say. Thanks.
Well, Tina can answer the strategic comments, or if we can't answer that certainly we can talk about it off line. I think that watching our cash very closely and this is a very high time of using cash and paying our vendors for the merchandise. So, we are looking at that ongoing, an ongoing basis.
Needless to say, we are very aware of the stock price and of what you’re saying, and understand exactly what you’re saying, Brad. But we have to look at it week by week and we do. And I think that if there’s opportunities that present themselves because we can see that the cash is in excess of what we thought would need to operate our business in a normal basis. And we’re also trying to look and forecast into 2009 and how the economic issues will affect us there.
Also, we sell a lot of Bear Bucks in the holiday season. And if that would change it significantly, that will impact our first quarter of business and cash needs could be different then and could hurt us. But we’re very positive about the opportunity and we think that with our bank line of credit and the funds that we made closing as we look at our business we’ll be able to consider options there.
Brad, our strategic review ended in March of this year and so other than finalizing accruals and things that we pay for, there were relatively minor adjustments in the third quarter that aren’t even material to even mention.
Your next question is a follow-up from Mike Smith – Kansas City Capital.
Mike Smith – Kansas City Capital
Well, one comment first before I ask a question. I would suggest you don’t buy any stock back because people can postpone buying bears for a long time, and cash is king. However, I do have a question. Two questions actually. You mentioned that you were going to look into the leases and renew in ’09 and ’10 and I was wondering how many leases are there that are expiring in those two years?
And then secondly, if all we’ve had provided earnings guidance and I noticed that this seems to be absent with this conference call, and whether you’d like to state whether you continue to think you’ll meet the Street's expectations.
On the lease question, we have some of the leases that were originally expiring in ’09 and ’10 we’ve already addressed prior to this. So, we’re really looking at 10 to 15 leases that are kind of up in the air that we’re working with landlords on. On an ongoing basis we have the kick-out clauses from our leases.
Those can be a number at any given time because generally we have one if not two kick out options. So, it’s something that we’re review on a market-by-market basis in a comprehensive way on an ongoing basis, even looking as forward into '10,' 11 and ’12 that we can build a long-term strategy for each market as we make the decision on the immediate leases that we’re reviewing.
Mike, while our internal claims have not changed much since July, much about the consumer and retail environment have changed, and that makes it difficult for anybody to really predict consumer’s buying behavior in this critical holiday season. And so, we are not resuming a practice of providing earnings guidance.
Your next question is a follow-up question from the line of [Tracy Cogan] with Credit Suisse
[Tracy Cogan] - Credit Suisse
Thanks. I just had a question on the value pricing. You guys mentioned that you have more bears at opening price points, and I was wondering if you’ve lowered any price points on any of the accessories. Thanks.
We have lowered some prices – not lowered prices you know we brought in products that will be at prices that are very attractive to our customers, that we know are strong you know price points, per se.
So, throughout our line there are things that are key items that are at very you know sharp retails, maybe relative to what they might have been. We've worked really hard with our vendors to you know try to project the quantities and the items and give our customers, in every category, something of substance, of huge value to them.
They'll recognize that those are – but, they've been customers; they'll recognize that those are good prices. And if they're new customers, they'll be very, very good prices, and it's an ongoing changing. We do this. We always have, we think, good value, but actually we're, I would say, making this a larger part of our assortment planning as we go into 2009, as well.
This isn't just something for the holiday. We don't believe these are our times or just for a few months. We think that we're in something that's going to be there for the foreseeable future, and that it's important for us to be able to focus in on some key price points.
A large percentage of our inventory has always been well under $20, but I think that – and our average price of an animal that we sell has always been about $16. But, now we're going to put a bigger percentage of our inventory you know at about $15 and under, as we go into 2009.
And, we think that that'll be – and the size of our animals is substantial, and again, where we always had that. And, even for the last year, we've had Build-A-Bearville. If you compare it to some of the products that we carry you know five years ago, 10 years ago.
Now, everything includes the added value of Build-A-Bearville, as well as the added value of our Frequent Shopper Program for our customers. So, what we you know it's in essence here lowering, you're going to have lower retails than you have had, and you're going to be giving the customer a lot more for their money.
Your next question is a follow-up question from Brad Leonard – BMO Capital Markets. Please proceed.
Brad Leonard – BMO Capital Markets
If we could just talk about the cost cutting a little bit, you mentioned some metrics here for savings, and I didn't catch all that, and then I want other opportunities to maybe right size the cost structure to make the business more profitable on a lower sales volume. Thanks.
But certainly the store model is one item that we looked to impact them, as we talked to our payroll structure, we are looking at taking one of our full-time management positions into a part-time associate manager position, which allows us that flexibility on our base payroll. And that's what we really need to affect, as we see the decrease in our first-store volume.
And that's what we talked about we can get in excess of $0.5 million on a full year basis. And that's been our mainstay on the store operations side. Also, on the LTL side to help us with the margin side, as we see the prices of our goods be affected by fuel prices, and also by the labor laws in China, we're trying to affect that and impact our gross margin with our LTL model.
(Operator Instructions) Your next question is a follow-up question from Michael Smith – Kansas City Capital.
Michael Smith – Kansas City Capital
Well, it's good that you're giving the customer a good deal in the fourth quarter, but how should that, if we translate this into the gross margin that you expect to achieve? I noticed it was up 330 bases points in the third quarter. Will we expect to see the same kind of change in the fourth quarter?
Yes, I think that the Build-A-Bear sales model includes really high initial markup. And, the margin impact will really depend on top-line sales, the way that you the products are based, like the noose that we don't have any royalties to pay.
That's strictly you know our merchandise that we developed, so that makes it a potentially much higher gross margin and markup products. But, we want to stay close to our customers during this time.
I think that discretionary purchases are under tremendous pressure, so we absolutely think that this will help our top-line sales. We may not see as much of the impact of that as we were able to sort prove that in our testing in the summertime, because the times are so significantly different.
But we think that it will absolutely impact the customer positively, from the level of marketing that we're doing, not only the outside marketing, but the signing in the stores, that the clarity of product offering in the stores.
And it'll drive us, so the customer might start with a lower price bear, but they'll be able to afford the added-on accessories, which is really big and will drive those margin dollars, which is really important in our flow through as you know on our business is very, very high. So, any change in that, that's been a positive, is definitely a plus to us and helps us. And, remember our margins that you see are you know our total margins are store rents; everything's in there.
And we think that we've been able to achieve still very, very high merchandise margins that will flow through to the bottom line and impact, and to help us better leverage the store margins that are impacted by, that could be impacted if we don't get the sales, but will positively impact if we bring our traffic up, significantly, get our share of the traffic that's in the malls.
Your next question is a follow-up question from Brad Leonard – BMO Capital Markets.
Brad Leonard – BMO Capital Markets
Yes, on the cost cutting, and what did you mention on the corporate side? I mean, you still have this business, Maxine, that is high sales per square foot. You have high merchandise margins, and with the impact and now our lower volumes, and your SG&A cost structure, your advertising, your rent, I mean how do you right-size this to for a continued weakness in traffic? And, how much can you take out of the corporate, and what is the pace of the cost cutting that's going to go forward?
Well, we're cutting everyday. We're, as I've said, we've eliminated positions here. We've cut down on travel. We've cut down on some of our training expenses you know anything that we've, some of the things that we've done that actually a part of our culture that we've been doing for a long time.
We've really you know reached out to our associates to understand that and have more you know kind of communications I have with them that is not in person, but you know on the phone and through email, trying to make them still feel connected to our business, so that they can help us achieve the goals that we have.
We've cut outside services. A lot of things that we normally do on a day-in and day-out basis, from some of the market research and in-depth business settings that we do, that we've tried to manage more, internally, rather than externally.
You could close out all the people that, if you wanted to, and you have some other things you could do. But, I think we've cut – we have a lot of systems here that tell us how many people we need to be on our phone board, how many people we need in our web, but I think that we're doing things that are appropriate.
We feel that we'll make those changes as we need to. I mean, we're really looking on a day-by-day, week-by-week basis, depending on what area it is, and cutting that much down as we can.
And, I think after Christmas we'll be able to see. Right now, because we've cut it to the bone of what we need for Christmas business, and we'll look at it right after the first of the year. We'll look at it every week and if it doesn't materialize, but we'll also look at it even more so after the first of the year and see what else can be eliminated.
That's what we're doing every single day in every single store and also here. We've put a lot of programs in place that have helped us save the money that we saved, and I think manage it as best we can.
And, our next question is a follow-up from Brad Leonard – BMO Capital Markets.
Brad Leonard – BMO Capital Markets
What would be the projected year end cash balance, if you could just give me a range? Of course I can estimate my own, but I'd like to hear what you have to say on that.
We haven't given any projections on you know balances for the end of the year. Again, it's you know we're going to monitor our cash, as Maxine said, on a daily, weekly as we always have and utilize it in the appropriate fashion.
And, at this time, we have no questions in queue. I would now like to turn the conference back over to Molly Salky for closing remarks.
Thank you, operator, and thanks, everyone, for your participation today. I'll be adding some new PowerPoint presentations to our IR website, later this week, and that presentation will include photos of our holiday product lineup. So, I encourage you to check that out.
Finally, if you have any follow-up questions from today's presentation, feel free to call or email me. Thanks again, and have a great day.
Thank you for your participation in today's conference. This concludes your presentation.
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