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Build-A-Bear Workshop Inc. (NYSE:BBW)

Q1 2009 Earnings Call

April 30, 2009 9:00 am ET

Executives

Maxine Clark - Chairman & Chief Executive Officer

Tina Klocke - Chief Financial Officer

Molly Salky - Director of Investor Relations

Analysts

Paul Lejuez - Credit Suisse

Tom Filandro - SIG

Mike Smith - Kansas City Capital

James Lewellis - Needham & Co

Brad Leonard - BMO Capital Management

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 Build-A-Bear Workshop Inc. earnings conference call. My name is Christa and I’ll be your conference operator for today’s call. At this time all participants’ lines are muted and we will conduct a question-and-answer session at the end of this conference. (Operator Instructions).

I would now like to turn the call over to your host for today’s call, Molly Salky, Managing Director of Investor Relations. Please proceed.

Molly Salky

Thank you, operator and good morning everyone and thank you for joining us. With us this morning are Maxine Clark, Chairman and Chief Executive Bear and Tina Klocke, Chief Operations and Financial Bear.

In a moment, I’ll turn the call over to Maxine to provide her comments on the first quarter. Tina will follow with additional comments on our financial results, and at the end of our remarks we’ll open the call up for your questions. Members of the media who may be on our call today should contact us after this conference call with their questions.

We ask that you limit your questions to one question at a time, this way we can get to everyone’s question during this one hour call. Do feel free to re-queue if you have further questions. Please note that our call is being recorded and broadcast live via the Internet. The earnings release is available on our Investor Relations portion of our corporate website and a replay of both our call and webcast will be available later today on our IR website.

Before we get started, I’ll remind everyone that forward-looking statements are inherently subject to risks and uncertainties. Our actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the Risk Factors section in our annual report on Form 10-K and we undertake no obligation to update or revise any forward-looking statements.

Now I’d like to turn the call over to Maxine Clark. Maxine.

Maxine Clark

Thanks, Molly and good morning everyone. Thank you for joining us to review our first quarter 2009 results. During the first quarter we managed to our dual goals of maximizing cash flow while continuing to develop our brand and position our company for improved long term profitability and growth.

We consider our brands to be the cornerstone of our successful and profitable business model and we’ll continue to preserve and build upon its long-term value by emphasizing our affordable and entertaining store experience and unique product offering. We know better than any one the power of our business model and one it can deliver when revenues are growing. We believe our focus on cutting $15 million out of expenses was appropriate and now our singular focus is on driving sale. Getting back on track to where we know our brand can perform.

Mall traffic continued its decline in North America versus the first quarter of last year as families reduced spending and avoided trips to the mall. While our business is impacted by these factors, we also saw bright spots in our sales trends when mall traffic increased. During spring break when kids were out of school and when occasions call for gift giving like Valentine’s Day and Easter particularly.

These bright spot helped validate for us that our brand is still top of mind when families are enjoying time together, celebrating special occasions and selecting a gift. With the inclusion of Easter our year-to-date comparable store sales in North America are showing a slight improvement from our first quarter trend and while the economic environment remains uncertain we have identified initiatives which I will expand upon in a moment that we believe position us to improve our performance of our business.

Our first quarter results include solid progress towards achieving our cost savings goals and we remain on track to generate our targeted annual saving up $15 million this year. We had successfully reduced capital spending and maintained our strong balance sheet. In this difficult economy all of our resources are focused on improving the trend in our business. As we know we can’t expense cut our way to prosperity.

By taking advantage of our more appointment driven consumer shopping patterns and know and how, when, and what prompts our guests to shop in this reduced consumer spending environment, we believe we have a plan to effect a positive change in our sales performance with initial improvements expected by the end of this quarter and through the balance of the year.

We are pleased to have increased leadership helping us achieve these goals. Just six weeks ago John Haugh joined us as President and Chief Marketing and Merchandising Bear. John has a tremendous track record of building successful brands. His background stands for retail, hospitality, entertainment and consumer product industries and he has already made positive contributions to our company in the short time that he has been with us.

As I mentioned, we are 100% focused on improving our business trends, and with John on Board, we have the benefit of new perspective and very objective insight and more power behind our merchandising and marketing efforts to improve top line performance and bottom line results. We are thrilled to have John on Board.

I’d like to focus my discussion today on several key initiatives that we expect will make a positive change in our sales and profitability this year. We believe we have appropriately identified and are in the position to capitalize on the controllable aspects of our business, namely tow initiatives in product and marketing, to maximizing our royalty program in virtual world and to cost containment moves we’ve previously identified.

Beginning with products; we are very excited about our upcoming product line up and we believe we identified strong assortments for summer, back-to-school and holiday. Importantly we have rebalanced our inventory within our key cost vacations of value for and new plush animals and are well positioned to match demand for products across the range of price points. Having the right balance of merchandise across our classifications disclose a sales opportunity and importantly a margin opportunity.

In North America our emphasis on value continued to prove successful allowing us to increase new guest visits. Through guest research, we found that people who had never visited our stores haven’t taken an impression that our brand is expensive, despite our bears always starting at just $10.

In the fourth quarter of last year, we expanded our animal product offerings at our $10 and $12 opening price points. While this strategy has been successful in getting new guests to visit our stores, our average transaction has declined and we are working diligently to increase that metrics.

We have strategies in place to increase the appeal for our core products and our price in the middle price range of our offerings $14 to $16 price product to entice that trade of sale and we are working on the closing and accessory add-ons with each animal.

Our North American merchandise margin was impacted negatively in the first quarter due to the higher than anticipated demand for these value priced items. This is a successful strategy as it allowed us to introduce new guests to our brand and broaden our customer base. As we began the second quarter, we expect merchandise margins to improve as our inventory product costs and price points are now aligned to deliver our traditional product mark up and improved merchandising margin beginning in the second quarter.

The trend in overall transactions have shown some level of the stabilization in our business and while we continue to focus on getting transaction growth we also see opportunity and are working on building up our average transaction to maximize the business from guests that are in our stores.

Our upcoming product tie-ins included incremental third party promotion in mid-October and we also expect to follow up last year’s Hannah Montana product with the hot talent this year that should add even more excitement.

Gifting and gift card have always been an important part of our merchandise offering. About 20% of our animals are also registered as a gift in our database and while people may be making less visits to the mall they still want to celebrate and make memories on special occasions. We believe we have a greater opportunity to attract more traffic towards our dot com site and our virtual world site to expanded gifting options, personalization and product bundle, particularly during the holiday season.

This year our plans include website enhancements that will improve our guest’s ability to choose and personalize a gift online as well as a stronger message for our Say it With Sound add on recorded sound. We are building a better gift machine so to speak on our website that is convenient, easy to use, will have added customization options for very affordable personalized gifts.

Our second initiative is marketing, which we are looking at very differently. Although we are spending significantly less, a planned 22% less than last year, we have focused our spending when the consumer is within reach. In this economy we can’t rely on our advertising to drive mall traffic. We know we must take advantage of every customer who visits the mall and every guest who walks into our store, so we are working intently on converting guests once in our stores to impactful product presentation, product promotion and communication.

With John’s input we have already put in place marketing programs that we believe will be more impactful during targeted times when our guests are in the mall such as during summer when kids are out of school and holidays.

While we plan to reduce marketing spend this year by approximately $8 million as compared to 2008, primarily to reduce spending on TV advertising and direct mail program, we have the marketing dollars, we do have to further drive sales as we allocate our marketing investments to keep time periods. We know our guests will be at the mall, strengthen our promotions and negotiate even harder on our marketing services.

To this end for example, May marketing includes the Mother’s Day Gift purchase for this Saturday and Sunday, May 2nd and 3 that has proven to be a winner in the past by driving a meaningful improvement in comp trends.

We have also expanded our summer promotions to include two weekends in June versus one weekend last year. Holding this promotion over two weekends, kids get more opportunity to visit our stores and take advantage of this offer which includes the gift with purchase and expanded virtual world gift as well. Similarly we are putting plans in place to back to school and holiday that will help win-win guests who are in the mall, help us win once they come into our store and help us optimize the use of media, and external marketing communication.

Our holiday result shows that the value messaging was effective in getting guest to come to our store. Guest survey shows that these guests have high revisit intent and our goal is to increase our overall repeat business by leveraging our loyalty program and other retention strategy.

Returning guests account for over 60% of our business and our Stuff Fur Stuff program now has over 8.5 million members giving us a powerful database of information on shopping patterns and preferences. Royalty members receive news and product updates, special offers and incentives and members only benefit, such as bonus points and birthday gifts.

By focusing on marketing efforts on our two-prong approach attracting new guests and increasing guest retention and visit frequency, we have clear priorities to execute even in a time when marketing spend has been reduced.

Our third initiative is leveraging our virtual world, we continue to believe that the unique combination of a physical store base, store brand awareness and the virtual world gives us opportunities other companies do not have. This unique position gives us the chance to take a holistic approach to institutionalize the virtual world into our business model, to encourage our store guests also visits the virtual world and to maximize our loyal and highly engaged Build-A-Bearville citizens.

As you know, we’ve created another category of merchandize, a category of virtual world merchandize that generates real revenues and real margin contribution. We first began selling Bearville’s game cards during the 2008 holiday season. These game cards provide the player with online currency, Bear Bills of the choice of Virtual Ride like a hover board or a scooter. We sold over 61,000 game cards online and in our stores with the initial launch, that is over $450,000.

Build-A-Bearville remains a free site, but offers enhanced play opportunities when you make a purchase in our store. In March we began offering an expanded assortment of Build-A-Bearville game cards online including $1, $5, $10, and $15 price denomination plus the card offering enhanced virtual ride and one with virtual vacation home option.

In May these will be added to our in-store assortments along with the VIB, a Very Important Bear, three, six or 12 months bear credit subscription cards. Through these game cards our virtual world citizens are able to purchase virtual product, customize their virtual world environment and experience, making their engagement with our brand even deeper.

Moving forward, it is our goal to increase the conversion of our store visitors to virtual world citizens using impactful store events to introduce more guests to our online experience. We know that the store guests who also becomes a Build-A-Bearville citizen is more engaged in our brand which leads to increased visits and a higher spend in our stores.

Our final initiative is maintaining a positive sales performance outside the U.S. in particular in Europe. In the first quarter, Europe delivered another quarter of solid positive comp performance and year-to-date comparable store sales have shown an accelerating positive trend from the 6.7% increase in the fourth quarter.

In Canada, our sales were down but well ahead of our U.S performance and also trending positive on a year-to-date basis versus the fourth quarter. As we look ahead, our priorities remain unchanged and our focus on maximizing our cash flow, achieving our cost savings plan, tightly managing inventory and providing a compelling and unique experience for our guests in-store and online.

As the trend goes for families that have vacation Build-A-Bear Workshop is a very close to home theme park in the mall, affordable family experience. Our stores are focused on greeting customers and engaging them in the store experience as soon as they approach the store. We know that highly satisfied guest spend more per visit and visit more frequently, so we are reinforcing our core store experience with renewed energy, so that every guest that comes in leaves completely satisfied.

We remain confident in our future success and believe our strategies have a poise to improve the trend in our sales and importantly increased value for all Build-A-Bear Workshop stake holders. Before I turn the call over to Tina, I’d like to mention that Tina was recently named our Chief Operations and Financial Bear. In March, Tina has been former responsibilities for store operations in addition to our continuing role as Chief Financial Bear.

Now, I will turn the call over to Tina for her comments.

Tina Klocke

Thanks, Maxine and good morning everyone. I would provide additional details related to our first quarter fiscal 2009 financial performance. Let me start with few comments on the effective currency encounter ships in our quarter.

Starting with currency exchange rates there was a significant strengthening of the U.S dollar versus the British pound in 2009 first quarter compared to first quarter 2008. The impact of the foreign currency exchange during the quarter caused reduction in our reported European revenues. The currency exchange rate also reduced our SG&A cost in the first quarter. Our merchandize margin however continues to be negatively impacted in Europe because that we purchased our inventory in U.S dollars.

Our sales performance during the quarter was also impacted by the calendar shift of the Easter holiday and associated school vacations from March last year and April this year. In addition, our 2008 fiscal year included 53 weeks plus the finance reporting quarters this year will begin and end a week later than last year, creating some quarter-over-quarter comparison differences throughout the year on reported revenues.

Now, to the income statement; net retail sales were $96.3 million in the first quarter, a decline of 19% excluding the impact of foreign currency. This decline was driven by a 20.5% decrease in North American comp store sales. The comp decline comprises both a decline in transactions as a result of the challenging consumer environment and a decline in average transaction value.

Our transaction value decline resulted from lower average product price versus last year, as our value focused merchandizing strategy gained traction and these products became a larger component of overall product mix compared to our year-ago first quarter. Transaction declines represented about 15% of the comp change and the drop in transaction value about 5%.

Sales from new stores opened in the last 12 months and the 5.6% increase in comparable store sales in Europe partially offset the decline in net retail sales. Just to remind you, we stay our comparable store sales on a constant currency basis.

In Europe our positive business result have continued. First quarters were $14.1 million, up 18% excluding the impact of currency translation. The pre-tax loss from European operations totaled a $9,000 loss in the quarter. The profitability in Europe was impacted primarily by a decline in merchandise margin resulting from currency translations and also higher SG&A cost resulting from transactional currency impact.

As Maxine discussed earlier, our results in Europe continued to outpace the economic and retail sales trends there. The sales increase during the quarter was driven by a higher number of transactions, a higher average transaction value and an increase in the number of in store parties.

We see further opportunities to grow brand awareness and continue to bring new guests into our stores while building frequency of visits from returning guests as we continued to aggressively manage our SG&A cost.

Total revenues included in international franchise fees of $6,000, was down from $1.2 million in the 2008 first quarter. The franchise fees decline is due primarily to the decline in franchisee store sales, reflecting the global economic slowdown. Also in the year ago fist quarter, we had a positive adjustment fees that do not reoccur this year related to the discontinuation of our India franchise.

During the first quarter franchisees opened one store and closed three stores. We ended the period with 60 stores in 13 countries. The pace of store expansion in international locations continues to be opportunistic and highly influenced by the economic health and stability of the franchisee country, the franchisees capital resources and the ability of the right real estate location for stores.

We continue to believe this will be a tough year for several of our franchisees, where we are partnering with them and working hard to improve the performance. We currently anticipate franchisees to open five to10 new stores this year, with a majority opening in the second half, including the first store in the United Arab Emirates.

Licensing revenues in the first quarter were $4,000 compared to $7,000 last year. This decline in revenues was due primarily to a change in the mix of the licensed products versus last year. We continued to anticipate licensing revenues of approximately $2.4 million for the year, down slightly from 2008 as our mix of licensed products continues to change.

Gross profit margin in the first quarter was 36.6% compared to 43.6% last year. The 700 basis point decline in gross margin was predominantly due to the de-leverage on occupancy cost in North America. We also experienced the decline in merchandise margins which reflect the positive consumer response to our new value pricing strategy implemented in the fourth quarter, and the impact of currency on merchandise margins. Partially offsetting these declines was improved occupancy leverage in Europe, a reduction in fuel surcharges and efficiency in our distribution and warehousing operations.

Total SG&A expenses declined nearly 18% to $36.9 million versus $44.8 million in the year-ago quarter. The SG&A decline reflects the aggressive cost reduction efforts we put into place to align our cost structure with the downturn we are experiencing in consumer spending. We realized significant dollar cost reduction in central office management cost, store payrolls, store supply and marketing cost in the first quarter versus the year-ago quarter.

On the payroll front, we’ve completed the majority of the modifications to our North America store management staff. The new structure better aligned store management resources with store sales volume and reduces the fixed cost components of store payroll.

While SG&A expense was down, our SG&A as a percent of sales in the first quarter increased to 37.9% from 36.2% due to the decline in sales. Certain components of SG&A cost de-leveraged including store payroll and depreciation.

Store closing expense in the quarter was $500,000 or $0.02 per share related to the closure of friends 2B made locations. The charge is predominately lease termination fees. At quarter end, we had eight friends 2B made locations in operations. All locations are slated for closure by the end of the third quarter.

Interest income decreased from the prior year period as we experienced lower interest rates and lower cash balances as compared to last year. The effect of tax rate for the first quarter was 25.4%, down from 37% in the first quarter last year and reflects the impact of combining domestic losses with losses in foreign operations where we were not able to recognize tax benefit.

We continue to expect our effective tax rate for the full year 2009 to be consistent with the rate in 2008, approximately 36%. The net loss in the first quarter was $800,000 or $0.04 per diluted share compared to income of $6.4 million or $0.32 per diluted share in the first quarter last year.

The lower diluted share count in the quarter reflects the impact of our share repurchase program activity in 2008. We took a conservative approach to the use of cash during the first quarter and did not repurchase shares. Approximately $31 million remains available to purchase under our $50 million authorization.

Regarding cash flow, capital expenditures in the first quarter declined to $2.2 million from $5.7 million in the first quarter last year, primarily due to no new store openings during the period. Our capital spending in the first quarter included enhancements to our virtual world, capitalized intangibles and information technology infrastructure.

Depreciation and amortization for the quarter was $7 million, flat as compared to 2008 first quarter. We continue to plan capital expenditures for 2009 at approximately $9 million compared to $23.2 million in 2008. This includes cost associated with one store opening and one store relocation, in addition to store maintenance cost, investment in the virtual world and ongoing capitalization of intangibles. The plan also includes approximately $2 million for capital related to converting three of the nine friends 2B made locations to expand at Build-A-Bear workshop locations.

We estimate depreciation and amortization to be approximately $30 million for the year. We ended the quarter with no borrowings on our bank line of credit and a consolidated cash balance of $34 million, compared to $41 million at the end of the first quarter last year. Consolidated inventory at the end of the first quarter was $43 million, down 14% compared to $50 million last year. Inventory per square foot declined 19% and is in line with our net retail sales trends.

We are comfortable with the composition and the level of our inventory. This concludes our remarks and now I’ll turn the call back to Maxine.

Maxine Clark

Thank you, Tina. I’ll conclude the call with just a few final comments. 2009 is going to remain a challenge and we are putting our focus on what we can impact to maximize cash flow while continuing to develop our brand. We have taken actions to align operating expenses with revenue expectations, low capital expenditures while at the same time, investing in brand building initiatives and our future growth.

Our initiative to improve our top line are focused, structure to take greater advantage of changing consumer shopping pattern and supported by enhanced leadership within our company. We believe these initiatives can improve our sales trends over the balance of the year. Our debt-free balance sheet and $40 million bank credit line provide financial flexibility, liquidity and staying power. We look forward to updating you on our program in the months ahead.

Thank you for your participation and now we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tracy Kogan - Credit Suisse.

Tracy Kogan - Credit Suisse

First question is, you mentioned the improvement in April around Easter, can you just quantify how much you think it hurts your comp in the first quarter, and then secondly I was hoping you could quantify some of those changes in the merchandise margin and the buying in occupancy de-leverage. Thanks a lot.

Tina Klocke

With inclusion of Easter we talked about our year-to-date comparable store sales showing a slight improvement over the end of the first quarter, so that we did see an improvement in the trend from the Easter season so to speak.

From a perspective of the gross margin, the majority of it was a de-leverage of occupancy cost in North America and some de-leverage in our gross margin on the value price animals and some impact of foreign currency translation in Europe and that was about a 100 basis points on the foreign currency translation, because as a remainder we do purchase all of our inventory in U.S. dollars.

Operator

Your next comes from the line of Tom Filandro - SIG.

Tom Filandro - SIG

Two quick questions if I can. One is Maxine can give us a better understanding of your comments about identifying some stronger assortment and rebalancing between value and core, to be more specific in terms of how we should look at the assortment go forward in terms of pricing and positioning.

Then my second question is more broadly speaking in terms of John’s impact on the business. Can you give us a little insight, you kind of noted that he had some positive impacts, can you give us some inside on exactly what the impact has been and how he is viewing your marketing spend go forward? Thank you very much.

Maxine Clark

Tom we always had our value pricing, but now that simply actually begun to feature it in our marketing messaging, we sort of separated out those animals and we’re calling the value price a points that $10 and $12 predominantly and some $14, and then every thing that’s in the middle of that from above that point is our core line.

Then we also bring in our seasonal and fashion items that might be just seasonal and sometimes they are at 14, sometimes they are at 16 it just depends on what the animal is. So we are looking at that more critically than we did before, because the customers gravitating so much to the lower side of the spectrum.

So we want to make sure that we don’t offer too many things in that price point and that we also have enough inventory behind the items that we do have, so that it balance and we are not chasing $10, we have to fly them in out of stock. So that’s really what we’re looking at from that point, but still it’s always been there.

We use to call it just core that was just part of our core inline anything that was not seasonal and/or fashion like Hannah Montana, but today since it has become such a strong segment because of its priced importance we are separating or calling it value, so that we are constantly measuring how much of percentage total of our business it is, how many shows it is on the wall and how much inventory we have behind it.

As far as John is concerned, I’m sure you’re going to appreciate that he has only been here for just six weeks, but I have known John for a long time, we have been talking longer than just six weeks period that he is here. He’s been very focused on the business; we’ll definitely make him available on the investment community in the future.

Right now his focus is 100% on the business and existing at the positively impacting our trends. He is obviously very talented as has a lot of experience in merchandizing and marketing, particularly in lots of price points as well in multiple categories and I think that he believes obviously, I think everybody who comes on and has to deal with marketing or be in marketing which is they had always wished to had more money to spend.

But I think that John sees the opportunity, forgetting the history he wasn’t here doing the history, or what we can is what we have and how to use it to driving customers when they are in the mall. That’s probably the most significant and we dress really quickly, we possibility use our advertising dollars, how reduced they are just in more key times and how we use it in the messaging as well, and then also how we use promotions.

I’ve used that word loosely because it doesn’t necessarily mean anything is on sale. It’s the way we use different purchase, but particularly how we look at those especially the few that are coming up, the one in June and then the one in back-to-school and how we might use it to drive more significant traffic since those are when we did do those things and do them we always have positive impact on our consumers and we do them over a longer period of time, not necessarily do more of them, but make the ones that we have larger and more impactful.

I’d say that that’s the biggest part, and then the other time is being sent on the assortment making sure that the fashion and the balance of the inventory, and looking at it just from a whole different view point that the days are quite full and lots of fun as well having John here. It’s great to have another person who has so much vast experience in merchandizing and marketing.

Operator

Your next question comes from Mike Smith – Kansas City Capital.

Mike Smith – Kansas City Capital

I have a couple of questions actually. I missed when Tina was talking about the doll, where you stand in terms of closing that our, how many are you going to convert the Build-A-Bears and so forth. The other thing I was kind of interested in, as you’re gross margins are probably going to improve because of better buying for the lower price point, can you quantify that for me?

Tina Klocke

The store closing expenses that we talked about in the quarter were about $500,000 relating primarily to these termination expenses and that we have eight more locations to close and that we should have them closed by the end of the third quarter. Of those eight we’ll convert three of those to expanded Build-A-Bear location and from our perspective of gross margin improvement we really have not teased that out on a go forward basis, but as you would anticipate our goal was to get back and mind with the high merchandized margins we have enjoyed over years back.

Mike Smith - Kansas City Capital

What does that mean Tina?

Tina Klocke

Well, it means that we have enjoyed high initial merchandize mark ups and years passed that we want to get back to. As I detailed in my comments, we did see a decline in merchandize margins that impacted the margins and really at this point in time can not quantify it for you on a futuristic basis, but we feel now that our pricing of our inventors are inline with now our retail pricing of our products.

Maxine Clark

Last year, obviously our $10 and $12 almost were always in there and at there price in the margin, but we use that opportunity to markets of the customer and we tested that in July and then by the time we got to the fall season we could see that the economy had changed even more dramatically after mid-September.

We moved some price points of things that it slowed up dramatically that were higher price like $18 or $15 or $14 into some of those price points and so those we sort of just made them happen because we need it to because of the way business have slowed down, but going forward now we have a plan of those what we’re going to have with those price points that we’ve walked to those price points.

Not that we might not have one or two things that we might include at a lower price, but right now our plan is that we’ve bought into these particular price points with new and/or existing four products that we’ve negotiated or markup at so that we’re not taking the lessons markdown, taking them down to a price point there, going to be at a price point they own them at and we’ll feature animal at $10 and $12, not animals that used to be, but another that our now $10 and $12.

Operator

Your next question comes from James Lewellis – Needham & Co.

James Lewellis - Needham & Co

I have two questions related to comps. The first one is what’s the potential impact of the Easter shift that being that being now it has come and gone how much of the comps are attributable to that shift? And the other is about gross margins. What will be the prognosis for comps if gross margins stayed in the negative teen?

Tina Klocke

So, again Jim as we talked about on the call we did say that our, with the Easter shift that our comps year-to-date were slightly improved over our comps that we reported for the first quarter in North America of 20.5%.

So, keep in mind in Europe, we’ve also enjoyed improved comps also there after the Easter shift and from a perspective of margin and comp store sales, I think again we’re working hard to increase those margins along with increasing the top line revenue of our business, and so up to end we are going to do -- as Maxine talked about negotiating with our vendors and getting the margins in line with the top line revenue.

So, basically as we rebalance the assortment and we get something to 10 and something to 12 and maybe move more things from 10 to 12 and 12 to 14, we’ll have the higher HPG which equals more gross margin and also should improve the comps.

I mean, definitely selling a large percentage of items that at lower price points right now, while its has increased the transactions it’s dramatically over what they were before. It’s not enough to really drive the comp store sales. You need a lot more traffic and I don’t know as anybody is getting that at this point, but we can see an improvement and we think that these price points will become more part of our assortment in the near-term for a longer time, but at a little bit we are going to hedge them up higher a little at a time and focus on some really strong product at these particular value core and then fashion price points.

Operator

Your next question comes from Brad Leonard - BMO Capital Management.

Brad Leonard – BMO Capital Management

Can we just get an idea of what are the merchandise margins? How much do that hurt the Q1, I mean was it a 100 basis points. I would guess that it was closer to 200 to 300 basis points of the decline and the gross margin was due to merchandized margin. Occupancy alone couldn’t have done, it couldn’t have been 700 basis points or whatever it was. Can you give some more color on that and then also you’ve mentioned that you’re seeing some stabilization in transactions. I’ve taken your comments.

Maxine Clark

Tina will take the first part and I’ll take the second.

Tina Klocke

So Brad, I would tell you that the majority of the gross margin decline is on the de-leveraging of the fixed cost and just as a reminder, those fixed cost is rank utilities and depreciation and that is added to the gross margin. I did talk about a 100 point basis on foreign currency on the merchandized margins, so take that into account. Then there was a slight decline in the other part of the merchandized margin, which was impacted by currency.

Maxine Clark

So, the transactions are still down over last year, but they’re not down as much as they were, but the HPG is down because of the value pricing. So that has impacted the dollar value of each transaction. We would be significantly better if we even achieve the lower transactions that we had this year at last year’s average transaction price for the quarter.

If you’re comparing first quarter of this year to first quarter of last year, HPG as we call it against this year’s transactions, it would have been a significant improvement if we’ve had last year’s HPG on this year’s transaction.

Operator

(Operator Instruction) Your next question comes from Mike Smith - Kansas City Capital.

Mike Smith – Kansas City Capital

Going back to the margins, the cost of goods sold this year was 63.4%, the cost of goods sold in the same period last year was 56.4%, variation of 690 basis points. I know that when I asked you the question earlier, you said you hope to get back to the old rates which net cost of goods sold were between 53% and 55%. How long do you think it will take you to get there?

Maxine Clark

I think Mike, in the economic environment that we are in; it’s really hard to project that. It’s going to be how we are able to grow our top line and we think we are working diligently on those initiatives to grow the top line. As we grow the top line, we’re going to be able to leverage our fixed expenses, which is at this point in time is the majority of our decline in our gross margin.

Operator

You final question comes from Brad Leonard - BMO Capital Management.

Brad Leonard - BMO Capital Management

Maxine, on your comments about your year-to-date trends for the comps, I just want to quantify you said year-to-date trends so your improved four months or whatever we are in now versus saying April trends. So obviously the April trends are going to be a bigger shift with jump at the Easter shift that I would imagine. Obviously year-to-date trends are better than what we’re seeing. So that doesn’t really tell us what, and I know comparing this April to last April is not going to give us an apples-to-apples?

Maxine Clark

Right and that’s why we are looking at it all together and I think as I said this in last quarter’s call that I think we’ll have a much better feeling about in the business and where the consumers at after the second quarter, because unlike other retailers our Easter shifts between first quarter and second quarter and just not knowing how travel would be in spring vacations, all those things have a greater impact on us, but I think that we’ll have a better understanding.

I feel actually that with the things that we are putting in place for our promotional efforts can not off price, but still mentioning our value products as well our gift with purchase promotions that we’re doing and the way we change the length of them will help us improve our business, because it is a promotion to the customer and it is a reason why you’re in the mall near to come into Build-A-Bear side.

I feel that we will start to see an improvement on that borrowing any unforeseen crazy things might go on in the economy or if this flu situation isn’t prolonged, I think we’ll get back to what we were starting to feel a little bit much more positive about our business and certainly we’re seeing that improvement more significantly in the UK and Europe and then in Canada, but not yet as much as we’d like to see it in the United States.

Operator

At this time, there are no further questions. I would like to turn the call back over to Ms. Molly Salky.

Molly Salky

Thank you, operator and thanks to everyone for your participation today. If you have any follow up questions, please give me a call or send me an e-mail. Thanks and have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Build-A-Bear Workshop Inc. Q1 2009 Earnings Call Transcript
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