Build-A-Bear Workshop's CEO Hosts Q1 2013 Results - Earnings Call Transcript

| About: Build-A-Bear Workshop, (BBW)

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

Q1 2013 Earnings Conference Call

May 2, 2013 9:00 AM ET


Alison Malkin – ICR

Maxine Clark – CEO

Tina Klocke – CFO


James Fronda - Sidoti & Company

Jacob Ma-Weaver - Amici Capital

Thomas Filandro - Susquehanna Capital


Greetings and welcome to Build-A-Bear Workshop First Quarter Fiscal 2013 results Conference Call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is my pleasure to introduce your host, Alison Malkin of ICR. Thank you, you may now begin.

Alison Malkin

Good morning. Thank you for joining us. With me today are Maxine Clark, Chief Executive Bear, and Tina Klocke, Chief Operations and Financial Bear. Before I turn the call over to management, I want to remind members of the media, who may be on our call today to contact us after this conference call with your question. We ask that you limit your questions to one question and one follow up. This way we can get to everyone's question during the one hour call. Feel free to re-queue if you have further questions. Please note the call is being recorded and broadcast live via the internet.

The earnings release is available on the investor relations portion of our corporate website. And a replay of the call and webcast will be available later today on the IR website.

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

Now I would like to turn the call over to Maxine Clark. Maxine?

Maxine Clark

Good morning everyone. For the call today, I will discuss our first quarter results and update you on our key products and marketing initiatives. Then Tina Klocke, Chief Operations and Financial Bear, will review the financial results and update you on our real estate optimization plan.

I'm very pleased with the progress that we have made on our strategy and the impact that it's having on our business. We had strong comp store sales increases in both North America and Europe, at 10.6% and 9.7% respectively. This resulted in a 10.4% increase in consolidated comparable store sales. Our e-commerce grew 7% on a consolidated basis. Even more impressive than the first quarter, we grew our total revenues by $8 million for an 8.5% increase. With 24 fewer stores this year, versus last year’s first quarter. All of this led to a profitable quarter giving us a great start to the year.

I'm also pleased to report that we have maintained our positive sales momentum moving into the second quarter. Breaking apart our year so far, January and February comps were up 4.9%, while March and April comps increased 15.7%, which removes the impact of the shift in Easter. This gives us positive consolidated comp sales of 10.1% year-to-date through April. Our results clearly reflect that our marketing, products, and store strategies are working, and driving improved sales and profitability.

I want to discuss the key factors that contributed to our sales growth across geographies throughout the quarter and update you on our long-term objectives. First, we continue to shift the messaging in our marketing to brand, experience, and product, from the previous product and promotion mix. We started this initiative in last year’s fourth quarter, and continued to realize positive impacts in the first quarter. In addition to the brand messaging, we have intensified our communications with moms, which included adding a flight of TV ads in the first quarter ahead of key Valentine’s Day gifting period.

We’ve had comp sales increases in North America in both quarters since we’ve made these changes. The marketing has increased the demand for the Build-A-Bear Workshop experience, which has also contributed to stronger gift card business. Since gift card sales are recognized and the cards are redeemed, the ground work that we laid at the end of last year was critical to starting off the new fiscal year on a positive trend.

During last year's peak gift giving period in the fourth quarter, we were able to increase the issuance of gift cards by 30% with nearly 350,000 more gift cards in circulation on a consolidated basis. As a result, we realized higher sales and transactions in our first quarter as guests redeemed their cards.

We have continued to see growth in the issuance of new gift cards with a consolidated 35% increase in the first quarter positioning us for continued growth in redemptions in future quarter. We’ve also enhanced our gift card business by expanding our popular gift card upsell promotion which guests with a qualifying transaction can purchase a $10 or GBP10 card for half off. This has contributed to our improved results across geographies.

We began this year with a fresher inventory position versus last year we had significant carry-over of holiday inventory. The combined impact of the marketing and quality of inventory allowed us to reduce promotional activity throughout the quarter. The promotions and discounts that we did use including the gift card upsell that I just mentioned was strategically focused on driving traffic and more than offset a strong McDonalds Happy Meal promotion that we ran in 2012. In fact, in the quarter, transactions grew 7.9% on a consolidated comparable per sale basis.

As a reminder, we have the next Happy Meal promotion later this year in our fourth quarter. In addition to emphasizing our brand, our marketing highlights key products to keep kids requesting visits to our stores. So far this year, we have had a good balance of licensed and proprietary products, something we continue to focus on in our merchandising. For example, our proprietary Valentine’s Day pop and floral bunny for Easter sold well as did the iconic My Little Pony launch that has fuelled our post-Easter sales.

Other notable and culturally relevant products include the Thin Mints Bear, the second in a series in partnership with the Girl Scouts of America. An added benefit of this partnership is strong party business with Girl Scout troops. We also had a limited-edition autism bear that had a charitable tie-in with autism organization which has resonated well, particularly with moms.

Let me update you on other significant activity towards our long-term objectives. First, we are in the process of opening stores in our new design. The six stores already opened in our new format continued to generate significant sales increases of 25% on average in the quarter. We remain on track to open approximately 25 more stores in the design by the end of this year.

Next, strategically-closed stores to improve overall productivity and profitability. We closed 18 stores and transferred over 20% of the sales to other locations in the same markets as planned. We expect to close 35 to 40 stores in total in this fiscal year.

On the international front, we are focused on improving sales and profitability in our UK operations and expanding high potential franchisees. In the UK, our results this quarter reflect the ongoing changes that we’ve been making in our product and marketing strategy. While we are pleased with the rebound we’ve seen in our business, which is up 7.9% year-to-date through April, we are still cautious of the overall economic environment in Europe.

As I noted, our primary focus with international expansion is to grow high potential franchisees. We continue to expect our franchisees to open eight to twelve stores in 2013. Finally, we are focused on improving cost efficiencies. Our bottom line results showed significant improvement, but we have more work to do. As it relates to product margins, we were successfully reducing promotional activity versus the first quarter last year. However, our merchandised margins were impacted by higher product costs. We have a new head merchant who has already made progress on sourcing and product costs. In addition, we are adjusting our merchandise mix. The impact of these changes is expected in the back half of the year.

We maintained our stringent control of costs and expect to realize cost savings of approximately $5 million to $10 million in 2013, which includes expense reduction initiatives and savings from closed stores.

In total, I am very pleased with our progress this quarter and remain confident that our strategies will result in improved long-term sales productivity and profitability and drive increased shareholder value.

And now, I would like to turn the call over to Tina, to review our financial results in more detail.

Tina Klocke

Thanks Maxine, and good morning everyone. Our first quarter performance included higher total revenues with 24 fewer stores than a year ago. Strong comp store sales growth across geographies and an operating profit. Our strategies are taking hold and moving us toward our goal of increasing long-term shareholder value. The quarter’s results included incremental costs in SG&A related to management transition expense and store closings.

Adjusted for these costs, first quarter earnings rose significantly to $0.14 per diluted share from an adjusted loss of $0.03 per share last year. For the first quarter, total revenue was a $104 million, compared to $96 million last year, an increase of 8.5% excluding the impact of foreign exchange. Consolidated comparable store sales increased 10.4% driven by a 7.9% increase in transactions and a 2.5% increase in transaction value.

By geography, comparable store sales were 10.6% in North America and 9.7% in Europe, and will remain strong on a year-to-date basis. Our e-commerce business was up 7% excluding the impact of foreign exchange. Our retail gross margin was 41.5%, compared to 39.9% last year. The 160 basis point improvement was primarily driven by leverage and occupancy expense and decreased promotional activity partially offset by our higher product costs. SG&A was $44 million or 41.9% of revenues compared to $40 million or 41.6% last year.

The dollar increase was driven by several factors. First, they had incremental cost related to management transition of $1.8 million, and store closings of $600,000. Excluding these costs, SG&A, as a percent of revenue decreased to 39.6%. Second, SG&A increased as planned with the additional investment in our marketing initiatives. As expected, this investment has driven growth in our total retail and comp store sales.

A third factor was an increase in foreign currency transactional losses. The translation of foreign currency into U.S. dollars generally affect our sales more than profit, as sales and expenses are translated at the same rate. However, the substantial decline in exchange rate in the quarter brought approximately $400,000 in transactional currency losses related to foreign payable balances denominated in U.S. dollars. This compares to currency gains of just under $300,000 in the 2012 first quarter, a swing of $700,000.

Our balance sheet remains strong. We ended the quarter with consolidated cash of $41 million, compared to $34 million at the end of the first quarter last year. We have no debt and no borrowings on our credit facility. Capital expenditures in the first quarter were $4 million, primarily for store related capital and IT infrastructure, comparable to last year. Depreciation and amortization was $5 million, down slightly from last year.

For the full year, we expect capital expenditures to be approximately $20 million to $25 million, and depreciation and amortization to be in the range of $20 million to $22 million. As quarter ends, consolidated inventories totaled $38 million, compared to $47 million at the end of the first quarter 2012. Inventories per square foot declined 10%.

Now, let me update you on our progress towards our objectives for our stores. In terms of our real estate optimization plans, we have made significant progress on our store closure initiative. During the quarter, we closed 18 of the 35 to 40 stores planned for this year. We expect to close 20 to 25 more stores in 2014 to reach our optimal store count of 225 to 250 locations in North America. On an annualized basis in 2015, we expect a sales impact of $30 million to $35 million from the store closures.

And overall store profitability to improve by $4 million to $6 million, as we close stores and realize transfer sales to other locations. We are working to make a strong base of stores even more profitable. Our top 200 company-owned stores had an average 20% unit level contribution in 2012. By 2015, we’ll operate fewer stores but we expect our ongoing store base to be more productive and more profitable.

Our first quarter results are indicative of the impacts we expect our strategy to deliver overtime. On an adjusted basis, first quarter income rose significantly to $0.14 per diluted share from a $0.03 loss per share last year. Historically, as you are aware, the second quarter, is our smallest quarter of the year, and typically results in a loss. We remain confident that we are driving towards our long-term objectives of sustained profitability and increased shareholder value.

Now I would like to turn over the call back to Maxine for concluding remarks.

Maxine Clark

Let me warp up by saying that I'm pleased with the start to this 2013 fiscal year with growth in total net retail sales, comparable store sales, and profitability, during the beginning stage of our multiyear turnaround. And I am even more excited to see every single one of our strategic initiatives working, and driving towards our long-term sales and profit goal. We have a powerful global brand that kids love and mom’s trust, and we are in a strong financial position to execute our plans.

With that I’d like to turn the call over to the operator to take your questions.

Question and Answer Session


(Operator Instructions) Our first question is coming from James Fronda with Sidoti & Company. Please proceed with your question.

James Fronda - Sidoti & Company

Just in terms of sales, I guess, do you think the sales growth is more related to, I guess, product, or store design, or was it both?

Maxine Clark

We only have six stores in the new store design. So they aren’t making a significant impact on the total company yet, but product and also as we discussed when we sold so many gift cards, the kids have those in their pocket, and those came from the marketing. So we’ve enhanced the marketing which says to a kid, “Mom I want to go to Build-A-Bear”. Mom may buy them a gift card or bring them into Build-A-Bear. The gift card is something that burns a hole in the kids pocket, and so they have been spending them at a pretty high rate, which is great.

James Fronda - Sidoti & Company

I guess, you expect that to continue, right. You said that second quarter might continue into third and fourth quarter?

Maxine Clark

That's what we are hoping and working for. All of our plans are in place to make that happen.

James Fronda - Sidoti & Company

And, I guess, the autism related bear, is that significant in terms of the jump that you saw on sales of first quarter? And I guess that's still somewhat of a long-term growth, right, because that was just introduced this quarter?

Maxine Clark

The autism bear was for the month of April, because April is autism month. So, it was significant in the month of April, but it's not unusually significant in the quarter. We have very strong products all the way from Valentine’s Day through Easter. Each of those products was incredibly strong this year versus prior years in terms of sell through and full price retail impact. And then we had My Little Pony right after Easter, which started off the second quarter very positively.


The next question comes from the line of Jacob Ma-Weaver with Amici Capital. Please proceed with your question.

Jacob Ma-Weaver - Amici Capital

Hey good morning. Very impressive quarter. Just a quick question, wondered if you could give everyone an update on the management transition and what sort of qualities you are looking for in your successor?

Maxine Clark

The Board is continuing to focus on the process of finding a successor for my position here at Build-A-Bear, and everything is moving along as planned, and I think that they have identified the key characteristics that are successful, somebody with retail experience, somebody with a strong feeling for branding and children’s retail and toys and many other attributes as well. So, I think we are in a great position to attract a wonderful candidate for the future transition of the company.

Jacob Ma-Weaver - Amici Capital

You also mentioned, I believe it was $5 million to $10 million in cost savings you anticipate for this year. I am wondering if you could give us a bit more detail on where that will come? Is it just some store closures?

Tina Klocke

It's primarily going to be – it will be across the board, they’ll be may be 30% to 40% hopefully in the gross margin line and the rest in SG&A as store closures happen, and also as we continue our stringent cost initiatives that we do from a perspective of how we go do (RPs) and things for all of our services. So it will be, you know, 30, 70, 40, 60, merchandise margin and the remaining SG&A.


(Operator Instructions) The next question comes from the line of Thomas Filandro with Susquehanna Capital. Please proceed with your question.

Thomas Filandro - Susquehanna Capital

Could you guys just update us on averaging unit costing, what do you seeing in terms of labor, product costing, and how should we think about the initial markup for the balance of the year please?

Maxine Clark

So actually, I don’t think our costs have been climbing a little bit every year, but I think it now is having a real, looking at this much more globally and putting in a sourcing department which we didn’t have at Build-A-Bear, we were all sort of individually doing the sourcing, I think we are going to make strides in that because we are really using strategic buying around this.

It's not easy in the toy business, because not a lot of people want to make these products and also not a lot of people want to put all the quality technical aspects into the business that they may not have if they were a clothing factory per se. But so far, we’ve been getting – actually starting to get some really strong price decreases this year. It just won’t be impacting us until the second half of the year.

So, we are really collecting all that. We also had some price increases over the last several years that we really, because business was so difficult, we didn’t take mark-ups on products. We just said business was tough, and we were in such a promotional mode that we take the mark-up up and we then would use a promotion to mark it down.

Now that we have weaned ourselves off the promotional playground, we can establish stronger retails and maintain them rather than just going between mark-downs all the time. So, I think that our mark-ups will be back up to our traditional levels by the end of the year, if not sooner, and that we can then be on our steady street on our marketing. We have a significant merchandise margin because we design and make all of our own products, so it's always been strong, but it's petered backwards a little bit in the end of last year.

Thomas Filandro - Susquehanna Capital

Hey Maxine, or Tina, can you give us a bit of a, maybe quantify a little bit on the basis point differential from maybe peak to where you think you can achieve your gross or IMU?

Maxine Clark

I think we could probably get from a perspective of just merchandised margin, probably 50 to 100 basis points improvement towards the back half of the year. Does that help Tom?

Thomas Filandro - Susquehanna Capital

Yes, it does. Is there a longer-term opportunity to see several hundred or is that at a point where you are getting close to sort of historic peaks or any perspective on that would be helpful.

Tina Klocke

I think we are close to historic peaks, and I think we want to make sure that we -- doesn’t mean that there is an opportunity, because as you work with factories and you try to use other techniques in there to similar materials, just in different colors to make products that you can maximize margins a little bit more. But I think that we have always had very high merchandise mark-up and merchandise margins.

And so, we want to make sure that we are always giving the customer the value for the money, and not -- that’s one of those things that has been sensitive certainly during the recession. And it’s so sensitive that I think we are starting to see a little bit more room there. Over time, our average transaction has been between $35 and $37.

So, the higher every individual price goes up, we sell less units, but we still stay around the same $35 to $37. So, we are starting to see an opportunity here to creep back up and we are taking some mark-ups along with it. It's not just about getting cost decreases, which we are getting in fairly significant ones, but we also are working hard to make sure that the customer enjoys the experience at our store. You know, that's the bear, the clothes, the shoes, the accessories, the sound, and we want to make sure when they walk out, they are walking out with a great value for their money.

Thomas Filandro - Susquehanna Capital

Great. And just one follow up if I could, any update on the party business? How that's performed in the quarter either as a percent year-over-year or penetration versus a year ago?

Maxine Clark

The party penetration is reasonably stable but it has been really good this year. Our Girl Scouts Bear has aided that dramatically, and especially we started the Girl Scouts Bear in February. So we increased our parties, and are strongly in the first quarter and that's continuing, it may level off a little bit in the second quarter. Because last year we sort of pushed, we had the better receipts on the Girl Scouts Bear in the second quarter than the first quarter last year. So the parties were sort of forced in the second quarter, so we are a little bit cautious about second quarter parties. But first quarter has been very positive.

Thomas Filandro - Susquehanna Capital

Can you just tell us Tina what was the penetration say in 2012 on the party business?

Tina Klocke

I’m sorry, Tom, the 2012 party business?

Thomas Filandro - Susquehanna Capital

I'm just trying to get a benchmark on what the penetration of that business was overall. I think in the past, it's given that the volume as a percentage of the total in the past.

Tina Klocke

In all of our years, it's always been you know less than 10%.

Thomas Filandro - Susquehanna Capital

Thank you very much. Best of luck.


(Operator Instructions). One moment please, while we hold for any additional questions. It appears that there are no further questions at this time. I would like to turn the call back over to the management for any concluding remarks.

Maxine Clark

Thank you again for joining us and we look forward to speaking with you when we report our second quarter result in July. Have a great week.


Ladies and gentlemen this does conclude today’s teleconference.

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