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

Q2 2009 Earnings Call

July 30, 2009 9:00 am ET

Executives

Molly Salky – Director of Investor Relations

Maxine Clark –Chairman and Chief Executive Officer

Tina Klocke – Chief Operations and Financial Officer

John Haugh – President and Chief Marketing and Merchandising Officer

Analysts

Paul LeJuez – Credit Suisse

Gerrick Johnson – BMO Capital Market

Sean McGowan – Needham & Company

Thomas Filandro – Susquehanna Financial Group

Brad Leonard - BML Capital Management

Operator

Good day ladies and gentlemen and welcome to the Q2 2009 Build-A-Bear Workshop, Inc. earnings conference call. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Molly Salky, Director of Investor Relations.

Molly Salky

Thank you and good morning everyone and thanks for joining us. With me this morning are Maxine Clark, Chairman and Chief Executive Bear, Tina Klocke, Chief Operations and Financial Bear, and John Haugh, President and Chief Marketing and Merchandising Bear.

In a moment I’ll turn the call over to Maxine to provide her comments on the second quarter. 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. Members of the media who may be on our call today should contact us after this 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 questions during this one hour call. Feel free to re-queue if you 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 portion of our corporate website and a replay of both our call and webcast will be available later today.

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. 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 Clark

Thank you Molly and good morning everyone. Thank you for joining us to review our second quarter 2009 results. During the quarter we remained focused on maximizing cash flow by controlling costs and capital expenditures in this ongoing difficult environment for consumer spending.

At the same time we continue to invest in our brand and market position and to develop new differentiated and compelling assortment pricing and marketing strategies. The recession has created a new normal with consumers continuing to cut back on discretionary items and services.

While we cannot be the sole driver of traffic in the mall, we are aggressively focused on getting our share of the mall traffic that is there, maximizing our share of the customers’ wallet, and delivering a wow experience for our guests.

In the second quarter we saw some encouraging signs from our new programs and again noted that when mall traffic increases and occasions call for gifting, our business trends improve markedly. For example, the Easter holiday and associated school breaks improved our sales trends significantly in April.

Furthermore, our North American merchandise margin improved compared to first quarter 2009 as our assortment strategies took hold, helping us to get our exceptionally strong historic margin levels. We believe we have plans to improve sales trends when our new programs are fully in place in the third quarter and during holiday, and I’ll talk about those plans more in a moment.

Let me begin with a review of our strategies for maximizing cash flow. First, cost control. During the quarter we reduced our selling, general, and administrative costs by $4.7 million through our continuing cost control initiatives. Through the first half of the year, we reduced SG&A by $12.6 million. Given this progress we now expect to deliver approximately $18 million annualized pre-tax savings this year up from our previous estimate of $15 million.

Capital spending was $1.6 million in the quarter, down from $9 million last year. For the year we continue to plan capital spending at $9 million down from $23.2 million last year. In addition, we ended the quarter with a strong balance sheet, including $31 million in consolidated cash, almost double the prior year, no debt, and no use of the bank line of credit during the quarter.

As you’ve noted in the past, we know we cannot expense save our way to our goals. Therefore, we also remain intently focused on improving the sales trends in our business. With the addition of John Haugh to our team, and a very welcome addition for me I might add, we are doubling our efforts to quickly implement new strategies in our merchandise assortment and pricing as well as our marketing programs to increase transactions in store traffic.

Unlike traditional retailers, Build-A-Bear Workshop has used marketing programs to grow brand awareness and capture mall traffic in our stores. We are aggressively focused on making our marketing programs work harder for us and we have placed more emphasis on marketing promotions and traffic driving initiatives versus general brand building messaging.

We aim to make our promotions more meaningful by expanding the value, the length of the promotion, and the depth of the merchandise supporting the promotion; adjusting our product in promotion events and timing to better reflect new traffic patterns of consumers; making fewer trips to the mall that are more productive per visit; communicating a more targeted value and price message versus a predominantly priced message; and continuing to place emphasis on what has made our brand iconic - our mom and kids store experience that is unmatched in the mall, products that fit into many occasions each year, and adding more reasons to purchase by reminding guests of the lasting memories that come with a Build-A-Bear Workshop experience.

Let me describe our plans for improving the business through marketing and product initiatives. We’re excited to offer a back to school promotion that we believe offers our guests a clear and compelling value proposition. Guests can purchase any animal, any hanging outfit, and any pair of shoes for just $29.99. This progression of our value messaging is a strong statement and the initial consumer feedback has been very positive leading into this promotion.

We believe that offering a complete experience for $29.99 will show more consumers that Build-A-Bear Workshop is a very affordable experience and will be recognized as a compelling value by both new and returning guests. When the guest adds on one accessory, the average transaction moves ahead of our historical average transaction value.

This promotion will be supported by TV advertising, direct mail, and social media. We will also place significant emphasis on store signing and communications in both store front and at point of sale. The signage should translate into more impulse transactions as we draw the customer off the mall line and into our stores with stronger and more singular messaging.

We will follow our August promotion with a freestanding insert that will be included in newspapers across the country on August 30. With a US circulation of 55 million, the SSI provides an efficient tool for communicating to a large audience of new customers.

With nothing hotter for girls these days than the Jonas Brothers, we see this exclusive plush franchise as a big winner and a must-have product. The Jonas Brother Dog matches up with the release of the Hannah Montana Bear last year. Indicative of how our product and marketing efforts are better aligned, we will offer a sneak peek promotion for the launch by preferred customer invite to generate just as much, if not more excitement, this year. Unlike Hannah, Jonas has had less exposure as a commercial property, so we are very excited about the product exclusivity and the appeal.

October will feature our third partnership with McDonald’s. This Happy Meal promotion will feature collectible mini animals and a free gift offer to drive people to visit our stores. The bounce back time was very successful in 2007 and today we’ve added the value of Build-A-BearVille to make the promotion and guest engagement even more exciting.

The Happy Meal promotion will run from October 2 through October 22. Six mini Build-A-Bear Workshop animals will be included in Happy Meals in the nearly 15,000 United States and Canadian McDonald’s locations. All Happy Meals will also come with a unique code that provides guests with free virtual gifts on both Build-A-BearVille.com and in McWorld at HappyMeal.com. Ronald McDonald will make a guest appearance in Build-A-BearVille and our mascot Bearemy will make an appearance in McWorld.

Our goal is to broaden our exposure for both our real and virtual worlds and importantly drive transactions and traffic to our stores and Build-A-BearVille.com. To optimize the event, McDonald’s will run television and print advertising and we will have cross-promotions by our stores, website, and guest communications. The Happy Meal mini animals are purchased and paid for by McDonald’s so this partnership carries no incremental costs but lots of upside potential. As a reminder, our last McDonald’s promotion ran in August of 2007. We did not have a McDonald’s tie in in 2008.

Our product assortment ranges in price from $10 to $25 with our average animal price in the $16 range. Our new product flow is relevant, differentiated, and supported with marketing communications to our guests. New product introductions include a wizardly owl, a fashionable peace and hugs bear inspired by our love, hugs, peace movement, a wolf that plays nicely into current popular culture, and a Portuguese water dog made popular by the Presidential pooch.

We don’t typically talk about holidays this early. We are excited to announce the expansion of an entertainment property we started last year, our Holly and Hal Moose story book and webisodes. Lat holiday you will recall that we introduced our first ever storybook about plush characters Holly and Hal Moose that were sold in our stores. Their story was featured in webisodes in Build-A-BearVille. The webisodes have been expanded into a full length hour long movie that will air on ABC Family at least twice during the Thanksgiving holiday season.

Following the television premier, we will offer this full length movie on DVD in our stores as well as a story book and an encore return of Holly and Hal Moose plush, better than ever this holiday season. The store will expand with new plush characters, new clothing and accessories, and new webisodes, setting up our second holiday adventure.

Our debut on ABC Family is an extension of our initiatives in entertainment and is a meaningful way for us to broaden our brand exposure while strengthening our relationships with existing guests. In November and December we are prepared to maximize holiday with classics, both old and new. Our plans include teaming up Holly and Hal Moose with another holiday classic that will be sure to make our guests smile. Stay tuned for that announcement at a later date.

Let’s move to a quick update on Build-A-BearVille which continues to be the platform for our entertainment offerings and key guest engagement tool. Usage and awareness of our popular site is steady and growing, now with 10.6 million online characters created and between 1.5 million and 2 million unique monthly visitors to the site. Build-A-BearVille is a meaningful tool for communicating with our guests, engaging guests on a continuous and frequent basis, and driving store traffic. 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.

Build-A-BearVille impacts revenue both directly and indirectly. We know from our guest survey work that now 13% of guests are highly influenced to visit a store or make a purchase online because of Build-A-BearVille, up from 10% last quarter. Direct sales of Build-A-BearVille game cards and credit subscription cards, while modest at this time, are growing and provide these loyal and highly engaged guests with an even better experience.

During the month of July our in-store communications and signage was all about Build-A-BearVille. We created immediate value for the consumer with a free 3-D map and scavenger hunt game. The game and reintroduction of Camp Happy Heart in the virtual world was a great success with over 400,000 kids attending camp during July in Bearville. This has to be the largest summer camp anywhere in the world. Kids have been thoroughly engaged and are eagerly awaiting the last day of camp and the announcement of the winning team, red or blue, and the awarding of very coveted prizes.

While we continue to monitor store payroll costs closely, we’ve been successful at maintaining and even improving our store experience. In the second quarter we increased our company wide guest satisfaction scores to over 82% for the first time in our history. That means that over 82% of our guests gave us a top box score.

Now I’ll turn the call over to Tina for her comments.

Tina Klocke

Thanks Maxine and good morning everyone. I will provide additional details related to our second quarter fiscal 2009 financial performance. Let me start with some general comments about the quarter. First, the second quarter is historically our lowest volume quarter due to the seasonality of our business trends. It’s the lowest volume quarter with or without the Easter holiday. This year the Easter holiday and associated school vacations fell into the second quarter which improved our sales trend compared to the first quarter.

The strengthening of the US dollar versus the British pound continued in the 2009 second quarter. The impact of foreign currency exchange during the quarter was less significant than in the first quarter with the translation of foreign currency negatively impacting second quarter revenue by $3.8 million.

Retail sales declined 11.3% excluding the impact of foreign currency. The decline was primarily driven by the 17.5% decrease in North American comparable store sales. The comp decline was made up of both a decrease in transactions and a decrease in average transaction value. The transaction decline represents about 11% of the comp change and the drop in average transaction represents about 6%.

Partially offsetting the decline in consolidated retail sales were our sales from stores opened in the last 12 months and the positive comparable store sales in Europe of 8.2%. On a consolidated basis, our comp decline in the second quarter was 13.9%.

During the quarter, our European operations again delivered positive results compared to second quarter 2008 with retail sales up 18% excluding currency impact. Positive comparable store sales and further efforts to focus on cost control drove improvements.

Franchise fees declined 26% in the second quarter, reflecting a decrease in international franchise store sales resulting from the slowdown in global consumer spending. International franchisees opened 3 stores and closed 2 stores for a net increase of 1 store in the second quarter. We ended the quarter with 61 international franchise stores.

With the global consumer slowdown, several of our franchisees have re-evaluated new store expansion plans. The current outlook is for franchisees to open approximately 5 new stores this year which is the low end of our previous range of 5 to 10 stores. Our full year outlook for franchise revenue is currently approximately $3.7 million.

Licensing fees increased 20% to $485,000 in the 2009 second quarter and continue on pace for full year revenue of approximately $2.5 million. Gross profit margin in the second quarter was 32.9% compared to 36.4% last year. The decline of 350 basis points was predominantly due to the deleverage of occupancy costs in North America.

Occupancy costs including rent, utilities, and depreciation accounted for approximately 280 basis points of the quarter-over-quarter decline. The remaining 70 basis point decline relates to a reduction in merchandise margins driven primarily by the impact of currency on our European operations.

Our merchandise margin in Europe is negatively impacted by currency exchange as we purchase our inventory in US dollars. North American merchandise margin was modestly down versus last year and improved versus first quarter 2009. Again this quarter we realized [inaudible] leverage in Europe which partially offset the leverage decline in North America.

We also continue to work to improve our real estate position. While we have been successful in negotiating rent reductions with our landlords, we do not expect to realize significant cost savings in any one year as the savings are spread over the remaining lease term. In our case, based on our average store life, we’ll recognize the savings over the next 5.5 years.

Now moving to selling, general, and administrative expenses. Total SG&A declined 11% to $376.5 million versus $42.2 million in the 2008 second quarter. For the first six months of 2009, SG&A is down 14% or $12.6 million. In the 2009 second quarter compared to the year ago second quarter we realized significant dollar cost reductions in advertising, store supplies, and store payroll, along with central office expense reductions in salaries, outside services, and travel expenses.

SG&A expense dollars declined while the SG&A margin increased in the quarter by 100 basis points to 45.4% from 44.5%. This was primarily due to the deleverage of store salaries as revenues declined.

Friends 2 B Made concept store closing costs in the second quarter were $230,000 pre-tax or $0.01 per diluted share. This charge is predominantly for construction costs related to reformatting locations for return to the landlords. At the end of the quarter we had completed the closing of 5 of the 9 Friends 2 B Made locations. Closing costs have been slightly more favorable than originally estimated and we have lowered our outlook for additional charges. We now expect to record total costs of $1 million to $1.2 million in 2009, down from our previous expectation of $1.4 million to $1.8 million. Final conversions and closures will be complete in the third quarter.

We recorded a $533,000 non-cash pre-tax charge resulting from the allocation of losses related to our investment in Ride Makers. Ride Makers opened its first store in 2007 and has built a brand with a great experience and products that their guests love. Ride Makers is still a young company in the startup phase. So far they have learned that their core customer is men and boys, their model is a destination and entertainment based model.

The management of Ride Makers is engaged in a deep dive planning process to identify new opportunities based on a successful destination entertainment model such as locations at Branson Landing and Broadway at the Beach in Myrtle Beach and to expand the model into new wholesale product development. We expect continued non-cash losses through year end as the brand is repositioned and new opportunities begin to build scale. We could recognize Ride Maker operating losses up to the amount of our investment, including our receivables, unless additional equity investments are made by other investors. We have no further requirements or current plans to make additional cash investments in Ride Makers. As they reposition their brand, we feel good about the long term viability of this business.

Moving now to income taxes. Our current outlook is for an effective tax rate of approximately 43% for the full year 2009. This higher annual rate compared to 2008 is primarily attributable to the impact of permanent items and result in foreign operations measured against US operations.

Regarding cash flow and the balance sheet, we ended the quarter with consolidated cash of $30.7 million, up $15.1 million from the end of the second quarter 2008. Capital expenditures were $1.6 million in the second quarter, down $7.4 million compared to the second quarter 2008 primarily due to no new store openings this year. Depreciation and amortization was $7 million in the second quarter, down slightly from $7.2 million in the second quarter last year.

Full year capital spending remains planned at approximately $9 million compared to $23.2 million in 2008. We continue to estimate depreciation and amortization to be approximately $30 million for the year. At the end of the quarter, inventory per square foot declined 1%. This modest decline in inventory is due to an unusually low level of inventory in the 2008 second quarter. As we head into the third quarter, we’re comfortable with the composition and level of our inventory.

This concludes my remarks and I’ll turn the call back to Maxine.

Maxine Clark

Thank you, Tina. In closing I’d like to make a few final remarks. Our goals are simple: to improve the sales trends of our business by introducing more relevant products and promotions, to maximize cash flows through cost savings initiatives and reductions in capital spending, and to grow our entertainment value and guest engagement through Build-A-BearVille.com, and further extension of our initiatives in entertainment.

We are optimistic about plans for the second half of the year with our back to school promotion, the SSI, the Jonas product, and McDonald’s partnership. We have a very strong lineup. In particular, as I said in my earlier remarks, we believe the back to school promotion will resonate strongly with our guests. At a time when families are having to say no to kids when it comes to a discretionary purchase, we are making it easier than ever to say yes. The promotion also positions our products and experience at under $30 which we see as an important and lasting message to both our new and returning guests.

This concludes our remarks. Let me turn it back to Molly.

Molly Salky

Thanks, Maxine. We’re now ready to open the call up for questions. Maxine, Tina, and John are available to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul LeJuez – Credit Suisse.

Paul LeJuez – Credit Suisse

SG&A dollars were up in the second quarter sequentially. Usually there’s a decline. I’m just trying to understand what might be going on there on the SG&A line and I guess related to that perhaps is marketing spend, just wondering what you have planned for the second half in dollars versus last year.

Maxine Clark

So you’re looking at first quarter over second quarter?

Paul LeJuez – Credit Suisse

Yes. Typically dollars go down in the second quarter for you guys on your SG&A line. They went up modestly but still up, so just wondering if there was anything one time, anything that got pulled forward into the second quarter, maybe related to marketing that’s going on for the second half.

Maxine Clark

Not in particular. Our marketing expense was in line with the programs that we had put in place for the second quarter and I think as we look at it, we now believe that our full year impact to SG&A would be $18 million savings.

Paul LeJuez – Credit Suisse

How about on the marketing side in the second half, marketing dollars versus prior year?

John Haugh

Marketing dollars, we as a part of the overall SG&A savings, we took a good chunk out of marketing. We have distributed that pretty much between first and second half so we spent what we thought smartly in the first half during key promotions like Easter and some Valentine’s Day and as Maxine mentioned, the Mother’s Day events and the [tall] events. In the second half we will have our spending commensurate to last year, down by the same percent year-over-year as we had in the first half, but we will spend aggressively behind our August promotion that we talked about, more modestly in September and October and then we’ll put a lot of energy against November and December, but again it will be ratcheted down by the overall adjustment that we made to ‘09/

Maxine Clark

I think in the very beginning of the year we did say that we thought we would be able to decrease our marketing expense by about $8 million and we’re on target for that on a full year basis.

Operator

Your next question comes from Gerrick Johnson – BMO Capital Market.

Gerrick Johnson – BMO Capital Market

I was hoping you could talk about your mix of sales, skins versus accessories and then further with just skins. How are the sales trends there, more towards your $10 to $12 bears and how are sales to the $18 to $22 bears?

Maxine Clark

The customer is still very price sensitive and so over last year we’re selling more in the lower price point then we had last year but that is coming down significantly as we get further into the year and the customer gets, I think, a little bit more use to the environment. But our mix of animals and accessories is very normal, total animals, total accessories, very normal to its past trends. When I count accessories we put animals and then any other things, clothes and accessories. So people are being careful about what they spend. Our units per transaction are down a little bit and what they’re spending overall is less like starting with the base of the bear but still the balance of our business and as you know our margins are fairly comparable between animals and all other products. We don’t inflate one to give away the other.

Operator

Your next question comes from Sean McGowan – Needham & Company.

Sean McGowan – Needham & Company

First, any comment on trends during the quarter from month to month or geographically that might point to what we can expect in the near term?

Maxine Clark

I think that things are… the west coast is tougher than anywhere else. I think that’s fairly consistent for a lot of people. Our business overall is fairly equal. The middle of the country is trending slightly better. Easter was in this quarter for us. Remember we’re on a calendar quarter, not on a retail typical fiscal quarter, so we did see an improvement in April as we said because of the Easter traffic and the spring breaks. That really benefits us because we get some of the spring breaks in March then we get Easter and some more spring breaks in April, so that’s very good.

So when the customer is out there, our business has been much stronger and we get better trends for particular purposes, very specific purposes, when people are out looking for gifts for Mother’s Day or graduation or those things. We can see some upticks in the business but we feel very positive about some of the things that we’ve put in place that we’ve learned, particularly about pricing with our customer and what they’re sensitive to and what they want and we’ve talked to a lot of customers and we feel very positive about the promotion that just started yesterday that we spoke about, our $29.99, our wardrobe event, a great opportunity for our customers to have significant savings and have the full experience at a price, and position the price in their minds as something they can afford.

Operator

Your next question comes from Thomas Filandro – Susquehanna Financial Group.

Thomas Filandro – Susquehanna Financial Group

The question is really related to this $29.99 event, Maxine. Just a little better understanding of how you came up with that price. Did you guys test it, and if I’m reading this correctly, that means all skins, so I’m kind of trying to figure out how does that fit into your margin structure? Did you buy differently for this event or is it just simply an event to derive shopper conversion? Then I have a follow up question please.

Maxine Clark

I know you asked me but I’m going to let John… we worked on this really together so I’m going to let him answer that question, then any other parts of it I’ll jump in for you.

John Haugh

As you guys know, our average transaction runs in kind of the low $30s. When our customers come in the door, generally what is purchased is what the kid wants, so even though our animals run $10 to $25, when we have taken this out and we tested this a little bit before we launched it obviously, we didn’t actually see everyone saying, “Give me the maximum savings.” Instead we found that basically the customer bought what they were going to buy anyhow so interestingly, the savings or the markdowns I should say are not going to be as high as they could be.

In fact we had a lot of debate around do you exclude certain price points, do you exclude like our licensed apparel, maybe the NFL uniforms or some of our Disney stuff because they’re $14 items versus our $12 and again the customer buys what they want to buy so the markdowns are in line with what we expected. The customer really likes the promotion because it’s straightforward. They get it. They get to walk out with a completed animal at $29.99 which is very important to them and it’s good for the mom and the kid, and the other thing with respect to how we came up with the number, starting with the number 2 is a big deal.

We had talked to consumers and we know that you can walk out of Build-A-Bear for a great experience in the low $30s. Customers still think you’re going to walk out spending $40, $50 and last year when we pushed $10 and $12, it was the right move at the time but when we stepped back, we said, “What’s really important is to put a promotion that has the whole experience and if we can start that promotion with the number 2, it’s a big deal” and the customers responded. As Maxine said, we put it into a store just to make sure it worked. We actually kind of seated it out there yesterday and we’re getting pretty good response so far.

Maxine Clark

One thing when John said they buy what they want to buy, one of the good things was we saw, people came in to buy a bear but when they could buy an outfit, we put it in a market where the customer average transaction was on our low side average customer, very normal, nothing fancy. When customers normally will come in there, they are price conscious, they will buy a bear or an outfit, and they were able to move the customer from just buying a single animal to buying the outfit and the shoes with it because it was such a good value.

On the other side, when somebody came in just to buy the outfit, they were able to move them to an animal because it was such a good value, and the store particularly changed its mix of what it was selling. Also we saw in the stores they were able to upgrade parties so that was a really good thing because they’re already in your store coming in anyway. They might have told you the $10 to $15 on an animal or maybe even $20 and they decide to upgrade because it’s really a great savings.

So in the past, you know Build-A-Bear pretty well, we offer a $5 off coupon usually in every mailer so you can get it off of a transaction and technically I think where this is going to land is similar to that, so it’s going to be on more transactions but it will hopefully be driving more sales volume with it. I think it will. All indications are that it will. It’s sort of like when retailers started doing the buy one get one 50% off. The customer perceived it to be a gigantic savings, like a 50% off savings, but it ultimately was only a 25% savings to the customer.

But it really did trigger a lot of interest and value in the messaging. Ours isn’t quite that drastic. We certainly don’t want to go there. But it’s very close to our regular transaction and when a customer adds on one item, just a pair of glasses at $4 or a handbag at $5, it’s going to be at or above our average transaction, certainly the average transaction we’ve been getting in the last few months, but even our traditional higher transaction and that’s a real positive and something we’ve already seen in the tests.

Operator

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

Brad Leonard - BML Capital Management

So on the $29.99 promo, do you expect it to hurt merchandise margins in the second half of this year or Q3 versus last year, and what do you expect for fourth quarter merchandise margins?

Maxine Clark

I think our margins will be the same. I think if the test holds true, which we expect that it will, and we’re not planning beyond this particular promotion. We’ll evaluate it and see how it goes and if it should be expanded into the fourth quarter. It should be a similar impact to a coupon that we offer to a customer. The perception is of greater value but the end result is about the same markdown as a coupon would provide.

Operator

Your next question comes from Sean McGowan – Needham & Company.

Sean McGowan – Needham & Company

Regarding these initiatives, I think I heard you say Maxine that part of the marketing program here is to expand the value and extend the marketing program. Can you square that with the desire to cut costs? What are the implications of expanding the value and extending the program?

Maxine Clark

The first implication is that it will hopefully drive more traffic which, when they’re in our store, we can convert them because we want to bring more customers in. So the longer promotion, when we extend the promotion from what might have been a weekend to two weekends, it provides the customer an opportunity to come in more than once. If they miss that, they can come in the next weekend. August is still a vacation month but we aren’t really extending anything in August.

Actually last August we had a coupon promotion on the front of the mailer that everybody got and then in the middle of August we had a backpack offer that was with a $15 purchase that was a weekend only. That is not running this month, and we don’t have the $5 coupon, so we’ve turned those dollars into behind the scenes with the value to the customer at the point of sale of the $29.099.

By the way, we didn’t tell you this, and maybe it’s just a minor thing, but when the customer gets the receipt, they will see their savings on there, and that was very well received by customers in our test as well, that they could see this. Again, further reinforcement of you can get a great experience at Build-A-Bear for about $30. So I don’t think that it should change anything except drive more traffic which should help us drive our expenses down. We’re not spending any more marketing dollars. We’ve said we’re actually spending $8 million less on an annual basis which was about the same in the back half as it was in the first half. We’re making it work harder for us.

The SSI that we’re running in September which will introduce a new product that we’re offering and also talk about value and has… Across the country while there’s two predominant offers, there’s a few other tests going on. We think that’s going to put us in front of customers who may not even have Build-A-Bear top of mind and have new young children, who are price sensitive, although ours is not just a price message, and I think it will be a good opportunity. We’ve never done it before, it’s very cost effective to reach a lot of customers, and that’s still within that same budge of marketing that we’ve been talking about so again if we see this promotion really does change the game at all, we will invest appropriately in how we want to do it in the fourth quarter.

But we’re very fluid, our fourth quarter plans are still open in many ways. We’ve kept them that way on purpose so we can learn from the things that we’re doing on back to school and make the good things repeat and correct any issues that maybe didn’t turn out they we wanted it to.

Operator

Your next question comes from Thomas Filandro – Susquehanna Financial Group.

Thomas Filandro – Susquehanna Financial Group

A follow up, Maxine. It’s pretty clear that I think you guys agree that you don’t necessarily drive traffic with some television advertising, it’s a brand awareness kind of thing, and everybody knows Build-A-Bear and what you guys do for a living. Is it conceivable down the road that television advertising becomes less of a piece of your whole marketing and I’m going to ask my other two pieces of this because the operator is aggressive on cutting people off. Will this promotion be highlighted in a commercial, and then my final comment is just looking at the website for what it’s worth, I think the landing page should be much more aggressively highlighting this deal.

Maxine Clark

We are using television for this promotion and we do believe that television is a strong driver of awareness of events as well as awareness of the brand, and so the balance is probably shifting a little bit away from brand and I’ll have John kind of give you how we’re sort of breaking it up a little bit differently than we used to do. We have cut it down dramatically and we are using Build-A-BearVille also as a way to reach our children guests subtly, but reach them with what’s going on at Build-A-Bear. The television commercials as you see for the first time on this particular promotion, they’re right there on the front page of the website and it is up there longer than normal and we can make it be up there longer than normal also but it’s getting an enormous amount of clicks already.

People are writing about it, people are blogging about it. Moms are aware of it. We have a whole mom blogging group that we seeded with this information and I think that the media marketplace is changing. There’s no doubt about it. We are changing with it. It makes it more complicated; it used to be easy. But back at Christmastime when we ran television to vocally tell customers about our $10 bears, it works. Television does work w hen you have a very specific message and I think this $29.99 message, if you look at that commercial, is very strong.

John, why don’t you talk about how we broke up the TV and how we’re looking at it as part of the mix.

John Haugh

The question is a fair one. What role does TV play today versus where would it go down the road? You’re correct that Build-A-Bear from an aided awareness is as high as it can be. Our opportunity is our consumers are thinking about us frequently enough for enough occasion so let’s use August as an example. It’s back to school. Mom’s worried about books and shoes and jeans and things like that. Does she need a bear? We actually believe she does. We actually believe that the best way to send a kid to their first day of kindergarten is with a bear. We believe one last great opportunity for mom and kid is to spend a couple hours together in a Build-A-Bear.

So the question becomes how do you get that across? Not do people know us, but how do you get that across? So if you look at your traditional mediums, you’ve got TV, you’ve got print, you’ve got direct, social media is obviously becoming bigger and bigger, and the final thing is malls. So our mall presence is frankly our biggest advertising weapon. So what we’re trying to do is look at the mix and determine when ins TV appropriate. It’s not appropriate all the time. When is direct, when is social media, which is getting bigger for us as it is for all others, and then also, how do we really maximize the malls?

So if any of you get a chance to walk through the malls in August and stop by one of our stores, you’re going to see very simple clean message that really talks about the value of this August promotion and that’ show we plan things through the course of the year. As we go through this [keedance] that Maxine outlined earlier, we want our store which is already vibrant and exciting, we want a clean, clear message that pulls customers off the lease line so we maximize whatever traffic is in the mall. So that’s how we’re looking at our overall media mix and as we refine it a little bit, TV will still play a role, as big as historical, we don’t know that yet, but that’s one of the things we’re looking at.

Operator

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

Brad Leonard - BML Capital Management

Maxine, the second half of my last question was not… Specifically I guess last year the merchandise margins I believe took a hit in the fourth quarter with the promo and the markdowns and whatever, but how do you look at fourth quarter merchandise margins this year as you have a plan now?

Maxine Clark

We’re looking at the merchandise margins coming up significantly based on the business as well as the fact that we’ve negotiated into the… we’ll have less items at $10 and $12 but the ones we will have, we’ve negotiated into the cost prices versus any that we added to the mix last year so we’ll be at a higher merchandise margin. We’re already starting to see that come back pretty quickly here.

Operator

This concludes the question and answer session of today’s conference call. I will now turn the call back over to Molly Salky.

Molly Salky

Great. Thank you Operator and thanks to everyone for your participation today. If you have any follow up questions from today’s presentation please give me a call or send me an email. Thanks and have a great day.

Operator

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

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Source: Build-A-Bear Workshop, Inc. Q2 2009 Earnings Call Transcript
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