Build-A-Bear Workshop, Inc. Q3 2009 (Qtr End 10/3/09) Earnings Call Transcript

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

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

Q3 2009 Earnings Call

October 29, 2009 9:00 am ET


Molly Salky – Managing 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


Analyst for Paul LeJuez – Credit Suisse

Michael Smith - [Density] Capital

Brad Leonard - BMO Capital Management

Thomas Filandro - SIG


Good day ladies and gentlemen and welcome to the third quarter of 2009, Build-A-Bear Workshop earnings conference call. My name Keisha and I will be your operator today. At this time all participants are in a listen-only mode. We will conduct a question and answer session a question and answer session towards end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Molly Salky, Managing Director of Investor Relations.

Molly Salky

Good morning everyone and thank you 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 will turn the call over to Maxine to provide her comments on the third quarter. Tina will follow with additional comments on our financial results. At the end of our remarks, we will 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 will get to everyone’s questions during this one hour call. Do 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 the replay of both the call and the webcast will be available later today on the IR site.

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

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

Maxine Clark

Thank you Molly. Good morning everyone and thank you for joining us to review our third quarter 2009 results. Although our third quarter performance continued to reflect the tough economy and reduced discretionary spending, we did see an improvement in our sales trend which is encouraging. The innovation we delivered in product marketing and our value initiatives resulted in both trend improvement in both comparable store sales and average transaction value. We are pleased to see a continuation of this trend improvement in October.

In the fourth quarter, we have additional plans in place to build on these initiatives in order to maximize the critical holiday season. We are comfortable with the level and composition of our inventory as we head into the fourth quarter. During the third quarter, we also achieved better than planned cost reductions. So far this year, we have realized $18 million in pre-tax cost savings and are now targeting approximately $20 million in full year savings. We also completed the renewal of our bank line of credit with our long-time business partner, US Bank.

Our line remains at $40 million with a $50 million seasonal overline and extends until December 2011. This agreement adds additional flexibility to our solid capital structure and puts our renewal process on a 2 year cycle. We remain confident in the strength of our balance sheet and positive cash flow outlook.

Now let me provide a quick review of our marketing and product strategies initiated in the quarter that contributed to our trend improvement. As we said last quarter, we are aggressively focused on making our marketing programs work harder for us. We have placed more emphasis on promotions and traffic driving initiatives versus general brand building messaging. We are focusing on marketing efforts to make it easy for moms to say yes, introduce new guests to our concepts, and to create a sense of urgency to new product introductions.

In the back to school season when Mom was focused on value and necessities, and that for most retailers was relatively weak, we successfully improved our sales trend by communicating a clear and focused promotional message featuring our first ever bundle that included any animal, any outfit and any pair of shoes for $29.99. The promotion resulted in improvement in our sales trend and an increase in our overall average transaction value with more items in each transaction. Our store teams found the value and simplicity of the offer easy to communicate and consumer feedback was very positive.

Moms found the offer made the store easy to navigate and left her feeling like a hero as she said yes to a fully outfitted stuffed animal. Research indicates that for future use of this promotion will be popular with a high future of visited tent ratings from those aware of the promotion. The plan is to strategically repeat the promotion in the future with some tweaks. Primarily, now that we have guests understanding and awareness of the offer, we will have to offer communication to moms at the onset of the event and communicate more with kids to keep them asking to come to our store.

Another new tool used in the quarter was a freestanding insert or FSI, a Sunday newspaper insert distributed at the end of August to approximately 55 million households. As many of you know, we have a strong customer loyalty program and over 60% of our transactions are with a returning guest. Our challenge is getting that new guest to visit. Traditionally, our methods to reach new guests have been mall traffic and TV advertising. With mall traffic down and TV viewing more fragmented, we have broadened our outreach method.

The FSI proved to be a highly cost-effective way to encourage first time visitors. Of all the guests who took advantage of the FSI offers, about 40% were new guests. We will use a FSI again in November. A new experiential venture, with our Jonas Brothers sneak peek event in stores on November 24. For this event, we created a sense of urgency by hosting an RSVP party to give our best guests the chance to be the first to purchase the Jonas Brothers’ dog priced at $25 and to receive a special free sound for their dog. During the event, we set a new record selling more Jonas Brothers dogs in one night than any single animal in any single day in our history.

With the event, we successfully anniversaried the launch of the Hannah Montana bear last year and kick started our holiday season momentum engaging guests and store associates, heightening awareness buzz of this new licensed product and creating a sense of urgency and exclusivity for our products. Additional product highlights for the quarter included our owl and our Peace and Hugs bear, both exceptionally strong sellers. Based on the environment, we planned our inventory investment in these products conservatively. For holiday, we believe that we have appropriately increased our investment in new animal introductions which will give us greater ability to maximize our new featured product during the fourth quarter.

This month, we are featured as the Happy Meal toy for girls at McDonalds. This marks our third Happy Meal partnership, a strong testament to the strength of our brand. The Happy Meal program enables us to reach a broad demographic, helps drive store visits and engagement in our virtual world. Our Happy Meal offer includes both a free gift from our store and virtual world gift. Since the program began, about 45% of guests redeeming virtual gifts are new Build-A-Bear citizens. These new citizens will interact with our brand and learn about new products and events going forward.

Now to the all important holiday season. As we look to holiday, we believe our stores’ product and promotional strategies will be even more compelling and offer a substantial opportunity to convert store traffic and purchases. Simply said, to win in the fourth quarter, we need to drive transactions and average transaction value. We have several key initiatives across all of our channels, in store, online and through our virtual world to maximize both.

On Sunday, November 1st, our stores will undergo a transformational change to become Santa’s workshop, taking on a new look, new winter activity, new product displays, new store signage that reads Santa’s workshop. Santa’s elves will take over the store and our TV advertising spots and provide a new interactive experience in the store. Using an elf access card and a new interactive technology, guests can reveal secret messages from the elves around our store and become honorary elves themselves.

Transaction driving tools will include another FSI placement in November plus couponing and bounce back offers to our guests throughout the season. Our holiday mailer will be in homes next week and have multiple offers to use during November and December. On November 24, we will debut our first ever TV special, Holly and Hal Moose, our uplifting Christmas adventure on ABC Family. This hour long original holiday classic is based on the book that we introduced last year and the webisodes featured in Build-A-Bearville. The broad reach of ABC Family which is available in 98 million homes will help build traffic for Holly and Hal Moose, their new outfits and the new movie DVD, all available in our stores this year.

Also in support of our holiday plans, we are using media outreach and guest communications which includes national kids and moms television. Our TV spots are humorous and send a message that Build-A-Bear Workshop is fun and the place for the best gifts. This is in contrast to last year’s holiday messaging which focused on our animals starting at $10. You can view our holiday TV spot starting Monday at

The second part of the win equation for holiday is average transaction value or HPG. We are supporting HPG with the best front product lineup in years. A lineup that puts us back on our sweet spot in terms of product and price mix with our animal product news in the mid to upper price points versus last year where the mix was more weighted to the mid to lower price range.

The lineup includes Holly and Hal Moose, our polar bear and all new Frosty the Snowman, Alvin, the Chipmunk, and a special collection addition of Hello Kitty will be celebrating her 35th anniversary with special apparel and accessories too. Alvin The Chipmunk will launch December 11 to take advantage of his pre-movie hype and theatre debut on Christmas Day.

This holiday will also bring the highly requested launch of Star Wars clothing for bears and the launch of Princess Tiana to coincide with the Disney movie, the Princess and the Frog which opens December 11. The cadence of product intros are paced throughout the quarter providing continued newness and reasons to come back to our stores. We believe that we have the opportunity to generate increased transactions and HPG in the fourth quarter based on the strength of our product and our marketing.

Build-A-Bear Workshop has always been the headquarters for plush gifts and this year, we are taking a strong approach to focus on the gifting experience in our stores and online especially for last minute shoppers who are short on time. In many stores, we will offer an array of pre-made and prepackaged gift animals, gifts on the go, priced in a wide range of good, better, best price points of $15 to $35 plus. Also we'll add a new fixture we call Build A Gift which includes an assortment of prestuffed animals and a variety of easy add-on clothing and accessory options all in one place for easy gift giving selection.

Our gift card allows guests to give the gift of experience and are an important part of our holiday business. The majority of our gift cards are redeemed in store post holiday with a total purchase well above the gift card amount.

This year our plan includes a 20% expansion of our gift cards through additional third party outlets in the United States as well as our first third party offerings in Canada and the UK. These access points strengthen our accessibility and support our efforts to appeal to new guests. Gift card sales also provide strong support to our first quarter results.

Now let me switch gears to our online channel. Build-A-Bearville continues as an integral part of our brand experience and now has over 12 million characters created. Our goal is to engage customers in our total brand experience in store, online and through our virtual world and we are seeing success.

Build-A-Bearville is gaining in popularity and our monetization strategies are working. We are very encouraged with a conversion rate of over 30%, meaning over 30% of our target age visitors who make a purchase in our stores are registering their animals in Build-A-Bearville.

When you look even closer at just girls eight to 12, a very large guest segment, we are over a 40% conversion rate. This engagement with our brand, the store-to-site synergy and site-to-store synergy are important benefits we get from having a presence in both the real and virtual worlds.

We plan to drive incremental gifting traffic to our e-commerce Web site with increased online advertising that kicks off this quarter utilizing banner ads and social media tools to more fully communicate how our product can be personalized and the variety of gift giving options we can fulfill with a broad spectrum of price points.

Another plus this year, we now have the capability to be present on other e-commerce sites to drive new traffic to our brand. We will launch our first third party Build-A-Bear workshop storefront on in early November.

I'll end my remarks with comments on our real estate. We're making good progress on lease negotiations, renewals and kick-outs. Our landlords are important partners. They've made significant investors in the company over the years. We're pleased with our progress and have negotiated significant savings this year and over the remaining life of our leases and continue to be aggressively focused on driving down our occupancy costs.

Importantly, we're continuing to evolve and improve upon our successful store concepts and business model. This year we spent much time on innovation of our store design in a disciplined process to create our store of the future. We expect our new design, Project Build-A-Bear Universe to debut next year and feature new technologies, enhanced product display and a more interactive store environment. We'll update you on the store in our future calls.

In summary, we continue to develop our brand position as a fun, happy adventure for kids and a yes experience for moms. Growing the top line and controlling costs are our priorities. In the fourth quarter we'll continue to manage to our dual goals of maximizing cash flow while capitalizing on all the holiday season has to offer with excitement in store, product and value initiatives.

We remain confident that our strategies position our company for improved long-term profitability and growth. And now I'll turn the call over to Tina for her comments.

Tina Klocke

Thanks, Maxine, and good morning, everyone. I will provide some additional details related to our third quarter financial performance. Let me start with our recently renewed bank line of credit which essentially replicates our existing line with a few modest changes.

The agreement was extended for 26 months, expiring in December 2011. Our borrowing capacity remains at $40 million with a seasonal overlying increase of $50 million. Our borrowing interest rate increased modestly from LIBOR plus 130 basis points to LIBOR plus 205 basis points. While we, again, did not use the credit line in the third quarter we are pleased to have this renewal complete.

As we outlined in our earnings release today Ridemakers have undertaken a major restructuring of its operations. To date they have closed seven of nine mall-based stores and opened one new temporary store in downtown Disney in the Disneyland Resort in Anaheim, California.

These moves are consistent with their strategy to operate primarily in tourist venues and to develop products for sell to third party retail outlets. We recognized a non-cash, net-of-tax charge of $2.3 million resulting from the allocation of losses from Ridemakers. Our investment in the company now stands at approximately $4 million including receivables. Importantly, our lost allocation cannot exceed the extent of our investment.

With regard to foreign exchange, the strengthening of the US dollar versus the British pound continued in the third quarter although less significant than earlier in the year with the translation of foreign currency negatively impacting third quarter retail sales by $2.6 million.

Moving now to the income statement, net retail sales declined 15% excluding the impact of foreign currency. The decline was primarily driven by the 16% decrease in North American comparable stores sales. The comp decline was made up of both a decrease in transactions and a decrease in the average transaction volume.

While average transaction volume was down year over year, the average transaction trend improved in the quarter. The transaction decline represents about 13% of the comp change and the drop in average transaction value represents about 3%, partially offsetting the decline and the consolidated retail sales whereas sales from stores opened in the last 12 months and the positive comparable store sales in Europe of 2.5%.

On a consolidated basis our comp decline in the third quarter was 12.9%. During the quarter our European operations again delivered positive results compared to the third quarter 2008 with total retail sales up 7% excluding currency impacts and positive comparable store sales.

Franchise fees declined modestly in the third quarter reflecting the general slowdown in global consumer spending. International franchisees opened two stores and closed two stores in the third quarter. We ended the quarter with 61 international franchise stores.

Joining our franchisee family this quarter is Mexico where we expect to open our first store in Mexico City in mid 2010. Our full year outlook for franchise revenues is now approximately $3 million. As store openings have slowed and global economic conditions as worsened, our revenue outlook for the year has declined somewhat.

We are encouraged by recent new store openings in Germany and Dubai that were exceptionally strong. Pacing our growth to make sure that we select the right real estate location for franchise stores remains a key objective.

Licensing fees increased to $1.1 million in 2009 third quarter driven by an increase in revenues through our partnership with Landry's restaurants and our third part licensing arrangements and they continue on pace for a full year revenue of approximately $2.3 million.

Gross profit margin in the third quarter was 36.5% compared to 40% 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 300 basis points of the quarter-over-quarter decline.

The remaining 50 basis points decline relates to reduction in merchandise margins driven primarily by decline in North American merchandise margin. Promotional initiatives in the quarter resulted in a product mix shift and a slightly lower margin. Again, this quarter we realized improved occupancy leverage in Europe which partially offset the deleverage in North America.

As we said earlier, our full year estimate for pre-tax cost savings is now $20 million with the majority or about $18 million coming from SG&A cost savings and the balance of fuel cost savings recognized in cost of goods sold. With SG&A we've realized better-than-expected cost savings as we have taken a concerted effort to go after any and all cost reduction opportunities.

Total SG&A declined 10% to $39.3 million versus $43.5 million in the 2008 third quarter. We realized significant dollar cost reductions in marketing and store payroll along with central office expense reductions in salary, outside services and travel expenses.

Year to date SG&A is down 13% or $17 million. SG&A expense dollars declined while SG&A margin in the quarter increased 220 basis points to 42.8%. This was primarily due to the deleverage of store salaries as revenues declined.

We completed the Friends to be Made concept store closings and recorded a charge of $250,000 pre-tax or $0.01 per diluted share. Ultimately closing costs were slightly more favorable than originally estimated and capital expenditures related to the concept closure were slightly lower.

Now moving to income taxes, our current outlook is for an effective tax rate of approximately 46% for the full year 2009. The higher annual rate compared to 2008 is primarily attributable to the impact of permanent items and results in foreign operations measured against US operations.

Regarding cash flow and the balance sheet, we ended the quarter with consolidated cash of $27 million, flat compared to cash at the third quarter 2008. Capital expenditures were $2.9 million in the third quarter, down $2.7 million compared to the third quarter 2008 primarily due to fewer new store openings this year. Depreciation and amortization was $7 million in the quarter, down slightly from $7.4 million in the third quarter 2008.

Full year capital spending is now planned at about $8 million versus our previous estimate of $9 million and compared to $23.2 million in 2008. We estimate depreciation amortization to be approximately $28 million for the year.

At the end of the quarter, inventory per square foot increased approximately 1%. This modest increase in inventory reflects the timing of inventory received and the typical seasonal build in inventory as we prepare for the holiday selling season.

On a two-year basis, our inventory per square foot is down about 18%. We are comfortable with the composition and the level of our inventory. For those of you working on your models, just a reminder that the 2008 fourth quarter included 14 weeks versus 13 weeks.

This concludes my remarks. Now I'll turn the call back to Molly.

Molly Salky

Thanks, Tina. We are now ready to open the call up for questions. Maxine, Tina and John are available to answer your questions. Operator, can we now begin the question-and-answer session?

Question-and-Answer Session


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

Analyst for Paul LeJuez - Credit Suisse

It's actually Tracy filling in for Paul. I had a question on that you mentioned that the fourth quarter sales trends are improving versus third quarter and was wondering if that was related to a specific promotion or initiative like maybe McDonalds? Or has traffic just generally gotten better?

And then was also wondering in Europe are you doing similar things to what you've done in the US in terms of the $29.99 promotion? Thanks.

Maxine Clark

We do believe that October, which starts our fourth quarter, did have a positive impact from the McDonalds promotion and that it's hard to tell whether overall traffic is improving. I think our merchandise mix is right and we are getting an improved HPG as our inventory balances out better in the mid to higher parts of our price points, the Jonas Brothers. End of September, it was the last weekend in September and also it's available now in October, so that also helps. So I think that's all positive.

We run similar marketing promotions in the UK to what we do in the United States but we did not run the $29.99. We do not run the McDonalds, that the McDonalds promotion and they don't necessarily run the same things in other parts of the world that they run in the United States. It's all different. So from time to time there are different offers, but generally speaking they're usually the same thing. This month it happens to be significantly different. Back to school and their back to school timing is slightly different than ours too but September and October promotions differ pretty dramatically.


Your next question comes from the line of Mike Smith - [Density] Capital.

Michael Smith - [Density] Capital

I was trying to write down fast but I wasn't good at that. Ridemakers, how much are you on the hook for with them and they're down to it sounds like three stores?

Tina Klocke

They're actually down to two stores that are tourist venues and three other stores that are continuing to operate in mall venues. Our net investment after the third quarter write-off was about $4 million which is inclusive of the receivables. And we did open a temporary store in Disney Land in Anaheim, California.


(Operator Instructions) Your next question comes from the line of Brad Leonard - BMO Capital Management.

Brad Leonard - BMO Capital Management

Maxine, in your prepared remarks on the press release it says steady improvement in our comparable trends throughout the third quarter. Do we see improvement sequentially month to month there and then also into October?

Maxine Clark


Brad Leonard - BMO Capital Management

Can we quantify that a little bit?

Maxine Clark

We don't give out a sales by month and also in the case of October we still have Halloween, which falls on Saturday this year, too. We're not sure exactly how much that will impact but we believe that our marketing promotions and the content of our inventory is - and the October event from McDonalds has helped our business trends pretty positively. That doesn't mean that the sales are positive but they're much less negative than they have been.


Thank you and please stand by for further questions. And we have a follow-up from the line of Brad Leonard.

Brad Leonard - BMO Capital Management

Maxine, lastly, on the SG&A here, it looks like we've already saved $17 million, so guidance for the year would be $18 million plus the $2 million that's coming out of, wherever, the gross margins, which seems like kind of a conservative estimate considering the fourth quarter's got one less week, which should at least get you that $1 million in savings. Is there something I'm missing on that or are we just being conservative?

Molly Salky

Tina, why don't you grab that?

Tina Klocke

Again, one of the things that in the fourth quarter, again, it's our biggest quarter of the year and we'll be using some of our marketing dollars that we may have saved from the prior quarters into that, which as you recall when we talked about this at the beginning of the year we said at least $8 million of the original $15 million was going to come from our marketing. So there is a bit of some timing in the fourth quarter.


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

Tom Filandro - SIG

Can you guys tell us and help us understand this skin mix in terms of pricing for the fourth quarter versus last year? How should we think about the average unit cost, what's been occurring in the business for you and how do we think about IMU? And then I have a follow-up question.

John Haugh

What we are doing, as I think you know, last year we, in response to kind of unprecedented economic conditions we put a lot of energy at a $10 and $12 price point. And that drove our average skin down. And we track, if an item goes out at $12 a skin, also how much apparel and shoes and total transaction that is and it goes out at $16 and it goes out at $20, so our goal is to get back into our sweet spot of $16, $17, $18.

Our historical average has been in about the $16-ish range. So this year we plan, not to get all the way back to a 2008 level, excuse me, to a 2007 level, but we do plan to be better than 2008. So we're trying to work our way back to our high water mark. So our average skin price we are targeting to go up in Q4.

Now none of us know yet what the promotional environment will be like. We might have to do some things to be competitive out there in the marketplace but at least as we're planning right now we think we will move our skin price up which will then move the entire average transaction up as well.

Tom Filandro - SIG

John, to be clear, so you have an opportunity to move the average skin price in the fourth quarter over time about more than 30%, is that what I’m hearing?

John Haugh

I don't think we would quantify the 30%. I think what we're trying to look at is look at some of our high water marks and figure out where we have been. 30% I think would be considerably high.

We have been again in the - maybe I was confusing, sorry. We've been in roughly the $16 price range. That's where we like to be. Last year there was a lot of emphasis at $10 and $12. That doesn't mean our average skin came all the way down to $10 or $12. Last year it came down but it didn't come down that far. So we are trying to get closer back to our average and we think that's where we'll be this Q4. So it is an improvement but it's not a 30% improvement.


Your next question is a follow-up from the line of Paul LeJuez - Credit Suisse.

Analyst for Paul LeJuez - Credit Suisse

I was wondering if you guys could tell us your initial thoughts on CapEx and store growth for next year.

Maxine Clark

We're really finalizing those plans, haven't put too much yet behind them. We're really waiting to see on the holiday season how some of the things we're doing happen. And then as I mentioned we are working on our new store prototype. And we are going to test that out in a couple of locations but also may send some of our money to retrofit and adapt some of those learnings to our existing stores. That's our goal. But we haven't quantified that yet. We'll keep you updated as that becomes clearer.


And your final question is a follow-up from the line of Tom Filandro - SIG.

Tom Filandro - SIG

Hey, John, I wanted to come back the IMU question. You gave us sort of the front piece of that in terms of what you are thinking in terms of the AUR, how are you positioned from a cost-stages with average unit cost so how should we think about eyeing you in the first quarter and into 2010, then I do have a follow-up question for Maxine.

John Haugh

From an IMU or a R-margin, we are working to improve that. Obviously, when we had to take pricing action last year, items were purchased and pricing was set so as we have been able to plan for Q4 for 2009 as well as rolling into 2010, we are more forward looking and will work to get back to our traditional gross margin levels at an IMU level. Obviously, we need to ultimately drive store business to get our overall gross margin up and to get our leverage back. But from an IMU standpoint, we are also looking to get back to historic levels. We will make some progress this Q4 and it is a target for us to continue to improve going into 2010.

Tom Filandro - SIG

Okay. If you could Maxine, could you give us an understanding of the thought process behind the holiday launches this year in terms of historically or at least the last few years, you have come up with a new, or at least I call it, holiday-centric skin which was different from the prior year and then we did bring back Rudolph at one time. This year, it is something that you had in the past, Holly and Hal and also, I think you said, Frosty the Snowman which you had in the past. Can you just give us a thought process around the merchandising for the holiday season please.

Maxine Clark

Last time we had Frosty the Snowman was in 2005. We have a considerable amount of new guests that were not even born in 2005, so a new wave of customers that this will be new for. It is also different than the one, even though it is a snowman and it is Frosty, it has some new technology that is improving it. But most of that we expect will come from new customers who weren’t even in our customer database at that time. That is exactly what happened with Rudolph when we brought him back. He was in 2004 and we had him in 2007, so that was even closer together.

Holly and Hal are in our inventory with a new addition, their little friend Hal and their new clothes and that comes for the fact that the movie is going to be on ABC Family on the 24th of November and also again in the morning on the Saturday after Christmas and we believe very strongly in all of the promotion that is going on after, I am sorry, the Saturday after Thanksgiving. We believe in all of the promotion that is going with that, with ABC Family and with ourselves and we have gotten quite a bit of press about that already. It is one of the cutest movies, we are a little biased, of course. But, it really turned out great.

I think it will be very positive and last year, no one even knew who Hal and Holly were so with this addition, again, we don’t have as many of those as we did last year that bought it with good reason, but again, we can track that specifically in our database and we are very excited about Alvin and the Chipmunks. It is a very cute movie. It comes out on Christmas Day. I am positive that there are other products from other licensees, but he is really cute and he is fun and cute and has a Christmas feeling to him just in general, but the movie isn’t about Christmas, but we are really excited about him and think that will be successful.

We also have Hello Kitty, a 35th anniversary edition, a special limited edition, very special, and very limited. We think that will be an exciting addition to our assortment along with a special outfit that is tied in even with something that is available in the market place for girls themselves. It is a quite beautiful outfit. There are things like that, we feel really strongly about the Star Wars collection, as I mentioned and we also feel strongly about the new Disney movie, Princess and the Frog which comes out in December and we are always very successful with the Disney princesses so a new princess and a new romantic story has been long awaited as there hasn’t been one in a while.

So, we feel that we represent all of the really popular things that are in the culture as well as the traditional classic things that come out and have been around for a long time and have been successful for us, even when we have repeated them.


And we do have a question from the line of Brad Leonard, with BMO Capital Management. Go ahead.

Brad Leonard - BMO Capital Management

Maxine, I believe on the last call, you told me that you thought merchandise margins would be up in the second half in North America. How do you feel about that now going into the fourth quarter?

Maxine Clark

The merchandise margins, meaning the mark-up, I feel that we are moving in the right direction. Again, other set pressures, leverage of the sale, occupancy costs effect what you see as margins, but our merchandise mark-up as John talked about is in the right direction and we have been working with our vendors and we have a very strong product line-up for the fourth quarter that I think will add to that greatly, assuming there is no major changes to what we see and we have to take any unusual markdowns or changes in our retail price points. But, assuming that things are as they have been in the last few months, and moving into the fourth quarter, I feel that we will be positive in the area of improvement.


There are no further questions in queue, I would now like to turn the call back over to Molly for any closing remarks.

Molly Salky

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

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