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

Q1 2010 Earnings Call

April 29, 2010 9:00 am ET

Executives

Allison Malkin – ICR

Maxine Clark - Chairman and Chief Executive Bear

John Haugh - President and Chief Marketing and Merchandising Bear

Tina Klocke - Chief Operations and Financial Bear

Analysts

Tom Filandro – SIG

Tracy Cogan – Credit Suisse

Gerrick Johnson – BMO Capital Markets

Sean McGowan – Needham & Company

Brad Leonard – BML Capital Management

Operator

(Operator Instructions) Welcome to the Build-A-Bear Workshop First Quarter Fiscal 2010 Results Conference Call. I would now like to hand the call over to Ms. Allison Malkin of ICR.

Allison Malkin

With me this morning are Maxine Clark, Chairman and Chief Executive Bear, John Haugh, President and Chief Marketing and Merchandising 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 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 note that our call is being recorded and broadcast live via the internet. The earnings release is available on our Investor Relations portion of our corporate website and a replay of both the call and 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 risks and uncertainties. Our actual results could differ materially from those currently anticipated due to a number of factors including those set forth in the risk factor section of our annual report on form 10-K and we undertake no obligation to update or revise any forward looking statements.

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

Maxine Clark

Thank you for joining us to discuss our first quarter fiscal 2010 results. For our call this morning I’ll begin with comments on our first quarter and update you on our progress toward achieving the priorities we set at the start of the year. John Haugh, our President will provide additional insight into our product and market strategies, and then Tina Klocke, Chief Operating and Financial Bear will review our financial results and outlook. Following my closing comments we will open the call to take your questions.

We have begun 2010 in a solid position and are pleased to show progress towards our number one objective of increasing shareholder value by profitably growing our sales. We posted positive comparable store sales in North America. We continued our positive growth in our European operations and we improved our profitability from last year, reporting positive earnings on a consolidated basis.

For the first quarter, consolidated net sales increased 3.6% driven primarily by total comp store sales increase of 2.1% including a 1.9% comp increase in North America. We previously advised that the sequential improvement in our North American comp sales that began in 2009 was carrying into 2010 from negative single digits in January 2010 to flat in February. The trend continued throughout the quarter with March posting positive low double digit comp store sales.

While the shift in Easter will impact our April results, when we look at March and April combined with just a few days remaining in the month, we expect comparable store sales for the two months together to show a modest increase over 2009.

Moving to Europe, our first quarter comps increased 3.2% continuing the positive trends we’ve had there for the last nine quarters or each quarter since we began reporting European comps. We believe we have future growth opportunities in both existing and new stores, particularly in the UK and Ireland. We are focused on continuing the positive trends that our stores have delivered.

In addition to the Easter shift, we also attribute our improved results in the quarter to initial progress implementing our key strategies regarding product, marketing, our online initiatives, and our brand extension. Already the improved integration of our product, marketing and store operations has had a significant impact and we continue to see strong sales online.

Our business has always been the strongest during the times that consumers have reason to go to malls, around holidays or for gift giving as well as times when kids are out of school on breaks. We’ve given increased focus to these must win periods with strong visual presentation of new products, supported with strong promotions to capitalize on mall traffic and maximize our in store conversion. In the first quarter this approach was successful. We delivered strong results in the key periods which included Valentine’s Day, St. Patrick’s Day, and Easter which drove our overall quarter’s results.

During the quarter our HPG or average transaction value grew approximately 2% driven primarily by a higher average skin price as well as higher skins per transaction. While our opening price animals continue to sell well, during the quarter we focused on clearly distinguishing the value in our middle price range of $16 to $20. Guests responded very positively particularly to the new animals that were launched. Many of these launches were limited editions products supported with strong gift with purchase and value promotions.

In particular this year we declared Build-A-Bear Workshop as the headquarters for Easter plush and saw strong consumer reaction. Kids loved our Easter products and mom’s loved our Easter basket candy gift with purchase. We will continue to offer relevant products for kids and promotions to mom’s to grow our business in all must win times.

We made progress with our strategy to add brand consistent toy products to our stores to convert our traffic to incremental revenue and profit. At the end of March we expanded the Zhu Zhu Pets product line to all of our US stores. Therefore, the impact on the first quarter was not significant. John will further update you on Zhu Zhu Pets in his remarks.

Our online initiatives also developed strong traffic in Build-A-Bearville engaging guests in our brand. Our ecommerce business showed strong momentum rising 10.9% for the quarter with a product that was successful in our stores also driving business online. We also focused on key online marketing and site enhancements that improved navigation and increased conversion.

Our balance sheet at quarter end also remained strong with cash totaling $53 million. Our inventory per square foot was up 11% reflecting the end of quarter arrival of Zhu Zhu Pets products. Including Zhu Zhu Pets inventory per square foot is down 9.5% on a two year basis.

Also in the quarter our Board extended our $50 million share repurchase program to March 2011. During the first quarter we repurchased approximately 210,000 shares at a total cost of $1.4 million.

As we look ahead, we are encouraged by the opportunities to further strengthen our sales and profitability. Our product launches continue to resonate with our guests as we create an immediate sense of purpose and urgency for visits to our stores. While general consumer sentiment has shown some recent improvement, broader economic indicators are still challenging, therefore we continue to take a conservative stance to expense balance sheet management.

We know that it will take ongoing focus to achieve our number one objective of increasing shareholder value by profitably growing our sales. We’re pleased to show progress already in 2010 towards this goal and remain confident in our strategies and our ability to continue to deliver improvement in our sales and earnings.

With that I’d like to turn the call over to John to review our product and marketing strategies in more detail.

John Haugh

As Maxine indicated, we are pleased with our first quarter results yet still very focused on building on this performance during the remainder of 2010 and beyond. Let me review and update you on our overall progress and the five key strategies we are focusing on for the year.

Our strategies are:

Product innovation. We are improving our product by enhancing the size of our launches and the design and value of our animals and related products.

Full integration of product, marketing, and store operations to create a sense of urgency with each new product launch.

Add complementary experiential toys to our assortment.

Grow engagement in our virtual world and sales on our online ecommerce site.

Develop new opportunities for our products to be sold outside of our retail store base.

During the first quarter we advanced each of these goals. In product innovation our initial focus has been on distinguishing our animals across price points and increasing our inventory commitments on our seasonal statements. In the quarter, we had strong results with our limited edition animals starting with the January launch of Be Mine Dalmatian and flowing throughout the season, most recently with Alvin and Britney from the Chipmunks. Our out the door selling price on animals increased over last year and each of the seasonal animals and related items performed above expectations.

Second, we improved the execution and coordination of our products, marketing and store operations. We are executing our integrative strategy by having one product statement, supported by one focused message, and one strong promotion that updates regularly throughout each quarter. We used powerful store visuals to drive traffic and integrated and clean marketing to stir kid’s interest and get mom’s to say yes. This allowed our store to focus on guest service by simplifying messaging and non-sales related tasks.

In the first quarter we focused on one new statement every three or four weeks. Starting in January we launched the iCarly Bear, a highly relevant product with our tween guests. iCarly off with a sneak peak event and offered a package that include the bear, a sound from the TV show these song, branded clothing, and supporting accessories. Our guests bought the entire package resulting in high transaction value.

We then switched our focus to Be Mine Dalmatian leading into Valentine’s Day. The product statement was supported with the strong in store theme of puppy love and one promotion sounds. This clear focus resulted in a sell out on the merchandise and an increase in our sound percent of six points.

Immediately on the heals of the Dalmatian we launched our Easter duo of Blossom Bunny and Easter Chick. This year we became the headquarters for Easter plush with a strong promotion that featured a basket and candy give away with a qualifying transaction. Our double digit sales growth in March speaks in part to the success of this story.

We also chased our successful Chipmunk product from Christmas by re-launching Alvin and a full sized Britney. We build high transaction value with a two for pricing and add on sounds. Both were hits with most transactions including the pair and the sound was added at more than double our normal levels.

Our third strategy to give consumers more reasons to come to Build-A-Bear Workshop by expanding our leadership in the toy business with products that reinforce our brand, kicked off with Zhu Zhu Pets an obvious choice as a hands on interactive product. As Maxine mentioned, Zhu Zhu an in demand plush hamster arrive in all US locations late in the quarter. Our initial results including the original test stores indicate that the product offering is an incremental sale for our stores and is complementary to core merchandise with high cross purchasing of products.

We are reinforcing the Build-A-Bear Workshop brand by developing exclusive product and integration into Build-A-Bearville. We will continue to build this strategy and selectively add appropriate toy products to our stores to drive sales, transaction value and overall profitability.

We showed solid progress in our fourth strategy to grow sales on our ecommerce site and increase engagement in our virtual world. Our online sales in the first quarter were strong up nearly 11% driven by our product launches, gifting focus and promotions. Our site features our spring product stories as well as seasonal, ready made bears, capitalizing on our ongoing gift giving initiatives.

Build-A-Bearville remains critical in our brand relationship with kids and we showed solid growth in our key metrics including unique visitors, total visits, and length of each visit. Our conversion of animals onto the site is strong with the target demographic and the amount of time these kids engage with our brand on the site continues to grow.

Our singular marketing focus is also evident in Build-A-Bearville. For example, we used the virtual world to generate buzz for new products by engaging kids in quests and mini games featuring the upcoming animals. We also now deliver coupons and special value offers through Build-A-Bearville Bear Mail and our direct mailers now show the Bearville prize that comes with each animal.

Finally, we continued to develop our licensing strategy. Our licensing revenue in the quarter increased versus last year with the launch of Wii and Nintendo DS games by Activision. We are developing new product categories and brand consistent merchandise as well as build this business through other retailers and channels.

Now let me spend a few minutes with a look at key merchandise stories you will see in our stores in the next few months. We have approximately one big idea each month featuring multiple products including animals, outfits, accessories, and sounds, one clear marketing focus in store and in our media and one promotional message for our stores to execute.

On April 5th our Enchanted Theme transformed our stores into fairytale themed palaces as two new limited edition animals arrived, the Enchanted Pony and Dragon. Sales of both have exceeded our expectations. We supported the theme in our stores, giving our guests a free crown and Build-A-Bearville we featured a quest to free the Dragon and guest that purchased a Pony or Dragon got themed gifts and bonuses. During the even we have had over 300,000 citizens participate in our medieval online activities.

Tomorrow, our stores will transform to a tropical bearadise theme complete with tiki hut motifs and plenty of sunshine as we bring Hello Kitty front and center in a limited edition tropical version supported with a Hello Kitty Journal gift with purchase.

In June our stores take on a Zoorific theme in support of the launch of a very limited time Zoo Animal Collection. We created this theme in response to numerous customer requests for zoo animals having seeing the collection online and in our zoo store. We will carry eight animals and offer a themed gift with purchase.

We celebrate National Ice Cream Month in July as we launch a collection of four Ice Cream Bears; each comes with an added value plus ice cream cone in its paw. Our merchandise assortment includes special outfits for each flavor to build our average transaction. To promote this event we have teamed up with a national retail partner to give a buy one get one free ice cream cone offer with any purchase in our stores. Our stores will take on an ice cream parlor theme and our highly popular summer camp returns to Build-A-Bearville.

A key gifting opportunity this quarter is gradation which speaks to our focus to maximize events to bring people to the mall, keep our products relevant and grow gift giving. You can outfit any of our animals in a graduation gown, add the pomp and circumstance sound, layer on a logo T and have the perfect gift for each graduate whether coming from kindergarten, grade school, junior high, high school, or college.

With the opening of the baseball season, our Bear Park stores are back in business and new Major League Baseball merchandise is coming to our stores. In addition to the team themed uniforms and apparel that we carry, this year we will introduce merchandise featuring the names of 12 of the best players in the game. Fans can dress their bear in the uniforms of A-Rod, Manny Rivera, Derek Jeter, Joe Mauer, and Albert Pujols to name a few. We also have Derek Jeter and Albert Pujols bears that have embroidered jerseys and replica signatures on the animal’s paws.

Internationally our stores are gearing up for the highly anticipated 2010 FIFA World Cup with officially licensed uniforms and other items for stuffed animals.

In summary, we are pleased with our early results but also very focused on continuing to improve our product stories and better align our products, marketing and store operations to continue to excite kids and moms alike. We will continue to update you on our progress towards achievement of our five key strategies throughout the year.

Now I would like to turn the call over to Tina to review our financial results and outlook in more detail.

Tina Klocke

I will provide additional details related to our first quarter fiscal 2010 financial performance. For the first quarter total revenues increased 3.9% to $101.4 million from $97.7 million in the first quarter last year. Consolidated net retail sales increased 2.3% excluding the impact of foreign currency. The increase in sales was driven primarily by a 1.9% increase in North American comp store sales and a 3.2% increase in European comp store sales, both of which include the benefit of the Easter shift.

The comp increase was made up of a 2% increase in average transaction value with a slight transaction growth for the quarter. On a consolidated basis, our comp store sales gain in the first quarter was 2.1%. As Maxine mentioned, the shift in Easter will impact our April results. When we look at March and April combined with just a few days remaining in the month, we expect a comparable store sales for the two months combined to show a modest increase over 2009.

Our European operations performed strongly in the first quarter with total retail sales up 3.3% excluding the impact of foreign currency. Pre-tax income from European operations was $313,000 up from a loss of $900,000 in last year’s first quarter. The positive performance was attributable to the increase in comparable store sales of 3.2% as our brand and experience continues to gain momentum with consumers.

In the first quarter, International franchise revenue increased to $683,000 from $597,000 last year. We ended the quarter with 63 international franchise stores up from 60 in last year’s first quarter. During the quarter we expanded our franchisee business to Bahrain with the successful launch and just the past week opened our first store in Mexico.

Turning to licensing, revenue in the first quarter was $967,000 up from $752,000 last year. The increase in licensing revenue for the first quarter reflects higher projected sales from our Wii and Nintendo DS games. Note, our 2009 licensing revenue reflects an immaterial reclassification of cost of sales that previously had been netted to licensing revenue. There is no impact on the 2009 net loss. We expect licensing revenue in fiscal 2010 to be in the range of $4.5 to $5 million which includes the impact of this reclassification.

Retail gross margin for the first quarter increased 450 basis points to 41.1% from 36.6% in the prior year. Our gross margin expansion was primarily driven by a 200 basis point increase in merchandise margin and leverage in buying and occupancy of 210 basis points. Total SG&A in the first quarter was $39.5 million or 39% of total revenue from $36.9 million or 37.8% of total revenue in the 2009 first quarter, reflecting a planned increase in store supplies to support our store themes as well as the planned increase in salaries and incentive compensation.

We continue to focus on strategically managing costs while delivering an exceptional in store experience to our guests. For the quarter, we recorded an effective tax rate of 40.4% compared to an effective tax rate of 25.4% in the first quarter fiscal 2009. For the full year we currently anticipate an effective tax rate of approximately 35%.

Net income in the first quarter was $1.7 million or $0.09 per diluted share compared to a net loss of $800,000 or $0.04 per diluted share in the first quarter last year. Net loss for the first quarter fiscal 2009 included a pre-tax charge of $500,000 or $0.02 per diluted share for the closure of the Friends to Be Made retail concept.

During the quarter we repurchased just over 210,000 shares of our common stock at a total cost of $1.4 million. At quarter end we had approximately $29.6 million of availability under the current stock repurchase program which was extended through March 31, 2011.

Regarding cash flow, we ended the quarter strong with consolidated cash of $53.2 million. As you know, we are an international company and as a result about half of our cash on the balance sheet is domiciled outside of the US. Because our cash fluctuates seasonally we evaluate our use of cash on a continual basis. Our cash usage peaks ahead of holiday and key business periods as we build our inventories.

We will continue to evaluate all opportunities to enhance shareholder value including opportunistic purchases of our company stock subject to market conditions and we will also allocate our resources to opportunities that are expected to increase the sales productivity and profitability of our stores.

Depreciation and amortization for the quarter was $6.9 million compared to $7 million for the first quarter 2009. For the full year 2010 depreciation and amortization is expected to be approximately $28 million.

At the end of the quarter consolidated inventories totaled $47.1 million compared to $43 million at the end of the first quarter 2009. Inventory per square foot increased approximately 11.3% which includes first quarter purchases of Zhu Zhu Pets inventory for roll out to all stores at the end of March. We remain comfortable with the level and composition of our inventory as we begin the second quarter.

Capital expenditures in the first quarter were $3.3 million up $1.1 million compared to first quarter 2009 primarily due to upgrades and purchases of central office information technology systems and equipment. We expect capital expenditures between $12 and $15 million which will primarily be driven by upgrades in our infrastructure as well as the opening of three new stores, two stores in the UK in the fall, one new format store in the US by early summer, and in addition we will relocate one US store in early fall also in our new format.

As we move forward through fiscal 2010 our top priority continue to focus on reigniting profitability growth for our company, particularly through marketing and merchandising initiatives as John just outlined.

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

Maxine Clark

I’ll conclude the call with just a few final comments. We were pleased to finish the first quarter 2010 in the strength and financial position with our strategies gaining traction and leading to improvements in sales and profitability. Build-A-Bear Workshop has always been a place for families to have fun and use their imagination. We are succeeding in making our experience more engaging than ever before and are very excited about the opportunities we believe exist to continue our improved performance as the year progresses.

With that I’d like to turn the call over to the operator to begin the question and answer portion of today’s call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Filandro – SIG

Tom Filandro – SIG

Can you help us reconcile the 11.3% I think you said per square foot increase in inventory and help us understand how it can reconcile that versus the current comp trend and how should we view that inventory position on a per square foot basis say at 2Q end?

Tina Klocke

Maxine commented in her remarks that on a two year basis we were actually down in inventory of 9.5%. The reason the inventory is up is because we were building our Zhu Zhu Pet inventory and without that inventory we were down on a year over year basis. We feel as we’ve going into the second quarter that we have the appropriate inventory and remember we just introduced Zhu Zhu at the end of the first quarter and had to build our inventories for that.

Operator

Your next question comes from Tracy Cogan – Credit Suisse

Tracy Cogan – Credit Suisse

The question is about Europe, it made money in the first quarter for the first time that I can remember and I was wondering if you expected it to be profitable in every quarter this year. As you guys look out beyond 2010 do you expect to ramp your store growth again and what do you see as the appropriate number of stores for Build-A-Bear.

Tina Klocke

As you know, we don’t give guidance on a quarterly basis but if you look at historic trends our second quarter has always been our smallest quarter of the year. Over the last two years Europe has been profitable for the total year.

Maxine Clark

The question on the real estate, we’re very focused on improving our current store base. At the same time we’re going to be going to the ICSC conference in a few weeks and we’ll make sure that we well position ourselves for the growth in the next decade. We’ll be open to new real estate opportunities that may be shifting a store from one location to another, downsizing a store, moving out of a mall into a lifestyle center or outdoor shopping environment. We’ll just take advantage of opportunities as they meet our return on investment criteria.

Build-A-Bear has 272 stores in North America and about 21 stores in Canada that are all in very, very well positioned malls and we’re very fortunate about that and we don’t think there are hundreds more stores to open up but there’s more repositioning to do. Our real growth will come in Europe over time and also in our franchised operations.

Operator

Your next question comes from Gerrick Johnson – BMO Capital Markets

Gerrick Johnson – BMO Capital Markets

How about the malls you’re in do you know what the comp for these malls have been in the quarter, are you outperforming the general traffic and buying at the malls or under perform kind of in line with what’s going on in the rest of the mall locations?

Maxine Clark

We don’t really know the specific mall locations until the end of the quarter. Most retailers are on a February, March, April quarter; we’re on a January, February, March quarter. I think that we’ve been tracking from what we know and really more conversation with other people in the mall that we’re tracking fairly steadily with improvements as well. I think we’re benefiting from the mall traffic and increased because the customer is feeling a little bit better, needing to get out and shop and buy some new things and while they’re in the mall they’re making a visit to Build-A-Bear Workshop as well.

Operator

Your next question comes from Sean McGowan – Needham & Company

Sean McGowan – Needham & Company

Regarding gross margins, can you get more specific about what drove the better margins in the quarter, was it lower product cost in terms of the cost of manufacturing at the factor, was it the pricing on it, and more importantly what are the implications for the balance of the year?

John Haugh

From a product standpoint what we have done is we have worked hard with our suppliers and we have talked before about trying to go bigger on ideas, we’re trying to buy smarter, we’re trying to make sure that the bundled package is stronger. Roughly half of our gross margin improvement is due to improvement in how we buy our product and in how we price our product and how we bundle our product. The second half is driven by better sales and store leverage.

Tina Klocke

As we have always said, if we can get to low single digit comp we believe that we can leverage our buying occupancy which we did in this quarter by 210 basis points.

Operator

Your next question comes from Tom Filandro – SIG

Tom Filandro – SIG

You said, Maxine, there was very little impact from Zhu Zhu Pets on the quarter but they were launched in March so can you tell us what impact they had on the March performance, give us an understanding of the IMU of the Zhu Zhu Pets versus the skins. Then I’d also like to know is there any opportunity with Zhu Zhu Pets to have an exclusive arrangement or a tie back to the skins, maybe a stuffable hamster or something like that?

Maxine Clark

The Zhu Zhu Pets we tested them in the early part of the first quarter in eight stores and then rolled it out to 50 stores then it hit all the stores by about the end of the third week in March so really at the end there was hardly any. We saw an impact but our own business was going up pretty dramatically; Easter bunnies and chicks.

As a percent to sales it was modest but positive so we were seeing a very strong response rate in terms of customers buying Build-A-Bear animals and adding on a Zhu Zhu Pet. Or if they came in for a Zhu Zhu Pet adding on a Build-A-Bear animal, that was all working fine. We think that now that all the stores have it in North America or at least in the United States we’ll start to see a much more significant statistics that we can point to.

The IMU on the animals for us is about; it’s significantly below Build-A-Bear, because Build-A-Bear is all around products and our markets are quite significant. It’s more of a traditional specialty store mark up in the 50% to 55% basis. We’ve been able to eek out a pretty good mark up on it because we’re in on it early.

Then we will have our own merchandise coming in actually arriving as we speak and coming out to the stores and will be full blown in June we’ll have our own clothes, we’ll have our own animal, our own exclusive Zhu Zhu Pet that you can get at Build-A-Bear, not a stuffable one but one like the ones they make but different color with a different name and more in line with what we’ve been asking for and that will be great.

If we wanted to do an exclusive plush we could but we’ve actually talked to some kids about that and that has not necessarily been top of their list. I think we’re watching that and we’re going to monitor it as kids get to be more familiar with Zhu Zhu Pets and we keep asking that question as soon as that’s something they’re interested in we can test it pretty quickly.

All of our other animals are getting a lot of attention and we think in our zoo collection which has some unique animals, not hamsters, but zoo collection animals that we haven’t made available to our customers, that’s really what the customer is looking for. I think what the hamster provided was some new fresh animal out there on the marketplace that kids could have some fun with and I think you’ll see in our zoo collection similarly some great fun with the new animals.

Operator

Your next question comes from Gerrick Johnson – BMO Capital Markets

Gerrick Johnson – BMO Capital Markets

What skin was your best seller in the quarter and what have you been doing to attract more boys into the store and finally do you have anything to take advantage of Toy Story coming out?

John Haugh

Best selling skin in sheer volume was our Blossom Bunny, it was an absolute homerun, it was tied well, as Maxine said, we have traditionally celebrated spring and this year we said, you know what we’re going to go after Easter, we’re going to have a great gift with purchase and when a customer came in and spent a minimum of $20 they got an Easter basket that the bunny looked great in and a bag of candy that we did with a promotion with Nestle, Wonka based candy. Our Blossom Bunny absolutely blew out it was an absolutely homerun for us.

That said, we had a couple other big hits too, our Dalmatian dog, Valentine Dalmatian was really well bought and well purchased by the customer. We had a fantastic Valentine’s Day weekend and we actually ran out of product a little bit early and so think we have a little more opportunity next year. We think the skin piece we pretty well nailed.

With respect to Toy Story, Toy Story we do not have a direct tie in with Disney on this. In some cases it makes sense for us to align with a movie studio like we did with Alvin and Britney from the Chipmunks Squeakquel. In some cases the product we just get an overall halo effect. With Toy Story there’s a lot of classic product in Toy Story so we will get a lift based on that. In a situation like that we don’t need to necessarily strike a relationship with Disney so when we look at licensed equities we jump on board when we think there’s an opportunity and sometime all boats go up in a rising tide so we think that will happen with Toy Story.

With respect to boys we actually are having a pretty good balance of our boy/girl business, again remember overall its about 70% girl, 30% boy. We’ve had several items that have done well with boys. Star Wars came in at the end of last year; it has done very well with boys. Some of the other licensed properties do well with boys. We think zoo will be a hit with boys and that is going to again break in June. The baseball players and the baseball team literally A-Rodriguez signed the back of his jersey and Pujols on the back of his jersey, Joe Mauer on the back of his jersey, we think will also drive our boy business too.

What we want to do is we actually want to make sure that we maintain the right balance of boys. If anything there are times we have more SKUs devoted to boys than we probably should from a percent of business. We’re trying to grow the boy business but we also are about a 70/30 as we’ve always been.

When we did the Pony and the Dragon we pretty much thought the Pony would be great for girls, white with long blond hair and the Pony would be great for boys, the Pony was great for boys, it was also great for girls. The Dragon did absolutely phenomenal with boys and frankly did awfully well with girls as well.

Operator

Your next question comes from Brad Leonard – BML Capital Management

Brad Leonard – BML Capital Management

Trying to know this Easter shift is really hard to see exactly how that affects you guys. Easter last year I think was middle of April, is that correct?

John Haugh

One week later than this year.

Brad Leonard – BML Capital Management

If you look at January, February combined would have been negative so March; April is slightly positive which is an improvement. Once you get past that Easter break do you see the trends then continuing their improvement in late April is that the same trend we’re on or it’s tough to tell?

Maxine Clark

It’s tough to tell. I think that the first couple weeks of April had last year in it of spring breaks and the Easter holiday. It spreads into even mid April. There’s also been a change in the way kids because of the winter weather the patterns that kids were allowed to stay out of school on spring breaks because they had to make up school days from the winter. It was inconsistent across the country but we’re starting to feel that we’re getting back on track so that’s a positive thing.

It just takes the whole month to get out what you were benefiting from in April last year and this was a very significant Easter for us, it’s probably the biggest Easter period we’ve ever had and I think it’s because we said it was Easter, meaning we anticipated a good Easter but it was much better than we expected and I think that’s the same for most retailers. It goes to show that April will probably be a little bit more challenged because we had planned it more balanced but the customer came out in full force for Easter and we benefited, I’m glad we have it in the bank.

Operator

Your next question comes from Sean McGowan – Needham & Company

Sean McGowan – Needham & Company

I wanted to circle back to a question I asked before see if I can get some color on. What drove the margin improvement in the first quarter assuming that sales show improvement over the last year you can get that portion of the benefit later in the year but do you expect to continue to see benefits on product sourcing and pricing and that other half.

Can you go over some of the metrics on Build-A-Bearville regarding what kind of influence you think that’s having, similar to the metrics you’ve given us in the past?

John Haugh

What we have really tried to do and we mentioned this I think before, the heart of our business is $15, $16, $17, $18 animals. When we do that it helps our margin because that’s really where we as a business can nail it. A $16 or $18 animal with an outfit, with a sound, that’s how we drive our best margin, that gets the most number of our suppliers involved and allows us to ramp up our volume with these guys. That’s what our business is really all about.

We’re trying to be very thoughtful and planful with our thinking for product and placing our product we’ve already, for instance, talked to them about what our holiday product looks like and where we should place it so that we can get in queue now and make sure that we are getting the best pricing possible because there’s a lot of pressure and I’m sure you’ve heard this but there is tight labor in Asia.

Our product has oil as a source so what we are really doing is working like crazy to make sure that we work with our partners, our suppliers and continue to drive our margin. The team back here has an objective to continue to improve its gross margin or its initial mark up as do all retailers and so far we seem to be on track with that so that’s something we will push on all year but again that’s only half the equation. The other half is to continue to make sure we get better leverage out of our box and as we improve sales, as Tina said, that also comes. That’s how we’re trying to hit it on both fronts.

Maxine Clark

On Build-A-Bearville we have about 15 million avatars, we’ll hit that tomorrow mostly likely that have registered in Build-A-Bearville since we started. Kids can register multiple numbers we don’t use that as the measurement of significant metrics although the membership is growing substantially. What we look at is how long they’re online which is growing. The average visit is about 30 minutes now which has grown substantially over the last year and particularly over the last six months. Of course it’s longer on weekends and longer when kids are out of school.

We also have a higher rate of growth of new avatars so our avatar growth of new people signing up on Build-A-Bearville is higher than our store business growth substantially and the same for animal registration, our animal registration people buying an animal in Build-A-Bear stores and registering it online is growing also in the double digits so that’s really promising.

The influence is about 10% that we ask people every week the influence of Build-A-Bear on your decision to come to Build-A-Bear Workshop store and that is about 10% it’s been pretty steady at that, of the people that said that was the number one reason that’s about 10% of the customers. That’s a steady number and we feel good about that.

I think the real interesting thing is the engagement that we get, the activities that we’ve created and how with the evolved way of Build-A-Bear is every single major event that we have in our stores is tied into Build-A-Bearville like the enchanted event that we have right now there’s tons of things to do online, you can decorate your whole condo as a castle, the whole town of Bearville changed over and kids love that. The engagement that we’ve had in the games has been much higher than the same time last year.

The other is that the next one which is the tropical bearadise, Hello Kitty is already featured and there’ll be a quest for her. When we get into the zoo which starts in June the zoo promotion is amazing and kids will now be able to visit for the first time ever through the buying of their animals in Build-A-Bear the Build-A-Bearville Zoo. Depending on the animal that they get, they get to have special attributes in that zoo. These are things that we’ve been working towards and its really the true sophistication of where we’re at today so that the product that you buy in the store brings you special powers in Build-A-Bearville so that’s why kids will want these different powers.

One thing about the horse and the dragon which was really the first thing that we did, you can ride a horse in Build-A-Bearville and you can start to see how that might develop over time that there’ll be more horses. The dragon flies over Build-A-Bearville and has wings and if you wanted to buy rides the Build-A-Bearville those would be about $5 so those came included with the animal. We’re making the value of the product and the value of your Build-A-Bear experience so incredibly tied together and the customer is getting that and we’re seeing that grow substantially in engagement.

Operator

Your next question comes from Tom Filandro – SIG

Tom Filandro – SIG

Are you guys planning at all, I thought I heard you say toys so I’m just curious, are you planning at all partnering or testing any other toy brands in your store? One final one on the ice cream partnership, who is that, I think you mentioned an ice cream partnership for the summer season?

John Haugh

Unfortunately it’s a major player we are just finalizing so that the ice cream partner, it is one that should be very, very familiar with. We’ve got great marketing, our window clinks will be in their ice cream cases and all their stores so its a major hitter but we can’t quite announce it yet, we’ve got one thing that we just need to dot an ‘I’ and cross a ‘T’ on. The deal is done but they want to do one more thing before we can announce it. We’re pretty excited about it.

Toy partners, we went out to toy fair, we had people walking the floor, we get ideas two a week probably come in there and say Build-A-Bear is the right opportunity for our store and we have the luxury of being very selective. Right now we don’t have any other product slated to come in besides Zhu Zhu but again as I think we said earlier, we think there are opportunities still there with exclusive hamster which we’ve got debuting shortly here, with take downs on some of our outfits with the Bearville tie in. We will ride this one for a little while.

We’ve got other things that we can take a look at if and when appropriate. Again, as we said maybe on the last call, this is compliment to us; this is never going to be a big chunk of our business. What we’re doing is giving customers who maybe only have a $10 bill in their pocket the opportunity to pop in and make sure that they know that Build-A-Bear has what they are looking for when it comes to experiential toys. That means we have the luxury of being a little bit selective and we can pick the right ones and right now we’re going to stick with Zhu Zhu for a little while here.

Operator

Your next question comes from Brad Leonard – BML Capital Management

Brad Leonard – BML Capital Management

I missed Tina’s comments on the SG&A and why it was up two point whatever, $5 million and what will we look like SG&A for the rest of the year?

Tina Klocke

The Easter shifted again into the first quarter and so that shifted some marketing and store labor into that quarter so that we could capitalize on our sales opportunity. We’ve also accrued bonus and stock compensation this year versus last year when we didn’t have any bonus accrual. Again, as we said on our call at the end of the fourth quarter that we’re going to continue to look strategically and aggressively at managing not only our SG&A cost but all of our costs on our income statement. That’s where we’re at, at this point in time.

Maxine Clark

I’d like to thank you for joining us and we look forward to speaking with you on our second quarter call in July. Have a great day

Operator

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

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Source: Build-A-Bear Workshop, Inc. Q1 2010 Earnings Call Transcript
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