Build-A-Bear Workshop's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Build-A-Bear Workshop, Inc. (BBW)
by: SA Transcripts

Operator

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

I would now like to turn the conference over to your host, Allison Malkin of ICR. Thank you, you may begin.

Allison C. Malkin

Good morning. Thank you for joining us. With me today are Sharon Price John, CEO; and Tina Klocke, COO and CFO.

Before I turn the call over to management, I want to remind members of the media, who may be on our call today to contact us after this conference call with your questions. We ask that you limit your questions to one question and one follow-up. 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 note, the call is being recorded and broadcast live via the Internet.

The earnings release is available on the Investor Relations portion of our corporate website. And a replay of both our 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 Factors section in the Annual Report on Form 10-K, and we undertake no obligation to revise any forward-looking statements.

And now, I would like to turn the call over to Sharon John, CEO.

Sharon Price John

Thanks, Allison. Good morning everyone. Thank you for joining us today. On today's call I will provide an overview of our fourth quarter and full year results and discuss the strategic initiatives we have set forth in 2014.

Tina will follow with a more detailed review of our financials, and then we will take your questions. In the fourth quarter, we demonstrated disciplined execution of our stated strategies resulting in improved overall profitability. In a highly promotional retail environment and with fewer stores, we increased gross margin and operating profit leading to a $4.3 million improvement in an adjusted net income compared to the fourth quarter last year.

In total for the quarter, consolidated net retail sales were $106 million, decline of $10 million from 2013, reflecting the impact of 28 fewer stores, and gross margin expanded by 250 basis points and adjusted net income increased to $6.9 million from last year’s $2.6 million.

Our performance continues to demonstrate progress toward our turnaround plans and adjusted to achieve sustainable profitable growth. Let me share some 2013 highlights with you. First, we increased comparable store sales by 5.1% on a consolidated basis. This was led by a 5.7% increase in North America. Key contributing factors were our elevated marketing efforts, which focused on brand building, our improved product offering for consumers of all ages, and the integrated execution of our high touch retail service model.

We also reduced discounts in North America by 30% as we rebalanced our marketing efforts to emphasis brand versus price. These initiatives drove 70% of the annual comparable store sales increase with the balance coming from our real estate optimization action.

Secondly, we improved North American store productivity to $381 per square foot, a 9% increase reversing a multiyear decline. This was accomplished by closing 37 doors and transferring approximately 20% of sales from the closed stores to other locations and strategically refreshing and selectively downsizing ongoing stores as we renewed leases. At year end, over 90% of our North American stores were profitable on a four-wall basis, compared to 78% at the start of the year.

Finally, we reduced expenses leading to an improvement in SG&A as a percent of total revenue and expanded our product margin. This was driven by expense savings from closed stores, continue renegotiation of terms with vendors and suppliers, adjustments to our store labor models to better align with overall traffic pattern, and the implementation of stringent expense controls throughout the organization particularly in the back half of the year.

On the product side, we selectively increased prices throughout the line and began to see the early impacted value engineered designs. We will continue to evolve our strategies as we move from a company in turnaround to one that delivers sustained profitability and growth.

Specifically in 2014, we are focused in four key areas. First, our real estate optimization efforts will continue with plans to close between 10 and 15 doors primarily in North America. As in 2012 and 2013, we expect to transfer a portion of sales to other stores in the same markets. We will also strategically refresh and upgrade stores with select key features from the new store design, while driving down the cost of capital that is needed for these improvements. Additionally, we will selectively open new doors as opportunities arise.

Second, we will continue to reposition our marketing programs to refine the consumer value equation. We will expand our integrated and elevated brand building marketing programs and increase the impact of our loyalty program, which currently has over 4 million active members. Specifically, we expect to refine our consumer segmentation model and develop programs to enhance the value of our Best Guest segment. And to assist us in achieving our goals, we hired Gina Collins as Chief Marketing and Brand Officer. Gina was most recently with The Coca-Cola Company and is a seasoned Marketing Executive.

Third, we are aggressively working on expense rationalization. In addition to ongoing value engineering of product, we have initiated an end-to-end review of our supply chain and have the gun to identify opportunities to further improve product margins and leverage our SG&A expenses.

And fourth, we will build on our core competencies as we make continual improvements to our high touch retail service model and customizable product offerings. Additionally, we will begin to lay the groundwork to further leverage the strength of the Build-A-Bear brand.

Let me update you on our – for 2014, first quarter. We increased comparable store sales in January seeding on the momentum of a positive December and stronger holiday gift card sales. Valentine's is an important holiday for us as families visit our stores for shared experience, and teens and adults purchase personalized gifts with or for their loved ones. Our Million Hearts, Million Hugs, Million Ways to Help campaign and the partnership with Make-A-Wish foundation is an example of elevated and integrated marketing programs that we will expand throughout the year.

For the remainder of the quarter, we are excited about some product launches including Disney’s Palace Pets collection, which will be supported by TV advertising. We also have a Superhero offering and we will kick-off our Easter campaign, Fun for Every Bunny in March supported by a compelling array of proprietary products.

While we feel good about the line-up, the first two weeks of February have proven to be difficult, and we want to remind you that Easter shift into the second quarter versus the first quarter for last year. Separately, I would like to note that Build-A-Bear Workshop is recently named Fortune 100 best places to work with for the sixth consecutive year, a proud accomplishment for the company. I would like to thank our thousands of associates and global partners for their passionate commitment to the Build-A-Bear brand and business.

In summary, I’m encouraged by the progress that we have made last year and are positioned for 2014. We have a strong emotional brand that has a broad demographic appeal, when that is trusted by moms and loved by kids. We are starting to see the results of our strong turnaround plan to return North American retail to sustainable long-term profitability. And we are laying the groundwork for a strong future, where we will leverage the strength of our core competencies to monetize the Build-A-Bear brand due to the creation of incremental profit and revenue stream.

Now, I would like to turn the call over to Tina to review our financials in more detail.

Tina L. Klocke

Thanks, Sharon, and good morning, everyone. As noted for the fourth quarter, net retail sales were up $106 million, compared to $116 million in the fiscal 2012 fourth quarter. Consolidated comparable store sales declined 2.2% driven by a 7.5% decrease in transactions, partially offset by a 5.7% increase in transaction value. By geography, comparable store sales declined 2.8% in North America and were down 0.1% in Europe.

Our E-commerce business decreased by 4.8%, excluding the impact of foreign exchange. Retail gross margin improved by 250 basis points to 44.9% with the majority of the improvement coming from enhanced merchandise margin. SG&A was $44 million or 40.9% of total revenues including $1.5 million in management transition, store closing and asset impairment expenses. This compares to $52 million, or 43.8% of total revenues last year, which include $2.5 million of asset impairment and closing cost. Excluding these costs, SG&A was 39.5% of total revenues in the fourth quarter of this year a 220 basis point improvement.

Adjusted net income for diluted share improved to $0.40 from $0.15 last year. For the fiscal year net retail sales were $373 million with 28 fewer stores in operations at years end, compared to $375 million last year. To put this in perspective the 28 fewer stores led to a 7% decline in total operating weeks in the year, while our net retail sales declined 0.5% excluding the impact of foreign exchange. Our consolidated comparable store sales rose 5.1% primarily driven by a 4.8% increase in transaction value and included a 5.7% increase in North America and a 2.9% increase in Europe.

E-commerce sales increased 0.3% excluding the impact of foreign exchange, while operating contribution improved by over 50%. Retail gross margin was 41.1% compared to 38.9%. The 220 basis point improvement was primarily driven by a 150 basis points of improved leverage and occupancy costs and a 60 basis point improvement in merchandise margin. SG&A was a $161 million or 42.4% of revenues including $5 million of management transition, store closing and asset impairment expenses.

This compares to $166 million or 43.4% last year including $3 million of asset impairment and store closing cost. Excluding these costs, SG&A was 41%, a 170 basis point improvement versus last year. Adjusted net income was $3 million or $0.17 per diluted share, a solid improvement from last year's adjusted net loss of $10 million or loss of $0.61 per share.

Turning to the balance sheet at year end consolidated cash was $45 million, down slightly from last year. We had no borrowings on our credit facility at year end. For the fiscal year capital expenditures were $19 million primarily for store related capital and IT infrastructure. Depreciation and amortization was also $19 million down 10% from last year.

Consolidated inventories at quarter end totaled $50 million, compared to $47 million last year. The $3 million increase is due to a combination of timing of receipts and additional inventory to support our first quarter sales plan. This represents an increase in inventory per square foot of 17% was previously noted our sales per square foot increased 9%. For fiscal 2014, we expect capital expenditures to be in the range of $15 million to $18 million to support the continued refresh and repositioning of our stores and the ongoing investment in infrastructure. Depreciation and amortization is expected to be $17 million to $19 million.

And now, I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) And our first question comes from the line of Jack Ripsteen with Potrero Capital. Please proceed with your question.

Jack R. Ripsteen – Potrero Capital Research LLC

Hi, good morning. Thanks for taking the call. In terms of the top, can you think about or tell us what it would look like with pricing increase and how much came from pricing you talked about, I think transactional volume going up even though or the value, sorry, versus maybe traffic?

Tina L. Klocke

Yes, thanks, Jack. Yes, I think that, we mentioned that our consolidated comp was 5.1 mainly driven by 4.8% increase in transactional value, which we used to sort of proxy calculation, which is the combination of our calculation of traffic and dollars per transaction. So we did see the pricing increase as we said in a selective way, but really the difference of the increase in transactional value was on the 30% discount reduction.

Jack R. Ripsteen – Potrero Capital Research LLC

So it wasn't so much you guys took prices, you stopped cutting price, basically is that…

Tina L. Klocke

I want to be clear with the combination of both, we had a 30% reduction in discounts year-on-year, and we did take select pricing increases where on products that we’re selling at a velocity that we sell could – that the consumer felt that there was the value was there to take the price.

Jack R. Ripsteen – Potrero Capital Research LLC

And as you get comfortable getting some of its data and not quite a full year under your belt, how much room is there for more selective price increases across different parts of the line?

Tina L. Klocke

Well, there is kind of two ways that we look at that. One is, across the line in terms of – do we have the right pricing from a segmentation strategy perspective and we are actually looking at that right now. What should be our entry-level price point? What’s a good mid-tier price point from our proprietary products? And you may see some easing up of prices across the line, we really haven’t taken any segment pricing in quite sometime.

But the other side of that equation is on some of our hot products. And those types of price increases come when you see the velocity moving at such a point that you feel like that you can move on the pricing, which is easier to do when you’re a vertically integrated company to get the right ratio of sales. So as an example, we actually took some selective price increasing on one of our very popular lines this year, My Little Pony, we took it from $23 to $25 and didn’t see a velocity impact at all.

Jack R. Ripsteen – Potrero Capital Research LLC

Gotcha. Okay, great. Thank you.

Operator

Thank you. (Operator Instructions) Okay. And it seems we have no further questions at this time. I’d like to turn the floor back over for closing comments.

Sharon Price John

Thanks again for joining us, I remain confident in our business prospects as we began 2014. The strategies we’ve implemented have led to improvements in our comparable store sales, margins, and profitability and we expect to build upon our progress during the year. We look forward to speaking with you when we report first quarter results in May.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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