Build-A-Bear Workshop's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Build-A-Bear Workshop, (BBW)

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

Q1 2014 Earnings Conference Call

May 1, 2014 9:00 AM ET


Allison C. Malkin – Senior Managing Director-Retail and Apparel, ICR LLC

Sharon Price John – Chief Executive Officer and Chief President Bear

Tina Klocke – Chief Operations and Financial Bear and Treasurer


Alex J. Fuhrman – Craig-Hallum Capital Group LLC

Gerrick L. Johnson – BMO Capital Markets (United States)


Greetings and welcome to the Build-A-Bear Workshop First Quarter 2014 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

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

Sharon Price John

Thanks, Allison. Good morning everyone. Thank you for joining us. On today's call I will review our first quarter results and give you an update on the progress we’ve made on our strategic initiative. Tina will follow with a more detailed review of our financials and then we will take your questions.

We had a solid start to the year, marking our fifth consecutive quarter of operating improvement. We are pleased with this period’s overall profitability particularly given that Easter shift into our second quarter. By staying focused on our stated strategy, we achieved our total revenues of $98 million with 17 fewer stores in operation at quarters end, compared to a $104 million last year.

We expanded retail gross margin by 200 basis points, and we generated an increase of $5 million in net income or $3 million in adjusted net income as compared to the first quarter of 2013. With these results, we are making progress on our stated objectives to return to sustainable profitability, while we are laying the groundwork to drive top line growth and leverage the strength of the Build-A-Bear brand to expand our business model.

This quarter, consolidated comparable store sales decline by 2.2% primarily driven by the Easter shift as well as the highly publicized weather patterns that impacted the retail sector overall. Through April, which normalizes further Easter shift consolidated comparable store sales were down approximately 1% following at 10.1% increase from the same period a year ago.

In the U.S. our largest region we posted a slightly positive comp through April. Even with the reduction of and in some areas the elimination of school vacations, due to the need to make up for the added snow day. Notably in areas of the U.S. less affected by the adverse weather patterns we posted an average comp increase of 5%.

Now let me give you some updates on our key strategic initiative. First we continue to execute our real estate optimization plans to improve store profitability. In the quarter we closed seven stores and expect to close an additional five to 10 during the year. In total for the 17 fewer stores in operation at the end of the quarter we transferred approximately 15% of sale to other stores in same market.

With the stated objective to drive down the cost of capital for store remodel. We have been evaluating the most impactful features of the stores that were updated in 2012 and 2013. In fiscal 2014 we will update eight stores that are forced to relocation corresponding at least expiration. We are using a streamlined approach that is expected to reduce the average capital per store by 40% versus last year.

As we review our real estate portfolio, our analysis shows that doors adjacent to tourist destination such as our Myrtle Beach or Downtown Disney location are among our highest performers. Applying this insight and given our stated strategy to opportunistically open new stores in June, we will add a store in an expanded development in Pigeon Forge, Tennessee located near the Great Smoky Mountains National Park, which is the most visited National Park in the United States.

We also have plans to open five to 10 pop-up locations in advance of the holiday season. This is a proven approach to drive opportunistic sale and in select markets provide a cost effective method of validating locations without long-term commitments. Second we continue to reposition our marketing programs to elevate the Build-A-Bear brand and integrate messaging across all consumer touch points, while refining the value equation.

In the quarter for the important Valentine holiday, we launched a new campaign called “A Million Hearts, A Million Wishes, A Million Ways to Help” which drove a per door sales improvement during this key time period. The campaign included a partnership with a Make-A-Wish Foundation and provided a basis of social media engagement, as well as an expanded PR effort that resulted in the delivery of $240 million brand building impression an increase of 63% over the prior-year. This program enabled the granting of some very special wishes for kids in need.

We also partner with Disney to launch the Disney Princess Palace Pets collection, based on a new expanded princess story line that was introduced via their popular new app for little girls. In advance of this summer’s Marvel Superhero film, we introduce the newly imagined Captain America and Spider-Man Bears along with their iconic costumes, both of these efforts have been well received. And for the Easter season, we balanced our license merchandise offering with a collection of our historically best performing traditional proprietary products in spring fashion.

Third, we continue to rationalize our expense structure. SG&A as a percent of total revenue improved by 160 basis points, excluding management transition and store closing cost. This was primarily driven by expense savings from closed stores and disciplined expense control throughout the organization. Merchandise margin rose by 270 basis points, driven by selective price increases and cost savings achieved through the value engineering of product design.

Turning to the second quarter, we will continue to evolve our elevated and integrated marketing strategy. In fact today, for the eleventh year in a row, we are announcing our annual search for Huggable Heroes. A program that recognizes charitably minded kids. For greater impact, we will expand the concept of heroes by partnering with the USO in support of their campaign Every Moment Counts to honor our armed forces heroes.

In addition, we will encourage consumers to recognize the everyday heroes in their life, given that both Mother's Day and Father’s Day occur during the program timeframe. We’re also very excited to announce that we will be introducing for the first time ever a line of make-your-own Teenage Mutant Ninja Turtles in advance to the highly anticipated release of the new movie scheduled for August 8.

Separately, given our objective to actively reengage in international growth, we are pleased to announce our first new franchise in three years. The addition of Turkey, brings our total international franchise presence to 15 countries, complementing our owned and operated international stores in Canada, the United Kingdom and Ireland. We expect our new franchise to open its first store in its symbol this June.

As we look ahead, we’ll emphasize and involve the strategies that has contributed to five consecutive quarters of operating improvement. With the increase in profitability and solid action plans, I believe that we are positioned to continue our progress in the second quarter and for the balance of the year.

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

Tina Klocke

Thanks, Sharon and good morning, everyone. Our first quarter results included and improvement in margin and operating expenses, resulting in net income of $5 million compared to $13,000 in the first quarter of last year. Net retail sales were $97 million with 17 fewer stores in operation at the quarters-end compared to $103 million in the prior year. The 17 left stores resulted in a 6% decline in total operating weeks for the period while net retail sales declined by 7%, excluding the impact of foreign exchange.

Consolidated comparable store sales declined 2.2%, reflecting the Easter shift. We had an 8.5% decrease in transactions partially offset by an increase in transaction value. By geography, comparable store sales declined 1.9% in North America and 3.2% in Europe. Excluding the impact of foreign exchange, our e-commerce business decreased by 9.1%, with a significant improvement and profitability.

Retail gross margin improved by 200 basis points to 43.5%. Merchandise margin improved by 270 basis points partially offset by deleverage of fixed occupancy expenses. SG&A was $38 million or 38.6% of total revenues compared to $44 million or 41.9% in the first quarter of last year.

Management transition and store closing expenses were $400,000 this quarter versus $2 million in the first quarter of last year. Excluding these cost in both periods SG&A improved 160 basis points to 38.1% in the first quarter of this year. Adjusted net income per diluted share improved to $0.31 from $0.14 in the first quarter of last year.

Turning to the balance sheet at year end. Consolidated cash was $42 million, up $1 million from last year. We had no borrowings on our credit facility. Consolidated inventories totaled $44 million, compared to $38 million last year. This increase is due to the timing of Easter recites. Inventory per square foot increased 24%, which follows a decrease in inventory per square foot of 10% in the first quarter last year.

Capital Expenditures were $1 million primarily for store related capital and IT infrastructure. Depreciation and amortization was also $5 million…

For fiscal 2014, we now expect capital expenditures to be $12 million to $15 million to support selected store updates and opportunistic openings, as well as the ongoing investment in IT infrastructure. Depreciation and amortization is expected to be approximately $18 million. During the quarter, we repurchased approximately 90,000 shares of our common stock at a total cost of $700,000. At the end of the quarter, we had $6 million of availability under the current stock repurchase plan.

Looking forward, the second quarter has historically been the smallest quarter of the year even when Easter falls into this period which can make it challenging to leverage fixed expenses. However, we believe we are positioned to continue our progress in the second quarter and the balance of the year.

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


Thank you. Ladies and gentlemen, at this time, we will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from the line of Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.

Alex J. Fuhrman – Craig-Hallum Capital Group LLC

Great. Thanks for taking my question and congratulations on a really nice first quarter here against a tough retail backdrop. I wanted to dig into the increase in merchandise margin, I mean that’s a pretty significant pick up in a period of when you think about the weak traffic and for a lot of retailers in January and February. You know probably a period where a lot of other retailers have been seeing a lot of markdowns.

I mean where specifically is that coming from? I mean is it from the reduced couponing or how much of that is due to efficiency initiatives you have in the supply chain and kind of thinking forward out into the balance of the year or I mean how much of that increase do you think is sustainable?

And then you know the other part of that gross margin equation I guess is the occupancy cost? I’m just trying to get a sense of the stores that were closed here in Q1 and then the stores that you have plan to close later on in the balance of the year. How does the occupancy cost per foot of those stores compare to your overall fleet?

Sharon Price John

Thanks Alex, I really appreciate the comments. On the [merch] (ph) margin, we are very focused on that. I mean clearly as we’ve mentioned the return to sustainable profitability is our primary objective and we mentioned in the script that there were really two aspects that were driving that for us and it was an improvement in the cost of the product through value engineering and ongoing renegotiations with China, as well as some selective price increase, particularly – well really only in the United States is where we did that.

And we did that in a couple of different ways, we took some prices increases on products that were very popular and that we were selling at a good clip and we also took some price increases on some more moderately priced products that drive a lot of volume for us, some lower price products we actually increased our entry level price point and put in a pricing segmentation strategy. This seems to be working and that the consumers are not reacting adversely to. On occupancy cost portion of the question I’m going to let Tina take that.

Tina Klocke

Hey, Alex when we look at occupancy cost of the closed stores, it was fairly consistent with the overall average. We really expect to have continued leverage through the year, but we’ll anniversary that cost savings from last year in Q4 and little bit more in Q3.

Alex J. Fuhrman – Craig-Hallum Capital Group LLC

Okay thanks. That’s helpful. And then just from – I mean kind of thinking over the balance of the year and as you have some of these leases coming up for renewal. I mean how do you think about some of these larger more expensive flagship locations? I mean I think given the transfer you are getting of revenue from closed stores into other channels and other stores, I mean certainly it seems like your customer will seek you out wherever your are or at least that’s the indication from the early stores. I mean might there be an opportunity to perhaps close some of these larger flagship type locations like the one in New York city and what could be the four wall impact of doing something like that?

Tina Klocke

Right that’s a good question. One of the things that we’ve noted of course is that we’ve certainly improved significantly from 2012 to 2013 on the number of stores that are in a negative situation. We now have listen 5% of our doors that we expect at the end of the year that will have an negative EBITDA. So we are improving overall clearly and it is this real estate optimization program that’s doing that.

With that in mind, we still do have some big doors that are challenging for us and the New York door is an opportunity for us to look at, although we have to balance that with this information that we shared with you as we are looking at new segmentation of our overall fleet. That we do tend to over perform in tourist areas of which new city is. One.

So at the same that we are looking at that particular location, we also have to balance that with the need to solve for New York City, I mean we have a couple of ways that we are looking at that that may or may not be inclusive of the renewal of that lease.

Alex J. Fuhrman – Craig-Hallum Capital Group LLC

That’s interesting. Well thank you for your answers. Congratulations and good luck. Looking forward to seeing the stores over the next few months.

Sharon Price John

Thank you.


Thank you. The next question is coming from the line of Gerrick L. Johnson with BMO Capital Markets. Please proceed with your question.

Gerrick L. Johnson – BMO Capital Markets (United States)

Hey, good morning. I was wondering what some of your best performing skins were in the quarter, also payables were down 20% while inventory was up on the book 16%. What explains the difference there? And my third final question would be, regarding Easter, what portion of your Easter sales are physical product sales? And then, what portion are sort of deferred sales from gift cards? Thanks.

Sharon Price John

Okay, and I’ll take the – Gerrick Hi, its is Sharon. I’ll take the question on top selling products. Clearly our valentine’s products were our top selling – it started to be our top selling products at the tail end of the quarter, but in the first portion of the quarter we introduced Milo Pony, which did quite well. And we also had a nice bridge strategy of a new assortment that was – called Bling in the New Year that also did well.

On your question about the gift cards. Most of our sales for this time period were as you would imagine they were just straight sales. And we did have of course a positive gift card impact versus prior year. Although we still continue to expect more gift card redemption throughout this quarter and beyond, because we had such a significant increase in gift card sales during the Christmas holiday time period.

Frankly, we had a higher percentage of gift card sales fourth quarter versus prior fourth quarter and then we had a gift card redemption first quarter versus last first quarter. We think some of that was related to Easter being later an of course the weather impact. So, but we do expect them to continue to redeemed those gift cards, given that we have a 90% redemption rate in gift cards overall.

Tina Klocke

And due to the decline in the payables is relative in relationship to the increase in inventory, it’s strictly really timing of our payables. We had more inventory that we paid for earlier and we actually had less capital this year than we did last year. So it’s all timing.

Gerrick L. Johnson – BMO Capital Markets (United States)

Okay, great. Thank you very much.


(Operator Instructions) Our next question is coming from the line of James Fronda with Sidoti. Please proceed with your question.

James Fronda – Sidoti & Co. LLC

Hey, guys. How are you?

Sharon Price John

Hey, James.

Tina Klocke

Hi James.

James Fronda – Sidoti & Co. LLC

Could you just talk about how much potential savings you anticipate within SG&A for 2014 or I guess that’s related to the store closures?

Sharon Price John

There is good portion of that of course that’s related to the store closures and we do expect to start and reversing some of the bigger impact saving towards the fourth quarter of the year.

James Fronda – Sidoti & Co. LLC


Sharon Price John

But there is probably a few more bucks in there.

James Fronda – Sidoti & Co. LLC

Okay cool. Thank you.

Sharon Price John

In addition on a second point, we’ve just now kicked off the supply chain as we’ve just talked about I think in the last call, we have a supply chain initiative then we may be able to continue to pick point, but not in the same areas that we’re picking them up right now.

James Fronda – Sidoti & Co. LLC

Right, okay. And then you mentioned the pop-up locations, how many did you say for this year?

Sharon Price John

I think that we had five to 10 in the call.

James Fronda – Sidoti & Co. LLC

Five to 10, okay.

Sharon Price John

And then so those are we’re in the middle of negotiating some of those.

James Fronda – Sidoti & Co. LLC

Okay, cool. All right. Thank you, guys.


Thank you. (Operator Instructions) Okay. It appears we have no further questions at this time. I would now like to turn the floor back over to Mrs. Sharon for any additional concluding comments.

Sharon Price John

Thank you for joining us today. And I look forward updating you again following our second quarter.


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

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