Ann Truman – ICR, IR
Maxine Clark – Chairman and Chief Executive Bear
John Haugh – President, Bear
Tina Klocke – Chief Operations and Financial Bear
Gerrick Johnson – BMO Capital Markets
Sean McGowan – Needham & Company
Janet Kloppenburg – JJK Research
Tom Filandro – Susquehanna Financial Group
Brad Leonard – BML Capital Management
Build-A-Bear Workshop Inc. (BBW) Q4 2010 Earnings Conference Call February 17, 2011 9:00 AM ET
Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2010 Build-A-Bear Workshop Inc. Earnings Conference Call. My name is Kristalin, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)
As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Ann Truman [ph] with ICR. Please proceed.
Thank you. Good morning, everyone and thank you for joining us. With me this morning are Maxine Clark, Chairman and Chief Executive Bear; John Haugh, our President 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 can get to everyone's questions during this one-hour call. 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 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 our annual report on Form 10-K, and we undertake no obligation to update or revise any forward-looking statements.
And now, I’d like to turn the call over to Maxine Clark. Maxine?
Thank you, Ann, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal 2010 results. For our call this morning, I'll begin with comments on our full year accomplishments and fourth performance and introduce the priorities we are focus on with the start of fiscal 2011. John Haugh, our President will provide additional insight into our product and marketing strategy, and then Tina Klocke, Chief Operating and Financial Bear will review our financial results and outlook. Following our prepared remarks, we’ll open the call to take your questions.
We are pleased to report positive net income for the fourth quarter and the year demonstrating the progress we made toward achieving our number one objective to increase shareholder value by profitably growing our sales. While the 3.7% comp store sales decline in the fourth quarter is disappointing, for the year we stabilized our sales trend, increased our average transaction and improved our margins as compared to 2009.
We elevated our traditional product launches and introduced the new proprietary product lines small fry’s. We also improved the alignment of our marketing and operations to drive sales even as we reduced total marketing expense versus 2009.
We opened 11 pop-up stores and also tested new products outside of our core Build-A-Bear Workshop offering to broaden our sales and customer reach. We recognized that we have more work to do in order to achieve our sales growth goals and have yet except strategies in place to achieve this.
Let me review the highlights of our fiscal 2010 accomplishments. In North America, we improved our comp trend by 15 points over 2009. In 2010, comps in North America were down slightly at 1.2%, as compared to negative 16.7% in 2009.
On a consolidated basis, our comp store sales declined 2%, compared to a 13.4% decline in 2009. Consolidated e-commerce sales rose 11% for the year. Retail gross margin rose 340 basis points for the year, which included the positive adjustment to deferred revenue related to the loyalty program. Our average transaction value increased by 1.8%, reduced operating expenses by $6.2 million, excluding the impact of Ridemakerz in 2009.
We generated solid profitability in the fourth quarter and delivered a modest profit of $0.01 per diluted share for the year, a significant improvement from a loss of $0.66 per share last year. Once again, we maintained a strong balance sheet with no debt and no borrowings on our credit facility with $59 million in cash at year end.
These results are a function of our focus on increasing the frequency and a feel of each new product launch supported by compelling promotions. We see further improvement opportunities for 2011 to excite kids with must have products and tied Moms with great promotions, while improving our efficiencies and expense structure.
In the quarter, we began working with an outside consulting firm to review supple chain logistic and other expense areas, and expect to generate savings in the latter half of fiscal 2011. We are also working together to identify opportunities for growth.
We are committed to focus on the business units that have the most growth potential. Therefore by year end we completed the closure of our three stores in France. We continued operation of stores in France, would have required considerable investment and management's time, we believe that this decision will allows us to improve the productivity of our core businesses and invest in opportunities that deliver higher and more immediate return.
We remain committed to our company-owned European operations, in the U.K. and Ireland where we have critical mass, as well as a significant growth plan from our other international geographies where we operate through franchise arrangement.
Now I want to review the fourth quarter. Our fourth quarter total revenues were $125.8 million, up slightly from a $123.1 million in the fourth quarter last year. The modest declines in comparable store sales were more than offset by increased revenues from new stores opened in the fourth quarter, inclusive of pop-up stores, increased e-commerce sales and positive adjustment to deferred revenue related to our royalty program.
In North America, comparable store sales declined 2.9% with our strong performance from our Rudolph collection. We increased average transaction by over 1.4% and improved retail growth profit margin for the quarter. While our holiday theme merchandise was strong, our SpeakerStarz Bear launch, which was planned to offset the Alvin and the Chipmunks product from last year, did not meet our expectations.
Although, kids reacted positively to the product concept in test, in actuality it did not deliver sales. We know the technology is important to our desk, but we believe our best use of technology is to grow brand engagement through Bear Bell and other platforms such as our iPhone app, which we launched last year.
In 2010, our focus was on our launches and making them more dominant. That continues in 2011, but we’ll also place added emphasis on our core products, they are also very size of part of our business. We’ll redouble our efforts to improve the fashion level and units of apparel and accessory categories in order to continue to grow average transaction value.
Our pop-up store test generated results in line with our expectations and we're continuing to evaluate the stores as we begin 2011. While we certainly intended to take advantage of excess real estate availability with this initiative, we also selected locations strategically in advance of other long-term lease decisions that we will be making. So our analysis is focused on long-term market layout, as well as short-term opportunistic growth.
In 2011, our current plans are to open three to five stores net of closing plus three to five relocations. Our e-commerce sales were up solidly in the quarter and our online revenue continues to add significant growth potential. We are working diligently to capitalize on this opportunity 2011. We also advanced our goals to sell Build-A-Bear Workshop products outside of our stores with a, excuse me, a successful introduction of our Build-A-Bear crash shop line in all Michael stores.
Internationally, our sales in the U.K. and Ireland were impacted by severe weather that caused stores to close for a number of days ahead of Christmas. Comparable store sales in Europe declined by 7% for the quarter, but rebounded nicely as weather has normalized. As we previously told you, we had television advertising in the U.K. in the fourth quarter for the first time and are seeing the early benefits of these brand building efforts.
As the world economy is stabilized, our international franchisees are benefiting and actively working on their growth and development plan. In 2010, our Mexican franchisee opened three stores with strong sales results and we also selected a franchisee to develop stores in Brazil.
In order to maximize our international development plans, we are continuing our focus on our existing countries. These countries have the greatest future growth potential and we intend to ensure that they expand successfully and deliver the Build-A-Bear Workshop brand experience to its fullest.
Also at year-end, we renewed our two-year credit facility with U.S. Bank. This extension lengthens the maturity of the facility through December 31, 2012, increases our financial flexibility and includes the same or less restrictive covenants. Available credit has also been maintained and includes $40 million for the first half of each calendar year with the seasonal over line of $50 million from July to December each year.
As we begin 2011, we'll build upon the groundwork we've laid to further improve our sales and profitability. Our priorities are focused on growing sales and improving profitability through continued product innovation in all areas of our merchandise selection.
Increasing the number of transactions, as well as average transaction value, continuing the growth of our e-commerce sales, expanding our licensing business, expanding internationally by focusing on the business development of our existing franchisees, generating cost savings across our supply chain and evaluating ways to invest our strong cash flow for the long-term benefit of our company.
Given that we report on a calendar year basis, Easter will move into our second fiscal quarter this year compared to the first quarter last year. This will impact our quarterly comparisons in 2011 versus 2010.
Also the first quarter will incur approximately $1.5 million in cost related to our consulting work to reduce our supply chain cost and overall expense structure. We expect product and distribution cost savings to offset the consulting fees incurred in the first quarter by year-end.
In summary, we generated significant improvement in our results throughout 2010 to end the year delivering a profitable quarter and modestly profitable year. We remain intently focused on driving consistent increases in comparable store sales, total sales and profitability, and believe that 2011 will be another year of progress towards this goal.
With that, I'd like to turn the call over to John to review our product and marketing strategies in more detail.
Thank you, Maxine. As indicated, we are placed with our overall progress, which includes stabilizing our North America sales trend, increasing retail gross margins and generating a significant improvement in profitability. I’m going to start with an update on the initiatives we put in place at the start of 2010 and how they will evolve to advance our key objectives as we begin fiscal 2011.
First, product innovation, the introduction of larger merchandise stores in limited edition products will continue to be a key focus for us in 2011. We will maintain our emphasis on offering a new themed collection approximately every month supported by coordinated marketing and powerful store visuals.
In keeping with this strategy, our Darling Doggy's limited edition collection was introduced following Christmas to capitalize on gift card redemption opportunities and the increase in mall traffic associated with school publications.
In January, we launched our Love Bug and Love Bear for Valentine's Day. This year we featured two animals versus one last year and for the time ever we partnered with Sweethearts to present a Candy Giveaway! for the qualifying purchase to provide additional value.
And in March, Build-A-Bear Workshop will once again transform into the headquarters for Easter with the launch of our Daisy Bunny and Floppy Lamb to add to our Easter offering, we are excited about the introduction of EB, the feature bunny character in the Universal Studios film Hop, that is due out April 1st and we believe will be a big hit with kids. This should be a good offset to last years Avenant Britney [ph], which was timed with the release of their DVD.
Overall, we feel very good about our current product introductions, as well as the inventory we've made, inventory commitment we've made.
Second, we will continue to execute on the coordination of our product marketing and store operations. Our integrated approach includes one focus message and one focus promotion to support each product launch with exciting offers, store visuals and events.
The fourth quarter provided us with some key learning’s that we will apply in 2011. On the positive side, we held a very successful Black Friday promotion, which drove a solid weekend business for us. We also had a strong performance from our limited edition Rudolph collection as Maxine noted.
That said, overall, we believe we missed sales opportunities on the product side in two key areas. First, in 2009 we had a very strong launch of Alvin and the Chipmunks, which was supported with powerful marketing for the movie by the studio. Our launch of our proprietary Speaker Star Bear did not perform at the level needed to offset the Chipmunks.
Second, we need to improve our core product offering in our animals and coordinate our fashion apparels to further grow our average transaction value. On the marketing side, we ran our first TV ads in the U.K. this holiday and have continued advertising into the first quarter of 2011.
Our early reach shows that consumer reaction has been good. We will continue to measure the effectiveness on growing our sales and enhancing our brand awareness, and evaluate its use for the remainder of the year.
Further looking into 2011, we expect to keep our overall marketing budget in line with 2010. We plan to continue to selectively use gifts with purchased to add value to our product offerings. For example, in the first quarter, we will again feature our popular Easter Basket giveaway with qualifying purchases.
We will also continue our direct mail and email programs to existing guests and use social media and TV advertising to reach new guests. The digital space has been very important in our strategies to reach Moms and we have built an active following in the blogger space, as well as on Facebook and other social sites.
Third, we will continue to look for opportunities that compel consumers to return to Build-A-Bear Workshop and increase incremental purchases from existing store traffic by expanding our assortment of brand right toys or through external sources, as well as internal development.
The latest editions to our proprietary brand, Small Fry's returned on February 15th. We believe that Small Fry's represents both in incremental purchase as an imposed item, as well as an add-on to our full sized animals.
By emphasizing the collectible nature of these animals, we believe we have an opportunity to increase visit frequency and the time to bear well increases ongoing brand engagement. We continue to evaluate external resource, non-proprietary product that complements the Build-A-Bear brand and expand our leadership in the toy business.
Fourth, we will maintain our emphasis to drive our e-commerce sales and increase engagement in our virtual world. Continuing a strong momentum in the third quarter we achieved a double-digit increase in our total online sales in the fourth quarter, excluding the impact of foreign exchange. Our e-commerce site focused on the same strong animal launches we had in our stores supported by enhanced technology that was rolled out in the year and – strong online promotions and offers.
Our Bearville community strengthened in 2010. During the year we increased brand retention and time spent in Bearville. Traffic and length of visit on Bearville combined represented more than 25 million hours of brand engagement in 2010, nearly one-third of our guests report visiting Bearville prior to visiting our stores.
We know that the top activities for kids online, including watching videos and playing games. We believe to move our digital initiatives forward in 2011. We will introduce the next generation of Bearville, expanding beyond the virtual world experience into an entertainment destination with a special focus on fun and relevant cultural content for children and families.
The site re-launches open beta on March 1st, feature unique video programming, celebrity interviews and a craft show, to name a few. The launch of our iPhone app in late 2010 builds further digital synergy allowing kids to connect with Bearville across multiple platforms.
Fifth, we will continue to develop new opportunities and revenue streams outside of our current store base. Our commercial revenue, which includes licensing, entertainment and wholesale revenues increased in the fourth quarter, due to success of our craft kids at a number of retailers.
Following the successful launch of our exclusive Craftshop line that is carried in all Michaels stores, we have further extended our brand reach. Importantly, these products include coach and tines for Bearville, as well as a bounce back to our stores or to our e-commerce site, which drives additional traffic.
In addition to the pop-up store format we introduced for holiday, we're testing additional formats outside of our mall store in 2011. In May, we plan to open a store at the Orlando International Airport, which will include pre-stuff and dressed animals, as well as animals to stuff and dress yourself. A Build-A-Bear Workshop store will also open in Cook's Children's Hospital and in Fort Worth, Texas, giving us another potential channel for expansion in the future.
In summary, we feel good about the progress we made in the fourth quarter and fiscal 2010. We began fiscal 2011 with a solid foundation from which to grow.
Finally, I'm excited to announce our partnership with our new brand ambassador, Victoria Justice, who is very popular with our targeted demographic. She is the lead character in Victoria's, a highly rated show Nickelodeon. In addition to television ads, Victoria will also be featured in our print and in-store marketing and we will offer Victoria Justice apparel and accessories.
Now, I'll turn the call over to Tina to review our financial results and outlook in more detail.
Thanks, John, and good morning, everyone. Because of this quarter and year end, I have a lot of detail to go through that should answer most of your questions. For the fourth quarter, total revenue increased $125.8 million from $123.1 million last year, an increase of 2.2%. Consolidated net retail sales were $123.2 million, an increase of $2 million, a $1.7 compared to last year's fourth quarter.
Excluding the impact of foreign exchange, net retail sales increased 2.7%. The fourth quarter included a $4.3 million adjustment in deferred revenue related to our loyalty program and a corresponding increase in that retail sale. In 2010, we changed the method although used to estimate this liability to more accurately reflect our expectations for future customer usage patterns.
As consistent trends in loyalty program emerge, we will continue to adjust our liability as necessary. As a reminder, with the exception of 2009, an adjustment has been made every year since the program's inception.
Net retail sales from European operations were $25.5 million in the fourth quarter, which compares to $26.7 million last year. Excluding the impact of foreign exchange net retail sales declined $0.09 of percent.
For the quarter, consolidated comparable store sales declined 3.7%, which included a 5% decrease in transactions and 1.4% increase in average transaction volume. While overall consolidated comparable store sales declined 2% for the full year, the North American comp decline of 1.2% marks a considerable improvement over a negative 16.7% comps in 2009.
For the full year, total revenue increased to $401.5 million from $395.9 million last year, an increase of 1.4%. Fiscal year total revenues included $6.4 million from non-reoccurring commercial transactions. Consolidated net retail sales were $387.2 million, a decrease of $1.4 million. Excluding the impact of foreign exchange net retail sales increased one-tenth of a percent.
As mentioned earlier, the full year included a $4.3 million increase in net retail sales due to an adjustment in deferred revenue related to the loyalty program. That retail sales from European operations declined $3 million to $69.5 million in fiscal 2010. Excluding the impact of foreign exchange, Europe operations net retail sales decreased 2.7%.
Pre-tax income from European operations was $6.2 million in fiscal 2010, compared to breakeven pre-tax income in fiscal 2009. Fiscal 2010 results include a net gain of $4.2 million resulting from intercompany charges, as well as $1.9 million of costs related to store asset impairment and store closing expenses.
This compares to $5.1 million of intercompany and store asset impairment charges in 2009. Excluding these items, fiscal 2010 pre-tax income from European operations totaled $3.9 million compared with $5.1 million in fiscal 2009.
Our e-commerce business performed well with fourth quarter consolidated e-commerce sales up 13.4%, excluding the impact of foreign exchange. For the full year, the increase was 11%. We achieved a strong growth in both North America and the U.K. resulting from product launches and new online marketing and promotional initiatives.
Commercial revenue, which we have previously referred to as licensing revenue, includes two significant wholesale transactions that had no gross profit. $5.8 million in the third quarter and $600,000 in the fourth quarter.
Excluding these transactions commercial revenues increased $400,000 in the fourth quarter and $800,000 for the full year. These increases reflect the success of our craft kids at a number of retailers in the fourth quarter.
As previously mentioned, our 2009 licensing revenue reflected immaterial reclassification of costs of sales that previously have been netted to licensing revenue. There was no impact on the company's 2009 net loss.
International franchise revenue was $900,000 in the quarter and $3 million for the full year. Both down from slightly compared to last year. We ended the year with 63 international franchise stores versus 65 at the end of last year.
In 2011, we are focused on helping our franchisees improve their business results through improved performance in existing stores and new store openings. We currently expect that our franchisees will open approximately five to 10 stores net of closures including the company's first store in Brazil.
Our retail gross margin rate in the fourth quarter was 45.7%, compared to 39.5% last year. The 620 basis point improvement in the margin was primarily attributable to 360 basis points improvement resulting from the significant reduction in asset impairment charges in 2010, as compared to 2009. Additionally, we achieved 150 basis points of leverage on fixed occupancy costs along with other improvements in merchandise distribution and purchasing.
For the full year, retail gross margin increased 340 basis points to 40.1% from 36.7% in 2009 last year. This increase was driven by 110 basis points improvement resulting from the significant reduction in asset impairment charges in 2010 as compared to 2009.
For the full year, we achieved 100 basis points improvement of – in leverage on fixed occupancy costs and a 70 basis point improvement in merchandise margin, along with other improvement in distribution and purchasing.
SG&A was 48.9 million or 38.8% of revenues compared to 39% in the fourth quarter last year. SG&A included $800,000 related to the closure of our two remaining stores in France and increased corporate payable costs.
This increase in SG&A expenses offset by marketing savings and improved leverage on store salaries and other fixed overhead costs. For the full year, SG&A was 163.9 million, a 48.8% of revenues, which is the same percentage as last year.
SG&A included $1.6 million related to the closure of our two remaining stores in France and increased corporate payroll costs primarily associated with the bonus accrual. This increase in SG&A expense was offset by marketing savings and improved leverage on store salaries and other fixed overhead costs.
As we closely monitor our cost, we continue to deliver a great experience in our stores as measured by our guest satisfaction scores. We finished the year with 80% of all guests giving us the top score on overall satisfaction. We are pleased – we were also pleased to be named in the Fortune 100 best places to work for the third year running.
Net income was $8.3 million or $0.44 per diluted share, a significant improvement over 2009 fourth quarter net loss of $900,000 or $0.05 per share. Net income for the fourth quarter of fiscal 2010 included $800,000 or $0.04 per diluted share in cost relates to the closures of its operations in France, and $500,000 or $0.02 per diluted share of store asset impairment charges. These costs were more than offset by $2.6 million or $0.14 per diluted share for the adjustment to the deferred revenue related to our customer royalty program.
Net loss in fiscal 2009 fourth quarter included $3.9 million in non-cash asset impairment costs and $2.7 million in non-cash losses associated with the company's investment Ridemakerz LLC. Net income for the full-year 2010 was $100,000 or $0.01 per diluted share and marks a considerable improvement over a loss of $12.5 million or $0.66 per share in 2009.
Net income in 2010 included $1.6 million or $0.08 per diluted share in costs related to the closure of our operations in France and $500,000 or $0.02 per diluted share of store asset impairment charges. These costs were more than offset by $2.6 million or $0.14 per diluted share benefit for the positive adjustment to the deferred revenue related to royalty program.
Net loss for the fiscal 2009 year included non-cash charges of $10 million for asset impairment and the write-off of investment, as well as $600,000 charge related to the Friends 2B Made concept closure.
The income tax benefit was $2.6 million for fiscal 2010 as compared to $11.4 million for fiscal 2009. The effective tax rate was 104.3% for fiscal 2010, compared to 47.7% for fiscal 2009. The increase in the effective tax rate was primarily attributable to a release of valuation allowances on net operating loss carry forward associated with our France operation, as well as of the impact of lower taxes in foreign jurisdictions and the releases of tax reserves.
In 2011, we anticipate our tax rate to be approximately 38%. Our balance sheet remained strong and we ended the year with consolidated cash of $59 million, compared to $60 million last year, with over 35% of our held outside of the U.S. We have no debt and no borrowings on our credit facility. Historically, our cash balance is highest at the end of the year, due to the significant gift card sales and seasonal sales volumes.
During the quarter, we did not repurchase any shares of our common stock and at quarter end, we had approximately $23.7 million of availability under the current stock repurchase program.
Capital expenditures in 2010 were $14.6 million, up $6.2 million from 2009. Primarily due to software and equipment upgrade start e-commerce platform, as well as opening 11 pop-up stores. For 2011, we expect capital expenditures to be approximately $15 to $20 million.
Depreciation and amortization from fiscal 2010 was $27 million, down from $28.5 million in 2009. For the full 2011 year, we expect depreciation and amortization to be approximately 26 million. At the end of the quarter, consolidated inventories totaled $46.5 million, compared to $44.4 million at the end of 2009.
Inventory per square foot increased approximately 4.8%, a considerable improvement over the 13% increase in Q3. As we enter 2011, we are comfortable with both the composition and level of our inventory investment.
As Maxine mentioned, in 2011, we will continue to support the strategies that have resulted in improving comp store trends and profitability. In the first quarter, we will incur approximately $1.5 million in cost related to our consulting work to reduce our supply chain costs and overall expense structure.
We expect product and distribution cost savings to after the consulting fees incurred in the first quarter by year-end. In addition, we expect our first quarter results to be negatively impacted by a later Easter in 2011 versus 2010.
That concludes our prepared remarks. And now I'd like to turn the call over to the operator to take your questions. Operator?
(Operator Instructions) Today's first question comes from the line of Gerrick Johnson with BMO Capital Markets. Please proceed.
Gerrick Johnson – BMO Capital Markets
Hi, good morning. I was wondering if you could discuss how your comp trends have progressed through the quarters, specifically how they look in December?
Sure, Gerrick. It's John. How are you?
Gerrick Johnson – BMO Capital Markets
We gave where we followed the quarter. We actually were kind of about the same month by month by month. We frankly, as Maxine mentioned and we talked about, we felt like we really had a great holiday promotion, Rudolph & Clarice and Bumbo, significantly outsold our holiday presentation last year. We had some great GDPs. We just – the one big miss we had was lower comp SpeakerStarz.
In 2009, we had Alvin and the Chipmunks and a lot of support by Fox Studio and it was a really good product for us. We were hoping SpeakerStarz with the launch in kind of mid-December would give us that shot in the arm. We just didn't deliver and if we look at the units we missed, Alvin versus this year SpeakerStarz and do kind of our average transaction at 35 bucks would have been right there at kind of a flat comp for the quarter.
So good news is Dennis is really getting where we wanted to go. Good news is, we've identified it and think we got it corrected for Q4, 2011. So that kind of – that's how quarter four came out for us.
Our next question comes from the line of Sean McGowan with Needham & Company. Please proceed.
Sean McGowan – Needham & Company
Thank you. I was wondering Maxine, if you could repeat or John, if you can repeat the store plans for 2011 and comment a little bit on what the timing would be?
We said that we would be opening up three to five new stores net of closing and those usually start around, we will open our first airport store in April, mid-April or early-May and then we'll have a few stores after that. And then we have three to five relocation stores that we’re moving within the same mall that are being downsized or reformatted. Again, most of those will happen towards the later half of the year.
Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed.
Janet Kloppenburg – JJK Research
Good morning, everybody. I was wondering if you could talk about the success of the pop-up stores and if that is going to be a viable avenue for growth for you in the upcoming holiday season. And I also – I'm hearing a lot about product cost increases from some of the apparel companies that I follow. And I was wondering what was happening on that front for Build-A-Bear? Thank you.
Hi, Janet. Maxine, I'll talk about the pop-up. We are – as I said in my comments, we looked at our pop-up stores, our first 11 that we did, one of them was actually a replacement to our Opry Mills stores that closed – due to the floods in Nashville and so we don't look at it exactly the same way.
But the 10 other stores, we look at them before we went into them as which ones could possibly be a replacement location for Build-A-Bear as we look at our real estate portfolio that is coming up for renewal or just because we want to try some other kinds of locations, strip centers, all kinds of things like that. So some of them are looked at for that, others were looked at for just being in a market that we might not have been in yet and was the market good enough to support a store full-time or possibly part time. And so we've been evaluating those results.
Because Build-A-Bear does so much business from Christmas, Valentine's Day and Easter, will be in the up most of these those through that time period and we think that we'll have much better idea after that. But we have seen in every market that we've entered that our sales as a market have increased, even though we've had modest, in some cases modest cannibalization of sales but we have been growth. And our plans would be not necessarily to have those two stores in the mall, one might have replaced the other one.
So we're looking at all of that through all the demographics and quite an intensive review. But we do believe that we will be closing some of these, turning some of them into permanent stores and then opening up different and more pop-up stores possibly in the fourth quarter of this year.
Why don't I – second question, but let me hear it, the product question. Tina mentioned inventory was up slightly over last year although significantly better than third quarter, just to address that it could be primarily driven by Chinese New Year and making sure our product was put in before that and also kind of longer related times and trying to take advantage of getting product placed to offset what our whole bunch of pricing pressures that are coming from Asia.
Are they real? Absolutely. But we have really tried to do, we talked about the consulting from we've got helping us. We really tried to deconstruct what we pay for product and make sure we understand what the raw materials are. We know they have gone up, some cases labor has gone up and we know we need to kind of account for that. But we don't want to necessarily let our partners just get kind of a free ride and bump in their profit margin or their distribution kind of logistics cost.
So as we have gotten even more precise in there, we have worked hard to figure out what price increases we can absorb, where we might want to introduce some product redevelopment and in some cases we are going to have to take some price increases within our line. We have every intention of managing this aggressively and delivering at or above margin for 2011 versus 2010. So our goal is not – we made good progress on margin in 2010, we do not want to go backwards in 2011 despite kind of in same pressure on the marketplace.
Yeah. And just I think I said it to be sure, the big task of the consulting from, Maxine mentioned and Tina mentioned, was to really help us again understand costs, how we can change our development site go, how we can drive out non-value added cost. It doesn't benefit Build-A-Bear, our shareholders or our consumers.
Our next question comes from the line of Tom Filandro with Susquehanna Financial Group. Please proceed.
Tom Filandro – Susquehanna Financial Group
Hey, thanks. A quick question on new toy categories. John, is there anything going on that front in terms of testing the new categories that you would like to add to the overall mix and then can you, you may have stated this, but the inventory, I think it's in our per square foot dollar basis, it was up roughly 5%. What does that look like on a unit basis and how should we think about the level of inventory up or down for the balance of the year or I understand it's some adjustment. So if you could answer that, I'd appreciate it. Thank you.
Let me talk product for a quite and mix in approach up in two weeks. Tom we had people walking Toy Show this week and kind of over the weekend. We had people walking Toy Show in Hong Kong. We believe in small price, we have a couple of other things of our own that bring development on and will be in test in our stores pretty quickly. That said, there are still some other things in the market that are pretty high, you have seen them.
Someone at some point would normally ask a question about pillow pals [ph] at this point. We didn't know if you if it was a fad. If you walk Toy Show, it's still out there in a big presence, the price hasn't really broken in the market. It's just kind of holding our SRP. So obviously, we need to be aware of something like that. There are some other things that we think could be some other grab and go items but again, what we fundamentally have to do is we got to make sure that if there are other categories that we work to bring into our store, that we put a Build-A-Bear ownership on them.
So in other words, when we do something in Build-A-Bear eyes, it sell us considerably better than it would just grab kind of open market products. So our opportunity is to look for things that are going on the market, kind of bring them in potentially in an open market and say does this have legs and then we can quickly develop it into something proprietary. That's our best way to look for new ideas and that's kind of our approach on this one. You want to add anything?
No, I think that's pretty accurate. I think that there are lots of interesting things going on not only in the products that were build where would normally carried, but I think products that would apply to our licensing business. And we see that growing from some of these new kinds of products that are out there and there will be some new products coming to Build-A-Bear this year, whether it's – we've interpreted into an individual animal or a series of animals you'll see as always lots of newness, we took our ice cream bear collection that will be coming out again.
We repositioned it marketing with a new partner. I think a more exciting partner and also adding attributes to the products that weren't there last year like scent. And we found ways to do that so that is not overwhelming to the customer and the customer can actually have a selection. So we see some things down the road that I think will be a product enhancement as well as tweaks but also a lot of interpretations of things as they relate our stuff animals, same in the fashion side of the business for the clothing.
One of the hardest things to talk there in fashion, I know this sounds silly when we are talking about bears, but our gladiator shoes and our shoes have – bears have gladiator shoes and twinkle toes from sketches that are just blowing out of the stores as well as our stores. And then jeggings, which are leggings for humans and bears and it's just been something that sometimes hard to see in Build-A-Bear as a key item because we don't have rounders of it but we sell lots and lots of them and we just have to make sure that we're on top of all of those things.
And I think we've enhanced our fashion apparel staff, significantly this past year with a new addition to our team who comes from that side of the business and were really – I think has already a great amount of fashion influence and we're starting to see that hit our floors in this next quarter. So I feel really good about what we saw.
But there wasn't anything radical there, there wasn't anything – there's nothing really radical. We are testing a few things and I think we'll be able to report to you in the second quarter and certainly into the third quarter how those are doing.
Tom, let me hit inventory real quick. I'm not going to break out kind of units in dollars right now. We're up about 4-ish percent, probably about that though the course of the year. That said, part of our project again with the consulting firm is, we have – we're probably over SKUed, so we're going to look at SKU productivity and really try to drive better velocity and better turns through our stores that also to the earlier question about cost that it will helps us manage our cost.
So our inventory, we think we've got it managed well. As you know, last we had a low built because of zoo-zoo, we've got that managed, we're back into kind of daily operating business. But that said, we think we can make improvement on it and it is part of this larger project that we are working on it and we should start to see benefits of that kind of Q2, Q3 of this year in terms of start to do, keep our inventory a little bit tighter and drive better velocity on the units that we carry.
But some, obviously, there are big cost increases and so some of that is coming from cost increases, not as much yet as it might come to be. But we're working on maintaining that and John said is mitigating it as best we can, but it is a reality and we have to make sure that our products are worth at that. We can – if we're going to take that cost increase, can we add a little bit more to give the product some to that or in some cases, there is something we can take out that will diminish its value to the customer.
That's always harder because Build-A-Bear always gives a lot for the money but we are all looking at all aspects to that to make sure our inventory has a discretionary product, our inventory and our products are easily acceptable to the customer from a value perspective, a price point perspective.
Our next question is follow-up from line of Gerrick Johnson with BMO Capital Markets. Please proceed.
Gerrick Johnson – BMO Capital Markets
Hi. I was hoping that we could discuss some of these one-time items in a little bit more detail. First of all, the deferred revenue, what lines does that impact to just the net sales line and then what were the strong asset impairments?
Hi, Gary. It's Tina. The deferred revenue impacts the top line, sales line and so I just want to – just to give a little color around it. It's a point in time adjustment. So, in reality, if you look at the beginning of the year balance to the end of the year balance, it netted too much smaller number of around $1.7 million.
So over the point in time adjustment based upon the methodology, we're using to calculate the differed by stuff, our deferred revenue liability. And then the second question was store asset impairment. As we – as you know, at the end of the year we look at all of our estimates and we look at overall net contribution and it was we had to impair for, about four stores none of which were in the U.S. So very significantly down over the prior year.
We have another follow-up from the line of Sean McGowan with Needham & Company.
Sean McGowan – Needham & Company
Thank you. I was wondering if you could talk a little bit about the timing of Easter and you historically in the past, how much of the revenue impact have you seen from when you used your shift from one quarter to the next?
Well, again, this is probably the latest Easter that we've had in quite a bit. And so again, we look at – you have to put together March and April and last year, I think in our call we said we were up a modest improvement over the prior year. So I think that, while we don't break our comps on a monthly basis and we don't give forward guidance, I mean, that's what you have to do because we're a calendar year end and our quarter ends in March, there could be a fairly significant impact to the first quarter. So as we get through the first quarter and get on our first quarter call, we'll definitely have a better information as to what that impact would be.
(Operator Instructions) And we have a follow-up from the line of Tom Filandro with Susquehanna. Pleased proceed.
Tom Filandro – Susquehanna Financial Group
Hey, John or Maxine, can you give us a little more insight on that comment about being a little over skewed and like maybe the magnitude of which you believe you're over skewed and what implications does that have for your go-forward view of store format inside. And if I'm not mistaking, I think you tested a smaller store formats as well. So if you can give us an update on that? Thank you.
I think that Build-A-Bear always prided itself on having about around four to 500 SKUs per store. For the most part, you do have that but as the older you get, a little bit here, a little bit there, stores want this team or that team and you look at yourself and you find that you have some stores in Texas that have the Pittsburgh Steelers and we really need that. This year you would didn't need it, because it sold everywhere that we had it, but most of the time you wouldn't necessarily need that.
And so we are just looking at a real closer scrutiny of our store productivity because actually what we have prided ourselves on in the years is that an A volume store and a C or D volume store have the same SKUs meaning they'll get the best end of everything. They may not get as much behind it, they get – after we set the floor with that merchandise, they get back what that they need in sales to replenish their sales.
So you could go to a store in Asheville, North Carolina and buy the Love Bug, the week before Valentine's Day and you can buy it in New York City. So that small markets aren't penalized. That being said, they all have about the same number of SKUs except for Disney in New York, which may get a bigger SKU assortment plant for them around Disney costumes or New York merchandise. So we think we have – maybe an opportunity to cut 10% to 15% SKUs.
And just know – that doesn't mean that SKUs gone out of our assortment, but would be out of many stores. So it might be – only in the stores that it need, so you're inventories working harder. Because quite frankly, when you get to the Pittsburgh's dealers, I'm just using that as an example, because it's one near and dear to my heart or to the Green Bay Packers and you don't have the merchandise in Green Bay Packers home town, because you've distributed it far across the country and you missed the opportunity there. And so we're just much more aware of that than we have been in the past, because every dime does have to count.
In the smaller stores that we're building Tom, they don't have lesser fixtures. They just have – might have fewer registers, one stuffer, so we could consolidated down the space and give them still the same amount of merchandise that we would get the best merchandise what we can advertise nationally and bring customers in with on our website all that, but they don't necessarily get as much of it. And so the store is tighter. There is not as much walk around room as there has been in the past yet the store still follows all guidelines.
So it's really more like that, it's not necessarily smaller. In the U.K., our smaller stores which we inherited, those stores might not have – those stores like 30 animals versus 36 animals. But for the most part they have everything else and again, they might – they wouldn’t have the American sports teams, but they would have their own U.K. sports team and we would market accordingly to that.
Our next question comes from the line of Brad Leonard with BML Capital Management. Please proceed.
Brad Leonard – BML Capital Management
Brad Leonard – BML Capital Management
We didn't talked about, how is your first quarter starting? What are the quarter-to-date comps, secondly?
Hi, Brad, John. We're early in the first quarter, you get some funny things with some weather, you get some funny things with separating Valentines Day and President's Day. So we're not probably at this point going to say where we are. We felt good about Darling Doggy's, which came out on top 26. We felt good about our Valentine's Day animals, we did two against one last year and frankly it sold right through Valentine's Day and in some cases broke a little bit early.
I think we have to, we're really looking at the first three months of the year as kind of a first four months of the year because we've got weather – little bit of weather, you got a President's Day shift and then there was a question earlier about the later Easter. We are hopeful that when this has happened in the past, we've actually been able to get a little bit of a bump from head of that spring break and then a bump from Easter.
So I think the best indicator of performance in 2011 would be where we sit at April. And we've got – we believe we've very strong product line up, we've got good marketing in place. We've got the store teams jazzed and as Tina mentioned 80 plus percent both start rating themselves. Probably too early to call and I think really April will be the best time to evaluate how well we did in "quarter one" even though it's four months.
We have a follow-up question from the line of Gerrick Johnson with BMO Capital Markets. Please proceed.
Gerrick Johnson – BMO Capital Markets
Hi. Forgive me if I missed this but did you discuss the tax rate in the fourth quarter was a little low?
I didn't discuss it in the fourth quarter. I just talked about it on an annualized basis and why it was, what it was the benefit from relating to the valuation allowances in our foreign jurisdictions.
And we have a follow-up question from the line of Brad Leonard with BML Capital Management. Pleased proceed.
Brad Leonard – BML Capital Management
First of all John, I'll leave it to that, could you guys obviously want to give up the comp and that doesn't make any sense to me why you can't compare 45 days in the quarter versus 45 days. We've gone through Valentine's Day, we've had all the stuff. The Easter shift is going to look ugly, I get that but it doesn't make any sense to me.
So, Brad, believe me, we always want to be as informative we can, you do have a President's Day shift, so you got to account for that. East Coast goes out next week versus this week, U.K. shifted there, what they call winter break. Okay. They have come after winter break for all of us. That would have been this week in the U.K., last year and the year we're in will be next week. So frankly, we don't want to give you something that's not accurate, it's not to dodge you, it's not to give you some that's not accurate. So I hope you'll respect that.
Brad Leonard – BML Capital Management
Well, I'll leave it to that. I understand their shifts but as an owner, it's nice to have the information versus waiting till April 25 to figure out how we did. So I'll leave it to that and understand that I think it's useful. But I guess no one has asked about this, I mean, there's obviously this report you guys are going to talk about, so we're just not going to comment on this report. You guys in discussions or you haven't hired Barclays again to a potential deal. Is that just something that we're not going to discuss?
The company did not make an announcement and again it's our longstanding policy not to comment on rumors or speculation.
There are no further questions. I'd like to hand it back to Ms. Ann Truman [ph] for closing remarks.
Great. Thank you very much. Thank you, everyone for joining us today. We really appreciate your interest and your participation in our call. We look forward to update you on our next call in April to discuss our Q1 results. Thank you so much.
Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect and have a great day.