Build-A-Bear Workshop's (BBW) CEO Sharon Price John on Q2 2016 Results - Earnings Call Transcript

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

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

Q2 2016 Earnings Conference Call

August 04, 2016 09:00 AM ET

Executives

Allison Malkin - IR, Senior Managing Director of ICR

Sharon Price John - CEO, Chief President Bear, Director

Vojin Todorovic - CFO

Analysts

Gerrick Johnson - BMO Capital Markets

Stephanie Wissink - Piper Jaffray

Greg Pendy - Sidoti & Company

Mark Rosenkranz - Craig-Hallum Capital Group

Operator

Greetings and welcome to the Build-A-Bear Workshop Second Quarter 2016 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.

I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison Malkin

Good morning. Thank you for joining us. With me today are Sharon Price John, CEO and Voin Todorovic, CFO. For today's call, Sharon will begin with a discussion of our second quarter results and highlight our performance against the key priorities we outlined we began fiscal 2016. Voin will review the financials and guidance and then we will take your questions. We ask that you limit your questions to one question and one follow up. This way we can get everyone’s question during this one hour call. Feel free to re-queue if you have further questions. Members of the media who may be on our call today should contact us after this conference call with your 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, any replay of both our call and webcast will be available later today on the IR site.

Before I turn the call over to management, 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.

Sharon Price John

Thanks, Allison. Good morning and thanks for joining us today. As 2016 is shaping up to be a tale of two house. In the first half we anticipated and experienced to the bumpy road of loss productivity due to closing and reopening a number of stores to update them to our now proven and more effective discovery store format while simultaneously willing out critical IT upgrade across the company to improve our efficiency. As we shared given the historically comparatively smaller financial impact of the first two quarters of the year which consciously shows the first half to make this much needed investment in the company with real estate and infrastructure requirement had been largely ignored for almost a decade. Although we still have some key investments to make in the third we’re pleased to report that we’ve completed most of the planned work for 2016 and we’re focused on delivering the important back half of the year namely Q4 d5riven by a special stronger more diversified and more productive sweet suite with an improved IT infrastructure across the company.

With this we expect our investments in this important evolution of the company to begin to reach returns in the second half of the year particularly in the all important fourth quarter and beyond. Reflective of our planned investments pre-tax loss was in-line with our second quarter guidance. Notably these results included $0.5 million negative impact from currency losses due to the re-measurement of our balance sheet driven by the sudden decline in the pound versus the dollar at quarter end. Some details of the second quarter include an expected consolidated comparable sale decrease as we anticipated the impact of last year's strong launch specifically consolidated comparable sales decreased 8.6% following 8.8% increase in last year's second quarter reflecting our planned positive two year stack.

Our stores that have been remodeled in the discovery format had an average sales increase in the quarter if they continued to outpace the heritage stores on the near double digit basis with stronger performance on key metrics. Consolidated comparable e-commerce sales increased 11.7% following an 11.4% increase in the fiscal 2015 second quarter. Merchandise margin increased 10 basis points which represent the 13th consecutive quarter of margin expansion and pre-tax loss totaled $6.2 million versus $438,000 in last year's second quarter.

In addition to the negative of $0.5 million to currency exchange, the second quarter included expenses of approximately $1.7 million related to planned investments and the evolution of our real estate portfolio including the rollout of the discovery stores and updates to critical IT infrastructure. Expenses were also impacted as we continued to establish a foundation for further international expansion including China and as we systematically evolved our talent pool to support the execution of our strategic plan.

Given the results to date, we are confident that these investments are essential to advance our overall strategy to deliver sustained profitable growth in the future. As a proved point on the annual basis we expect to see an uptick in total revenue and the fourth consecutive year of pre-tax profit improvement with growth of 15% to 25% excluding the impact of foreign exchange. Also in the quarter we advanced other key initiatives of our more strategy which is focused on having more products reach more consumers and more places with more profitability and more products for our older growth segment we launched a new proprietary property, Horses & Hearts Riding Club.

As with many of our other Build-A-Bear proprietary launches Horses & Hearts is posting higher than average dollars per transaction by our ability to command price parity with other licensed products combined with our own ongoing improvements in integrated and marketing and merchandising, which we believe is driving add on purchases. In fact, the average North American dollars per transactions for our proprietary collections including Honey Girls, Promise Pets and Horses and Hearts was over $80 compared to our average DPT for the change at $45.21, which is already an all time high for the second quarter. An important marketing element for the brand in key product line design and developed by Build-A-Bear has been the creation of opportunities for consumer to participate and play beyond the plush through digital engagement.

This digital engagement ranging from watching Honey Girls music videos, playing games or viewing our very popular Bearville Alive! YouTube episodes have continued to increase costing almost 40 million digital interfaces to-date. On the inbound license front we launched a number of properties in conjunction with feature films premiering in the quarter via our new now playing marketing campaign design to support historically strong movie collections including refresh version of Captain America and Teenage Mutant and Ninja Turtles. While introducing collections for new movie properties like Finding Dory and Ghostbusters.

We also continue to build on our success of Star Wars and Nickelodeon's popular program PAW Patrol by rolling out new characters. Although these offerings in total contributed positively to our overall business for the quarter together they were not able to overcome impact of the unusually broad consumer appeal of last year's Minions collection. Separately as it relates specifically to the outbound licensing effort of the Build-A-Bear brand we have now secured a wide array of product categories and expect the new toy line developed by Spin Master called the Build-A-Bear workshop stepping station to launch in the second half of the year in the US.

Products are already available online and are scheduled to be in big box and toy retailers supported by national TV advertising during this holiday season. On the more people front we continue to expand our appeal to the team plus consumers by offering a broad base of relevant license products such as Make Your Own Pikachu, a Pokémon character that we released last holiday in celebration of the brand's 20th anniversary. Sales have gained momentum since the recent launch of Nintendo's highly publicized Pokemon Go augmented reality game which includes select Build-A-Bear stores as a parent Poke stuff. In the back half, we will be adding a new character to continue to feed opposite innovative gaming platform. In addition we also offer an exclusive online Pikachu bundle to separately drive our e-commerce sale.

Speaking of e-com, as a part of our stated objective to profitably build our online business through a combination of re-positioning the business model upgrading the interface, and improving the fulfillment we have now delivered 8 consecutive quarters of consolidated e-commerce sales growth with continued margin expansion. As we have previously noted the team plus consumers segment tends to over index for online shopping and pub culture products like Pikachu. We believe our impressive offering of location specific properties like major league and college sports and our expanded gifting selection also have high potential for growth as we actively add new purchasing capabilities and options for our web savvy consumers.

Given that in addition to the continuous improvement we have been making to our e-commerce and mobile site, we are currently rolling out endless aisle ordering and delivery options across the US chain in conjunction with other critical POS upgrades. This new capability expands options for consumers to make online purchases such as completing an e-com exclusive product transaction, purchasing a micro-distributed sport license product or ordering a customized and broader Bear for homer gift delivery from any store location. We expect to begin to realize initial benefits of this new competency in our traditionally strong gift business in the fourth quarter of this year.

In regard to more places, we have been keenly focused on improving and diversifying our real estate portfolio by updating an age suite into our proven discovery format leverage temporary percent of sale base leases to validate location and result before committing the long term traditional leases creating the infrastructure to profitably expand our international presence and opening new locations beyond traditional mall such as our first ever value oriented outlet format, our permanent and temporary shop-in-shops mall, our traditional tourist locations and temporary event locations. The successful new discovery branding has now been rolled out in a number of configurations allowing us to expand into and take advantage of the variety of retail opportunities, advantageously supporting our strategy to diversify the portfolio.

To that end for the first time we have developed a highly effective kid park with the variety of store fixtures and separate designs that can be used to easily accommodate a wide range of store size in the physical layout for about temporary and long term opportunities across geographies. As a part of this effort we are leveraging our new presence in China to store fixtures, supplies and other equipment as we drive down the capital cost and expenses. This best in class approach is opening up new and emerging expansion opportunities from movie theaters to cruise ship to new countries that we can now take advantage of comparatively quickly with a lower investment per location.

In addition to driving down remodel cost and continuing to perfect the discovery format and service model we have also been able to more effectively assess the potential success of new retail locations by opening temporary storage to validate the results before we commit to longer term leases. With this strategy as a backdrop we anticipate to have up to 10 new locations this year temp for different model which are primarily in traditional locations where we have the market gap. Other news on our retail gross front includes the celebration of the grand opening of our first owned and operated store in one of the largest and fastest growing markets in the world China in Disney town at the Shanghai Disney resort. While early we have seen promising traffic levels and growing interest as we are introducing our unique brand of experience of retail to a whole new range of Chinese consumers for the first time potentially enabling further development of the market through new partnership like franchising.

The addition of a number of new royalty generating locations from our international franchise later this year, which has been driven by our improved business model and new discovery fixture strategy, the plan expansion of our outlet stores in the few select high volume outlet centers using the learning from our first year of our value driven outlet strategy which is designed to both drive incremental sales and provide a tool to better manage our inventory life cycle. The launch of our first to Build-A-Bear workshop at sea is part of a new experiential wholesale arrangements with Carnival Cruise lines with expectations to have a presence on ten ships by the end of this year. The planned expansion into new non-traditional event driven retail spaces to opportunistically leverage the excitement of some of our amazing movie property launches in select and see theaters to test market later this fall and the planned reopening of our seasonal shop-in-shops during the holiday sales period with Massey’s and expansion into [indiscernible] where we expect to grow from one to four locations.

Of course, all of these new retail sites are or are planned to be in our new discovery branding. As a reminder our discovery stores that are in the - the discovery formats stores have continued to deliver very strong results with the significant increase on key metrics including traffic, units per transaction and dollars per transaction resulting in a sales lift of almost 10% compared to heritage stores. We ended the quarter with 31 discovery store location and expect to have 50 to 55 stores by the end of the year through either new stores, remodels or temporary locations. Notably the quick turnaround on the AMC and carnival opportunities was made possible due to the development of a new multi-purpose fixture and mini stuffer designed for portability and small phases from our kid of parks.

These are great examples of the innovation and flexibility we are building into our thought process to achieve future growth and diversify our real estate portfolio by expanding our presence into more places for more consumers to have the one of the kind branding experience that only Build-A-Bear can do.

On the more profitability front we continue to implement new processes, streamline procedures and add important IT capabilities to enable us to deliver our stated goals. As we move into the back half, we have scheduled a strong line up which includes our popular core product line, our own proprietary properties and new license collections from our best in class partners. Just last week we added an exciting new proprietary property design to appeal across ages and genders called monster mixture which adds a new way for consumers to personalize their own plus. Mixture allows consumers to make their own adorable monsters by adding arms and legs that feature an assortment of colors and patterns to the monsters' body.

For our younger girl segment we have strong initial result with our re-imagine Disney princess featuring a golden light up crown. We also re-designed our princess costumes and fashion tips reflecting Disney's new dream big girl empowerment position on this historically successful every green property. For older girls we expect to launch a new offering in conjunction with the highly anticipated film [Trow] which will open in November in the United States. We are thrilled that Build-A-Bear will be participating in Dreamwork's multi-level marketing campaign that includes unveiling in early October. With that in mind we are also excited to share that the [Trow] movie will be the first property for Build-A-Bear at AMC theaters when the film premiers. For boys and the team plus consumer we continue to expect Star Wars to play an important role throughout the year as the line is updated with new offering including [indiscernible] as we build up to the release of the next film in December of 2016.

We expect to cap off the holiday season by introducing the next chapter of our historically successful Merry mission proprietary offering which appeal to a broad consumer base. As originally introduced the Merry mission Reindeer collection and an exclusive play beyond the plush app that virtually brought the characters to life in the fourth quarter of 2014. We enhanced the story in 2015 adding a snowy white character who was impressively the number one selling item for last year's fourth quarter. We are planning to once again build on the success with the introduction of two new characters along with an exciting update to our fan favorite.

With Merry mission we expect to further solidify Build-A-Bear workshop as a holiday tradition and destination with a new fully integrated marketing program and TV campaign for the season. From a quarter-to-date performance perspective given that the Minions movie hit theaters on July 10 of last year, the first few weeks of July have had tough comps. We have now reversed the trend and have started to regain some positive consolidating comps which we expect to continue through the reminder of the quarter. As you recall we have planned flat to slightly up comparisons for the total quarter.

Note however that our original estimates included the potential of troll sale at the end of the third quarter. As I mentioned as part of the partnership in a conjunction with Dreamwork's multi-level movie launch marketing program we have delayed our set date to early October to coincide with their activity. We expected decisions to create an overall positive impact for the property of Build-A-Bear for the year. However it will push all of the 2016 troll sales into the fourth quarter adding some pressure on third quarter comps. Nevertheless, because this is simply a quarter shifts in sales we continue to plan slightly positive comps for the year. We strongly believe we have consistently proven the sustainability and viability of the Build-A-Bear experiential retail business model by delivering three consecutive years of positive comp sales and profit improvement.

We have proven that despite macro traffic trends we can build our base business while executing a fresh retail concept that it's actually driving traffic and increasing our sales. We have proven that we can profitably expand our retail footprint in new locations beyond malls. We have also proven that we can profitably grow our Brick-and-Mortar business and e-commerce business simultaneously.

Finally we are showing traction on our ability to leverage and monetize the brand beyond its previous boundaries with new license categories beyond plush. Given that we continue to believe our strategies are moving Build-A-Bear to achieve our long term goal to sustained profitable growth. The back half particularly the fourth quarter has historically been our largest and most profitable of the year and what we believe we have a strong and balanced offering including new licenses, proprietary concept core products and holiday offering for all of our key consumer segment.

Our discovery stores continue to outface heritage stores and we are expanding and diversifying our real estate portfolio. We remain focused on executing our initiatives as we evolve our business model to leverage the power of the Build-A-Bear brand. Finally as previously announced the company continues its exploration of a range of strategic alternatives. As you are aware this could take many directions and there is no assurance that this exploration will result in any strategic alternative we announced are executed. We continue to be limited as to any additional comment on this topic as the process unfolds unless and until our board of directors determine the further disclosure is appropriate.

Now I would like to turn the call over to Vojin.

Vojin Todorovic

Thanks Sharon and good morning everyone. Second quarter results were in line with our guidance. Total revenues reflected a consolidated comparable sale decline against the difficult comparison of the prior year second quarter as well as temporary store closures due to significant remodel activity to our discovery stores format. We completed 13 remodels in the second quarter and continue to see significantly higher sales from our discovery format stores versus our heritage stores.

Another positive is our continued increase in merchandise margin which demonstrates the ongoing strength of our product development planning and pricing strategies. In addition to expanding our discovery format stores we also advanced our initiatives to grow revenue from diversification of stores beyond mall and develop new income stream to outbound license agreement. We expect these programs along with easing comparisons to position us to accelerate sales and operating income in the second half and most significantly in the fourth quarter. Separately as many of you are aware, approximately 20% of our annual sales are generated in the United Kingdom.

As such the sudden and sharp decline in the British pound versus the dollar at quarter end driven by the outcome of the UK referendum in late June had an effect on our second quarter earnings and we expect further impact to our previously stated full year guidance that I will discuss shortly. Continuing with the details of our second quarter results consolidate comparable sales decreased 8.6% following an 8.8% increase in the second quarter last year which was in-line with our expectations for two year positive stack. Comps in North America and Europe declined 8.3% and 10% respectively. Our comparable sales reflect 4.8% increase in dollar per transactions offset by a decrease in overall transactions. Importantly transactions in our remodel North American and UK discovery stores are significantly higher than in our heritage stores and these stores on average had 0.6% increase in sales versus last year which compares very favorably to our overall 8.6% decline in total comp sales. We expect comp sales to benefit as we open more discovery format stores and these stores come into our comp base.

Net retail sales decreased $6.4 million or 7.9% excluding the impact of foreign exchange. This represented a decline of 6.4%. The decrease in net retail sales is primarily attributable to decline in consolidated comparable sales, and store down time due to remodel activity during the quarter.

Retail gross margin contracted 130basis points to 42.2% reflecting a 10 basis point expansion in merchandise margin offset by the leverage of fixed occupancy cost and lower sales. SG&A was $37.1 million or 49.3% of total revenues compared to $35.7 million or 44.1% of total revenues last year. The $1.4 million increased in SG&A was a result of unrealized currency losses due to the re-measurement of our balance sheet driven by the significant weakening in the British pound sterling. The increase also reflects investments in new business initiatives, international expansion, the timing of marketing expenditures and cost associated with the review of strategic alternatives.

Store preopening expenses of $1.2 million primarily due to the second and third quarter openings of our new and remodeled discovery format stores. Our second quarter pretax loss totaled $6.2 million which included $1.7 million in business expansion cost and $500,000 impact from currency losses due to the re-measurement of our balance sheet. Income tax was a benefit of $1.9 million compared to a tax expense of $200,000 in the second quarter of 2015. In-line with our expectation net losses is $0.28 per share compared to net loss of $0.04 per share last year.

Turing to the balance sheet at quarter end cash and cash equivalents were $10.2 million and we had no borrowings under our revolving credit facility in the quarter. We handed our quarter with $55.5 million of consolidated inventories representing 10.1% increase over the prior year. The majority of the $5.1 million increase is the build-up inventory to support the introduction of new products stores, new revenue channels and new locations in the back half of the year. We are comfortable with the composition of our inventory as we enter the second half of the year which is historically our largest and most profitable period.

Turing to guidance, our objective for 2016 continues to be focused on the transition from sustained profitability to sustained profitable growth. For fiscal 2016 we have adjusted certain of our stated expectations mainly in consideration of the recent fluctuation of the dollar to the British pound. We now expect total revenue to increase in the low single digit range compared to the prior year.

Consolidated comparable sales to increase in the low single digit range for the full year and positive consolidated comps in the back half of the year which will be driven mainly by fourth quarter performance particularly given the negative 5.6% comp in the fourth quarter last year. Additionally we expect revenue in the back half to benefit from 15 to 20 more stores versus the fourth quarter last year, the strong line up of key stores that Sharon mentioned and the initial contribution of royalty income related to our outbound licensing.

From the profitability perspective on the GAAP basis including the impact of foreign exchange we now expect free tax income for fiscal 2016 to grow by 10% to 20% compared to the prior year excluding the impact of foreign exchange we expect pretax income to grow by 15% to 25%. The negative impact of foreign exchange is currently estimated to be in the range of $1 million to $2 million for the fiscal year inclusive of the $500,000 reported in the second quarter. Specific to the third quarter we expect total revenue to be down primarily due to the negative impact of fluctuations in currency exchange rate with additional headwinds from the closure to multi-million tourist locations in our fleet last year at this time.

From the guidance perspective we currently expect third quarter GAAP pretax income to be between $1 million and $3 million. Additional considerations for the second half include SG&A dollars to less than last year even with an increase in store count and higher total revenue resulting from lower marketing expense as we shifted investments to the first half of the year. A reduction in duplicated cost inclusive of third party fees due to efficiencies gain from infrastructure investment and process improvements and the overall level of preopening cost as the majority of the expenses for our new stores were incurred in the first half of the year. In fact, preopening expense for the second half of the year is expected to be flat with the prior year and approximately 50% lower than preopening expense during the first half of the year.

In regards to the fiscal year tax rate, we currently estimate an effective tax rate of approximately 34%. Again the unexpected movement in British pound exchange rate is also impacting the mix of earnings between different tax jurisdictions which will pressure the tax rate versus previous expectations in the full year basis. We anticipate ending the year with 345 to 350 stores with 50 to 55 stores planned to be in the discovery design. This is above our original expectations of 300 to 345 stores. We don't expect the increase in store count to impact our previously stated capital expenditures range of $25 million to $30 million due to our ongoing ability and effort to drive down the store build up cost. Depreciation and amortization continues to be expected in the range of $17 million to $19 million.

Thanks for your time this morning. We will now turn the call back over to the operator to take some questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Gerrick Johnson of BMO Capital Markets. Please state your question.

Gerrick Johnson

Good morning. The discovery stores, how are they comping against themselves so the ones that are reformatted last year how are those performing this year relative to themselves and then also how many stores I guess it was 13 stores that were down in the quarter are those stores included in the same store sales calculations or are they excluded and my last question you started one comment saying despite macro trends so can you just talk about the macro trends that are affecting right now? Thank you.

Sharon Price John

Sure. We don't have any discovery stores that are comping themselves yet.

Vojin Todorovic

First start up was in Q3 of last year, and the 13 remodel stores, they are not part of our comp numbers.

Sharon Price John

Yes and that question is simply referring to what's going on in mall traffic overall over the last three years?

Gerrick Johnson

Okay, sounds great thanks.

Sharon Price John

No problem. Thanks Gary.

Operator

Next question is from Stephanie Wissink of Piper Jaffray. Please go ahead.

Stephanie Wissink

Thanks. Good morning everyone. And thanks Sharon and Vojin for the additional color. I just curious shown on your comments regarding quarter-to-date sound like the first couple of weeks for a little of bit more difficult time as comparison, but then you seen a positive trend over the last couple of week. Can you just talk a little bit about some of the performance may be by brand or category where you’re seeing that step up and then also on top appreciate the timing shift which will want to make sure we fully understand and what you are suggesting in terms of the comp impact Q3 and Q4 by a couple of weeks?

Sharon Price John

Yes, so as I mentioned the Minions movie actually hit theaters July 10th of last year. So, our comparisons were still pretty tough to the first two to three weeks of July. Minions then started to decline significantly as a percent of our overall sale. So, we now through the balance of the quarter had much easier compares. A lot of our different programs are working I mentioned many of them, some of our proprietary properties as well as Barbie Doll working quite well for us right now, Star Wars is working quite well for us, The New Disney Princess there is working quite well. We like to see it hitting on all of those key consumer segments that’s when we generally have the best opportunities and so that's a younger girl, a boy, and a younger boy and girl mix with the Barbie Doll. So we're pretty pleased with our lineup as we go through the rest of the quarter. On the Trow impact we had planned on setting that Trow line towards the end of September when we first laid out our comp plans and shared our expectations on positive negative comps in January in the ICR meetings.

We still expect to see slightly positive comps, we now have to believe that they will affect the range of positivity from pushing the Trow into the fourth quarter. It's still the right decision, it's through the relationship and partnership with Dreamworks so that has been great. They have a very powerful marketing plan lined up for this is really exciting movie. The trailers are amazing and our product looks terrific. And we want be able to fully take advantage of that partnership. So overall we believe it will not affect the total sales of trolls probably improve the total sales of trolls. It's just the quarter shift.

Stephanie Wissink

Thank you and Vojin there is a couple for you. the first is with respect to the UK I know you are changing your pretax growth outlook based on currency but is there any change in the cadence of the business there based on what you see in terms of volatility in the currency?

Vojin Todorovic

So far what we have seen the real we haven't seen material impact to our business as a result of break, we are seeing just the impact as it relates to currency and it creating some volatility just like what everybody else but we are trying to mitigate some of that exposure. We are looking at different options how we can further mitigate some of those challenges either through pricing initiatives or looking at the ways to have some of our positions that we have outside of US.

Sharon Price John

We have already made a few pricing changes in the UK. Just easing up some pound prices at some natural breaks.

Stephanie Wissink

And is that both on owned and licensed properties Sharon or just your capabilities on -

Sharon Price John

Yes we kind of win across sort of our natural price expanding and ease them up per pound here and there.

Stephanie Wissink

Final question just on the balance sheet working capital looking at inventory level, can you just talk about the composition of that inventory and the balance sheet what you are seeing in terms of deployment of that either into your new store remodels or where we should think about those inventory being focused?

Vojin Todorovic

Yes. So as I mentioned like we are making some strategic investments as we are expanding beyond retail like thinking about the carnival cruise and like having some inventory for our wholesales business growing. We are expanding our product lines as well as we are going to building our store count. We expect to continue to make some of these investments in Q3 as well to get ready for Q4 but by the end of the year we are expecting to be on par with last year on for store inventory level at the end of the Q4.

Stephanie Wissink

Thank you, best of luck you guys.

Vojin Todorovic

Thanks Step.

Operator

Your next question comes from the line of Jeremy Hamblin of Dougherty & Company. Please go ahead.

Unidentified Analyst

Hi, this is David on for Jeremy Hamblin. Thanks for taking my question. Regarding the Pokémon it was obviously the big coincidental hit but seem like locations sold out pretty quickly how soon can the product be replenished and then what actions do you plan to take to respond the craze?

Sharon Price John

Yes so Pokémon we were very fortunate to the already in relationship with Nintendo with our Pikachu and Pikachu bundle and we have benefited from the Pokémon Go craze. The sell out was in uneven so we are you may have been in the store that was a Pokémon stop which sold out very quickly but we had started to pick up the sales of Pokémon across the board and we are seeing some stock out. We have been on the case for Pokémon since we saw it here and we are re-planning as quickly as possible additionally as I mentioned in the remarks we are adding a new character and that we had already been in the pipeline and we will be able to get that before the end of the year.

Unidentified Analyst

Okay. Thanks. And then just jumping over to the discovery remodels Q1 you noted that there was about 12% sales lift from the old heritage stores and now this quarter you mentioned they are coming at about 10% I guess now that more discovery models are coming into the system I guess what should we expect in terms of sales increase in the long term.

Vojin Todorovic

Based on these early indications what we have on stores is that we have opened we are seeing similar growth as we see in Q1 and Q2 we would expect on all these stores that we continue to remodel into a discovery format to see the similar growth rates. Once they start on - don't have enough history and we are going to start getting some of that late Q3.

Unidentified Analyst

Okay and then it looks like 2016 number or remodels were coming at the high end of your guidance just looking at it in the 2017 should we still expect around 50 remodels or is there a chance given their success this could be accelerated?

Sharon Price John

We really haven't shared anything about our capital plans into 2017 clearly when we work with the board and make those decisions the success of the discovery stores as well as our ability to continue to push down the cost of each of the subsequent stores that we are building will be a big part of consideration set. But we are very excited and feel good about the to-date performance of discovery and feel like that we have a tremendous solution on not only how to evolve the business model and in mall experience but also this model with the slow and excitement and the stuffer it's translating into non-mall areas, tourist areas, and non-traditional areas. So actually there is really not a place that we put it from a concept perspective and it isn't working. So we are looking forward to being able to continue to both remodel and build new locations with the discovery format in the future.

Unidentified Analyst

Okay. Thanks and just one last one. There is 31 discovery stores right now expected 50 to 55 on the year how much of that will come in Q3?

Vojin Todorovic

So probably most of the remodels are going to be done in Q3 some of the new stores as Sharon talked about temp to perm some of that is going to be late Q3 early Q4.

Unidentified Analyst

Okay great. Thanks.

Sharon Price John

Yes right. Most of our temp to perm stores when we are trying to access a new location with a percent of sale lease and we really try to get at least two of our big seasons under our bell. So we will - we want those opened before the holiday before Christmas. We like to run them before Easter. We often sign up the lease for a year to get a full assessment so we have really great information going into the negotiation.

Unidentified Analyst

Okay, great, thank you.

Operator

Next question comes from the line of Greg Pendy of Sidoti & Company. Please go ahead.

Greg Pendy

Thanks for taking my call. I guess just looking at the discovery stores you say on average they were up I guess 0.6% but if I am not mistaken now you have done some mall locations like Mall of America maybe some flagship locations like Myrtle Beach within the discovery format are you finding maybe more success in the malls or more success in the tourist locations?

Sharon Price John

Well, like I was just mentioning with the previous question this particular format seems to work in different types of location. As I thought about we try to provide you with some information on where they are slightly over performing they actually have a greater impact on stores that were already good for us which are amazing. So the malls at America store has been a very powerful remodel and the other one that you mentioned which is Myrtle Beach also very powerful remodel. But they have positive impact in more of a traditional type mall place like Christiana in Delaware for example.

Greg Pendy

Okay. Thanks. And then maybe I can just get one follow-up just on the tax longer term I understand there is a lot of noise in getting the tax up to 34% but what you think your normalized tax rate over the long term once this kind of stabilizes?

Vojin Todorovic

Well, I would expect it to be like closer to what we have previously in low 30s, but again, with some of these changes in the income that we are getting from different tax jurisdictions and specially the impact from the unexpected impact of the British currency devaluation impacted significantly so I think those things they get more normalized and we would expect to be in those low 30s.

Greg Pendy

Okay, thank you.

Operator

[Operator Instructions] Next question comes from the line of Mark Rosenkranz of Craig-Hallum Capital Group. Please go ahead.

Mark Rosenkranz

Hey, great, thanks for taking my questions. Just real quick, open the call talking about the productivity losses for the re-openings can you just walk us through what the typical ramp time to where you see after reopening where you get the normal levels?

Vojin Todorovic

Yes, so we talked about this in the past typically when we do these remodels it takes us 8 to 10 weeks before the store opens. So we have some down time. In all the cases if we are able we are trying to preserve the top line sales by opening a temp location and in the lot of the cases we are able to do that stuff but sometimes we are not able to secure the location or the economics for attempt location may not make financial sense and we will pass but typically 8 to 10 weeks.

Mark Rosenkranz

Okay great. That's all for it. Then last question from me just wondering if you can discuss the China opening one more Disney town you mentioned some credentials new franchise opportunities just kind of any opportunities you are seeing in terms of big markets we are looking at in the next couple of years internationally?

Sharon Price John

Yes. China is very exciting for us. We actually are in some initial conversations with quite a few potential partners on the franchising front the store is very exciting and the park is amazing. So we have - we feel very good about the decision that we have made particularly given that where we are working with the long term partner of our Disney. On the additional expansion front from an international perspective we have a great partner in Germany KFG they are best in class retailer and children clothing manufacture we are working with them to expand into other European countries from - that's a big potential for us to take a known partner and start to move into new countries as we mentioned on the call sometime ago, we have already expanded their right into Australia and Switzerland we should be opening in Switzerland soon.

We have also started to take another one of our important franchise, for example, our Australian franchise and we just expanded the rights in New Zealand and so that's kind of our first goal is to take known entities partners that are working well with us and help them build into new countries and then we are looking at the next year of opportunistic expansion in countries that there are large countries that we don't have a presence in that are stable but I would rather not mention that specifically right now as we are not in any sort of contract.

Mark Rosenkranz

Okay. Great. Thanks for taking my questions.

Operator

Ladies and gentlemen we have reached the end of the question-and-answer session. And I would like to turn the call back to Sharon Price for closing remarks.

Sharon Price John

Thanks for joining us guys and we really appreciate your time this morning and we look forward to speaking with you when we report third quarter results.

Operator

This concludes today's conference. Thank you for participating. You may now disconnect your line.

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