Build-A-Bear Workshop Inc. Q4 2007 Earnings Call Transcript

Build-A-Bear Workshop Inc. (BBW)

Q4 2007 Earnings Call

February 14, 2008 9:00 am ET

Executives

Molly Salky - Director of Investor Relations

Maxine Clark - Founder, Chairman and Chief Executive Officer

Tina Klocke - Chief Financial Officer, Treasurer and Secretary

Scott Seay - President and Chief Operating Officer

Analysts

Thomas Filandro - SIG

Paul Lejuez - Credit Suisse

Michael Corelli – Barry Vogel & Associates

Evan Wilson - Pacific Crest

Brad Leonard - BML Capital Management, LLC

Analyst for Brian Tunick - J.P. Morgan

Presentation

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 Build-A-Bear Workshop earnings conference call. My name is Michelle and I’ll be your audio coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Ms. Molly Salky, Director of Investor Relations. Please proceed, ma’am.

Molly Salky

Good morning, everyone, and thank you for joining us for a review of our results for the 2007 fiscal fourth quarter and full year. With me this morning are Maxine Clark, Chairman and Chief Executive Bear, Scott Seay, President and Chief Operating Bear, and Tina Klocke, Chief Financial Bear. In a moment I’ll turn the call over to Maxine to provide her comments on our financial results and 2008 business plan. Scott will update you on our store operations, distribution center, and logistics initiatives along with international franchising. Tina will follow with additional details on our financial results. At the end of our remarks we’ll open the call up for your questions. Members of the media who may be on our call today should contact us after this call with their questions. We ask that you limit your questions to one question and one follow up. This way we’ll get to everyone’s questions during this one hour call. Do feel free to re-queue if you have further questions. Please know that our call is being recorded and broadcast live via the internet. The earnings release is available on our Investor Relations website and a replay of both our call and webcast will be available later today at the IR website.

I need to remind everyone that forward-looking statements are inherently subject to risks and uncertainties. Our actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the risk factor section of our 2006 annual report on form10-K filed with the SEC and we undertake no obligation to update or revise any forward-looking statements.

In our earnings announcement this morning we announced that in June 2007 the company retained Lehman Brothers to assist it and the Board of Directors in an analysis in consideration of a broad range of strategic alternatives to enhance long term shareholder value. This review of potential strategic alternatives is continuing. While we hoped to have concluded this process by now, its timing has been complicated by a significant tightening of the financing markets and the general weakness in the retail environment. We currently expect that the Board will conclude its review by the end of the first quarter. There is no assurance that the conclusion of this process will result in any changes to the company’s current business plans or lead to any specific action or transaction. As before, the company does not expect to disclose further developments regarding its review of potential strategic alternatives until the review has been completed. Additionally, our policy is not to provide forward-looking guidance until the Board’s review of potential strategic alternatives is complete. We will not discuss the strategic alternatives process or earnings guidance further on the call today.

Now I’d like to turn the call over to Maxine Clark for her comments.

Maxine Clark

Thanks Molly and good morning, everyone. Happy Valentine’s Day and thank you for joining us to review our fiscal 2007 fourth quarter and full year results. The 2007 results for Build-A-Bear Workshop and for many retailers illustrates the very difficult retail environment we face. The impacts of slowing economic growth, declining mall traffic, and slower consumer spending are evident industry wide. These impacts could be even more dramatic for Build-A-Bear Workshop given the discretionary nature of our products and our experience.

Our disappointing comp store sales performance and full year revenue growth of 9% reflect this retain environment. Full year GAAP results also include the impact of $2.4 million in inventory write off and $1 million in costs associated with the strategic alternatives review. Importantly, the inventory write off positions us with a very clean and balanced inventory position as we enter 2008.

Our plan for 2008 combines new initiatives with our fundamental brand strength to address our biggest opportunity, attracting new guests to our stores. As we think about our business and priorities for the future, we consider how to maximize our core assets, our exceptional real estate, network of highly productive stores, our large and loyal customer base that includes our Stuff For Stuff members, and our extensive international franchise business. We are optimistic about our plan which addresses opportunities for growth in each of these areas and we see 2008 as an important rebuilding year.

Our 2008 plan includes a slow down in new store openings. This will help us refocus our business and align all operations around our goals of new guest acquisition and guest retention aimed at improving our comp stores sales performance. While we’ve never believed our concept to be a high comp store model, we know comp store sales are an important metric and we believe we can improve our performance. We plan to open approximately 25 new stores this year, down from opening 50 stores in 2007. Approximately 20 new stores are planned for North America compared to the 39 stores last year. In Europe we plan to open approximately 5 stores compared to opening 11 last year. This plan allows us to invest in building our long term brand value with the addition of our virtual world, BuildABearVille.com. In addition to leveraging BuildABear.com to bring profits to our stores, our ongoing marketing and merchandise plans balance initiatives to attract new guests and retain existing guests. We will enhance communications to our loyalty program members which today includes about 5.6 million guests and places emphasis on our broad product newness and collectibility, a fundamental strength of our brand. Before describing each of these initiatives in detail, I’d like to recap the results of our European operations.

We are proud of the performance delivered by European operations in 2007. Our brand building and store operation strategies have begun to take hold with the operations delivering significantly improved results compared to 2006. This segment of our business now includes company owned stores in France along with our stores in the United Kingdom and Ireland. We opened 3 new stores in the UK and one store in France during the fourth quarter. We ended the year with 49 company owned stores in Europe. Fourth quarter sales were $23.5 million up 49% from 1$5.8 million in the 2006 fourth quarter. Our operating performance in the quarter was significantly improved. We reported operating income of $5.1 million compared to $3.3 million last year. For the full year, sales from European operations increased to $59 million and delivered operating income of $700,000 compared to a $1.5 million loss last year. For the year European stores showed an increase in average transaction value, an increase in party sales, and strong positive comp performance. In addition, guest satisfaction scores continue to be very high in Europe. In some stores, even higher than our North American average.

Party sales as a percent of revenue, while still lower than our North American stores, have showed a steady increase this year and we’ve placed more marketing emphasis on the party opportunity in the UK. Just a reminder that out of home parties in retail stores are a US phenomenon that Build-A-Bear Workshop has pioneered. We believe we will have several years of growth in this area as the trend continues to grow in the UK and France.

We see continued opportunity for growth in 2008. Our strategy includes driving top line growth through raising brand awareness and communications with guests as well as a plan to launch our Stuff For Stuff loyalty club program in the second half of the year in the UK. We also expect to improve gross margins through lowering occupancy costs on new stores which we made some progress during 2007 by a better negotiation of new store locations.

Let me now discuss three key initiatives included in our 2008 plan. The first is investing in our virtual world, BuildABearVille.com. Our strategy has always been to put our brand wherever families and kids go to have fun. Our investment in BuildABear.com recognizes the powerful and emerging trend of kids’ interaction and play in the online space. Our goal with BuildABearVille is to leverage the brand equity we’ve built in the real world by creating a complementary brand experience in the virtual world. We also aim to create synergy between our real world stores and our virtual world website to attract new guests and returning guests to our stores. In the real world we’ve created a safe place where children can play, express their creativity, and use their imagination. We’ve brought our concept to many locations around the world and now we’re bringing the same qualities that parents value and trust and kids love about Build-A-Bear Workshop in the real world into the virtual world.

We designed BuildABearVille to be a place where kids can grow their friendships with their furry friends as well as their real life friends too. This [inaudible] challenge with an educational quests and adventures and learn lessons about being responsible citizens of the world and have good real world behaviors reinforced all in a fun way. We believe we have a unique competitive advantage in this new virtual world market because we are the only company with both real world stores and a virtual world. With over 60 million stuffed animals sold and our impressive database we have a large number of guests already familiar with our brand ready to attract to our virtual world. Having both also allows us to control the in-store experience and incorporate traffic driving and therefore revenue driving features into the overall process to drive in store and online sales.

BuildABearVille surpassed the 1 million online character milestone just 6 weeks after going live on December 11^th. We’re pleased with this initial adoption phase progress which is better than we expected and continues to accelerate each day. You may be familiar with internet play but what’s different about BuildABearVille? Our site offers more than playing games and collecting points. It offers a level of personalization that we think is different than any other site. BuildABearVille has no fees and imposes no expiration dates. The site offers many special features including the ability to create a unique online character or avatar whose hair and skin color, along with personalized style and color of clothing. By participating in games and quests, guests can earn Bear Bills, the BuildABearVille currency. This virtual money can be used to customize and purchase from a vast array of clothes, furniture for their cub condo homes, and other items. Citizens can also trade items they’ve purchased with others in the world and several measures are in place to help protect the privacy and safety of guests visiting BuildABearVille including a safe chat system that allows parents to control the chat options for their children. In addition, the site is monitored for safe socialization.

The emerging trend of internet and virtual world play is powerful. In 2006 kids age 2 to 11 spent an average of 9 hours and 24 minutes per week online, an increase of over 40% from 2003. By kindergarten, 32% of kids have used the internet. The largest group of new users to the internet are kids 2 to 5. Market research MPD group founded a recent study that approximately 39% of children’s game time is spent connected to the net. Kids sitting at home playing on their computers does not help us unless they are playing with our animals and our virtual world and that is our objective.

If you’ve been to one of our stores lately, you’ve no doubt noticed the store signage supporting the virtual world. Throughout the store, from the front windows to the stuffer to the naming station to the cash wrap, we’ve integrated virtual world messaging to raise awareness. This integration of the virtual world into all of our marketing tools continues and will also include TV advertising as well. Our 2008 marketing programs will leverage BuildABearVille as a new platform for communicating with guests. The virtual world is real news and a highly relevant new offering to tell our guests about. The unique characteristics of BuildABearVille combined with our loyalty program, the Stuff For Stuff Club, gives us additional opportunities to leverage, reward, and communicate with our best guests.

Our Stuff For Stuff Club loyalty program rolled out nationwide in June 2006 and today membership in the program has grown to 5.6 million members with 4.2 million members having at least one transaction within the last 12 months. Our latest data shows that in January 2008, approximately 74% of our transactions were made by Stuff For Stuff members, either a first time visitor to our store who signed up at that purchase, or a returning guest. This is evidence of how appealing the program is to our guests and how important our loyalty program members are to our business. We want to make sure our returning guests receive special attention, particularly in today’s environment when getting customers to the mall is not easy.

This month we began offering these special guests another added benefit: for every dollar spent in Build-A-Bear Workshop stores, Stuff For Stuff Club members will receive 100 Bear Bills, the BuildABearVille virtual currency used to purchase clothes, décor, and other accessories in the world. So if Mom spends $35 in our store, her child gets $3500 Bear Bills to spend in the virtual world. This is just one example of the ways we can offer our guests special benefits and drive visits from the store to the virtual world, and from the virtual world, back to the store. With meaningful Stuff For Stuff Club program experience under our belt, we have new initiatives planned for 2008 to further enhance communications and benefit for these important guests. Through our detailed analysis of guest shopping behavior, we know that a guest who returns to the store within 90 days of their first visit is 5 times more likely to become a best guest, and we define best guest as one who visits our store 4 times or more per year.

Leveraging this learning, we’ve instituted for 2008 a welcome kit message to all members within the first 30 days of their first visit. Moving more members into the best guest category is a key growth strategy. We launched the Stuff For Stuff Club program in Puerto Rico in October 2007 and expanded throughout Canada, including Montreal, in November. Our plan is to launch the program in the United Kingdom in the second half of 2008.

A fundamental strength of our business is our strong merchandising expertise. We know that the consistent introduction of new seasonal and collectible products drives newness and excitement with guests. Our product assortment in 2008 continues to emphasize newness and collectibility. During 2007 our limited edition collectible series, the Bears For All Seasons, was so successful that we introduced another special series this year. The Gem of a Friend series began in January with Precious Pink Teddy. It’s important to note that all new products introduced in 2008 have a unique tie in with BuildABearVille In addition to extra Bear Bills, each comes with a unique condo room and an exclusive virtual world bonus. In the case of Precious Pink Teddy, her bonus is a princess crown. In February the Groundhog reappeared in our stores. You may recall that last year the Groundhog sold out over a single weekend. This year we planned for the product to be available in our stores until late February. Our spring assortment includes our first ever Pink Bunny and Yellow Happy Chicks, our limited edition product for Easter.

Staying relevant with our customers is a key success factor. Our assortment of Hannah Montana, High School Musical, and Cheetah Girls clothing and accessories continue to be very strong performers. We will build on this assortment throughout the year and you may see other celebrity tie ins. This summer the world will be focused on the Summer Olympic Game sin China and we will have great merchandise as well as a strong focus on sports and exercise in our stores. We are optimistic that our product and merchandise assortment can help us attract new guests as well as always offering something new for our returning guests.

Now for a quick update on RideMakers. RideMakers is a new interactive retail concept that allows children and families to build new and customize their own personal cars. Our partnership with RideMakers includes a capital of investment of approximately $3 million along with operational and advisory services in exchange for additional equity ownership. RideMakers completed its first holiday season with four stores located in Myrtle Beach, South Carolina, Minneapolis, Minnesota, Fredericksburg, Virginia, and Indianapolis, Indiana. The outlook for 2008 s to open 8 new stores. Locations include Detroit, Chicago, Houston, Baltimore, Hagerstown, Maryland, Appleton, Wisconsin, and Branson, Missouri. The stores are highly interactive and early results show that the concept appeals particularly to boys ages 6 and older. Guest survey data is very positive. Approximately 95% of respondents indicate that they are likely or highly likely to return to the store and over 90% of respondents rated their level of satisfaction as satisfied or highly satisfied. In January RideMakers was awarded the 2007 Chain Store Age store of the year in attraction retailing for store sizes 5,000 square foot and under. Our operational partnership with RideMakers has given them the ability to focus on refining their product offering and store operations rather than building their infrastructure, a distinct advantage for the concept.

I’ll conclude my portion of the call with a few final comments. Last year was a very difficult year for our company and the environment continues to be tough so far this year. We’re going to work harder and smarter. Our plan to slow down new store growth will allow us to focus on our existing stores and our comp performance. A fundamental brand strategy for our company is to add value to our product and brand by investing in marketing rather than markdowns. While our marketing spend as a percent of revenues will be similar in 2008 as compared to 2007, we’re challenging ourselves tog et more from our marketing dollars. Our aim is to both attract new guests to our concepts and support our growing base of returning guests with our marketing programs. With this in mind, we are re-allocating marketing dollars in 2008 to test how shifting our investment can better achieve this goal and using BuildABearVille as a new platform for marketing messaging.

Finally, in good times and challenging times, a fundamental strength of our company remains our very strong economic model. Our store model has delivered net income growth even in difficult economic climates. Our stores are highly productive, generating strong sales per square foot and positive cash flow. Our stores have typically paid for themselves in the first year of operation. This store model and our unique store experience have placed us in a position to weather continued tough times and maximize and grow our business when the retail environment improves.

Now I’ll turn the call over to Scott for his comments.

Scott Seay

Thanks, Maxine, and good morning, everyone. Let me start with a store update. During the fourth quarter, we opened 8 new Build-A-Bear Workshop stores in North America, 3 new stores in the United Kingdom, and 1 additional store, our third, in France. As Maxine discussed, our plan in 2008 is to slow our store opening pace. Opening fewer stores this year will allow our store operations team to focus on comp store performance and spend more time in the field visiting our existing stores. This plan also maximizes sales cannibalization. Most of these new stores are smaller format stores. From our UK experience we learned that we could successfully operate stores in a smaller footprint without sacrificing the brand experience. We re-engineered our store design and developed a format that works in about 2,200 square feet compared to about 2,800 square feet in the past.

A couple of important points: first, these stores incorporate all elements of the Build-A-Bear Workshop concept, so we are not limiting our product our experience in any way. Second, the store economics are in line with our regular mall stores so we’ve lowered the capital required while still maintaining a large tenant allowance. Third, we can operate the store, keeping payroll costs in line with our corporate goals. The result is a very strong model that continues to be the backbone of our business.

One additional comment with regard to our 2008 store growth plan. With this lower store growth, we also see an opportunity to integrate our international franchise team with our domestic team to better provide overall consistent training and support for our franchisees. Last year we strengthened our international focus by aligning our US based functional departments with the respective contacts within our international franchise organizations. This more fluid organization allows us to provide resources to the international franchisees to assist them in growing their business and at the same time protect our brand. We ended the year with 21 countries under franchise agreement and with 53 stores in 15 countries. By aligning more of our internal resources, including store operations, marketing, and assortment planning and allocation, we see an opportunity to solidify and strengthen this business as a growth platform. During 2008 our international franchising will focus on existing stores and countries rather than expanding our base of countries. Although there are a few key countries where we will continue our efforts to find qualified franchisees.

Franchisees anticipate opening 15 to 20 new stores this year, including 3 additional new stores in South Africa, which has proven to be a successful country for our brand. The plan is to open in one new country through our goal state franchisee and the United Arab Emirates. Our ability to expand in overseas markets is highly dependent on our ability to find suitable locations. The right size location, the right mall, the right location in the mall. These elements are all much more difficult in overseas markets than in North America.

We found that in India, our concept was a bit early. Our franchisee in India will be closing their 3 concession stores next month. They had difficulty identifying cost-effective retail space and the right locations and the impact of high import tariffs and other costs unique to that country inflated the price of our products. Overall, while we wish they could have been more successful, it’s been a positive learning experience for us.

International franchising is another ground breaking hallmark of the Build-A-Bear Workshop brand and a business model and while we are encouraged with our overall international performance, we are still learning and adjusting our international strategies with each new country. While our experience in North America is a powerful base, we know from our experience in the UK and Canada that there are differences in operating in various economies and cultures. We balanced leveraging their expertise with our franchise’s brain with our company-owned store history. We feel that our brand is extremely relevant but timing our entry into emerging markets in particular and unique economic considerations of those markets is very important. We clearly view our extensive international franchise business as a core asset of our company and a growth platform for the future.

In 2008 we looked to find savings through our logistics and distribution system. We’ve now had our company owned distribution system fully operational for about 18 months. We realized initial benefits of having inventory centralized with systems in place that help us manage our supply chain and provide us greater visibility to inventory movement. One of the early benefits has been our ability to test and alternate our distribution methods. We now use a variety of distribution methods for moving product from the warehouse to our stores and alternate the method depending on store and seasonal inventory demand.

The headwinds we have faced relative to realizing cost savings have been rising fuel costs. In 2007 fuel surcharges continued to increase, making it difficult to gain overall cost savings from our distribution process. Finding ways to mitigate continued fuel price escalation is the high priority this year.

Another cost savings opportunity in 2008 is our inbound distribution systems. As you know, the majority of our merchandise is produced in China and comes to the United States and the UK via over-the-water container transport and in this [trough] or rail to our distribution centers. Our company-owned DC is in Ohio and our third party distribution centers are located in Toronto and in Middlesex, England. We are evaluating ways we can consolidate our inbound shipments to gain efficiencies, consolidating both containers and shipments, and ways to get increased visibility to this inbound inventory movement. We expect to have some changes in place by mid year that will benefit our overall distribution system costs.

Moving now to inventory, our consolidated inventory at the end of 2007 stood at $48.6 million compared to $50.0 million at the end of 2006. However, on a per square foot basis, excluding inventory on our web store, inventory declined about 18% to $53.00 per square foot down from $65.00 a year ago. We’ve entered the first quarter with a clean and lean inventory and are comfortable with these levels. We’ll continue to monitor and adjust inventory on a real time basis to insure that the inventory levels remain appropriate.

In closing, I’ll add that we continue to closely monitor all expenses and strike a balance between our store payroll costs and providing a wild guest experience in this difficult economic environment. Now I’ll turn the call over to Tina.

Tina Klocke

Thanks, Scott. I’ll add some additional details regarding our fourth quarter and full year performance. Our fourth quarter total revenue increase of $4.1 million was fueled by new North American stores opened in the last 12 months, an increase in European sales of $7.7 million, and higher combined revenues from franchise fees and licensing. These increases were partially offset by a decline in North American comp store sales. Also, our 2006 fourth quarter revenues included a loyalty program adjustment, benefiting sales by $5.2 million. Consolidated net income in the quarter of $9.9 million included operating income from European operations of $5.1 million compared to $3.3 million in the year ago quarter. Our GAAP gross margin rate in the fourth quarter was 46.2%. Within this gross margin rate was continued strong and improved merchandise margin driven by the stronger margin we received on our European sales. Cost of goods sold in the fourth quarter includes the $2.4 million pretax, $1.6 million net of tax inventory write off. This write off of inventory included excess Shriek inventory.

You’ll recall that the 2006 fourth quarter gross margin benefited from two adjustments. The first was an adjustment to our loyalty program deferred revenue totaling $5.2 million. The second was an inventory cost adjustment that reduced cost of goods sold in the UK by $1.2 million. Adjusting for these special items, the decline in gross margin was primarily attributable to the lack of leverage on our fixed occupancy costs in the North American operations.

During the fourth quarter the SG&A expense margin increased to 36.8% compared to 35.2% last year. The margin reflects higher costs associated with a review of strategic alternatives totaling $400,000 pretax or $300,00 net of tax, an increase of store payroll as a percent of revenue, and higher stock based comp expenses.

Moving down the income statement, the effect of tax rate was lower than last year at 33.3% in the fourth quarter versus 38.4% last year as we benefited from an increase in product contributions made in 2007. In the fourth quarter we partnered with the Marine Toys For Tots program which was struggling to achieve their goals. We donated a stuffed animal or toy with every product sold in our stores over the weekend of December 22^nd to December 24^th. In 2008, we looked for a tax rate of about 37%.

Looking now at our full year results, I think it’s helpful to talk through the items impacting the GAAP results. Full year 2007 operating income was $33.5 million versus $46.9 million last year. The 2007 GAAP operating income includes a $2.4 million pre-tax inventory write off, costs related to the strategic alternative review of $1 million pretax, and higher stock based compensation expense of $800,000. The 2006 GAAP operating income included distribution center costs of $1.7 million pretax, the benefit of the frequent shopper program adjustment totaling $3.6 million pretax, and the UK inventory adjustment totaling $1.2 million.

Now for a couple comments on the balance sheet. Capital spending in the fourth quarter was $8 million, up $6 million in the 2006 fourth quarter. For the full year our total spending was $34 million in line with our plans. We entered the year with a cash balance of $66 million. During the year we did not utilize our line of credit. Our policy is not to provide forward-looking guidance until the Board’s review of potential strategic alternatives is complete. However, I’d like to note several assumptions in our 2008 business plan.

We expect to maintain our marketing spend in the range of 7% to 7.5% of total revenues. Separate from this spending is our investment in the development and ongoing support of the virtual world. Capital expenditures will decline reflecting our slower new store growth. We expect CapEx to be in the range of $25 million to $30 million and depreciation and amortization to total approximately $30o million. With regard to the quarterly flow of our earnings in 2008, there are a couple of things to note. First, 2008 is a 53 week year and the 53^rd week falls into our fourth quarter. Also, Easter shifts to the first quarter in 2008 versus the second quarter in 2007.

Our gift card business in the fourth quarter grew as a percent of our total sales, however, the gift card results still reflect our decline in traffic which impacts our first quarter sales that are driven in part by gift card reductions. Our business in the UK has improved significantly; however, our outlook for 2008 is for the seasonality of the business to remain fourth quarter heavy. In 2007, the European operations generated losses in the first, second, and third quarters and delivered a profit in the fourth quarter and for the full year. We expect that seasonality to be similar in 2008.

Finally, our outlook for 2008 assumes a challenging economic environment with modest improvement expected in the second half of the year.

This concludes our prepared remarks and I will turn the call back to Molly.

Molly Salky

Thank you, Tina, and before we open the call up for your questions, I’ll just repeat that our review of strategic alternatives is continuing ad we currently expect that the Board will conclude it’s review by the end of the first quarter. During the review we are not providing forward-looking guidance and we do not intend to discuss these matters further on the conference call today. So please focus your questions on our financial results and business initiatives that we have reviewed on the call today.

Now I will open up the call for your questions. Operator, we are ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Tom Filandro of SIG. Please Proceed.

Thomas Filandro - SIG

Thanks. My question actually is related to the strategic review. It’s not specific, but I have to understand this. You noted that you wanted to conclude the review by year end and then you highlighted that the credit market tightening and the environment were the two reasons why you were unable to do that. So sort of a two part question. I see the first part is given the credit market tightening remains a factor in here and you clearly identified that the market is challenging, why would we now conclude that by first quarter you’d be able to complete this strategic review and then second part o this question, it sounds like the credit markets are tightening, it seems to me that you guys are suggesting there was some sort of a deal on the table, either private equity or strategic. The final piece here is why are you not buying back stock? The stock is down 15% today. What are you guys doing with your cash? Thank you.

Molly Salky

Hey Tom, it’s Molly, and thanks for that question but we’re really not able to respond to any questions related to the strategic alternatives review. Can we have the next question please, Operator?

Operator

Our next question comes from the line of Paul Lejuez of Credit Suisse. Please proceed.

Paul Lejuez - Credit Suisse

Hey guys. Can you provide the comp breakdown before traffic and ticket? I’m not sure if you did that.

Tina Klocke

Paul, it’s Tina. It’s all transaction based.

Paul Lejuez - Credit Suisse

Okay and can you talk about the $25 million to $30 million of CapEx? How does that break down, new stores versus maintenance versus whatever IT projects or anything else you have going on?

Molly Salky

The majority of it is going to be in the new stores and then there will be some investment in some IT and then just some general capital.

Operator

Our next question comes from the line of Michael Corelli of Barry Vogel &Associates. Please proceed.

Michael Corelli – Barry Vogel & Associates

Hi, good morning. I got two questions for you. One about the store growth. Considering the economic environment and the fact that you’ve had pretty materially negative comp store sales here, obviously we would like the company to focus on getting the maximum return and maximum improvement out of their existing stores, although I’m encouraged to see you pulling back on the store growth, why not pull back even further?

Molly Salky

Well, we look at every store location appropriately and some of these have been in the plans for quite some time and are important to our location and to our customer strategy and the majority of them, I believe it’s like 75%, are in markets where we don’t even have a Build-A-Bear Workshop store, and we have been working towards building a store there. So I think this is a minimal amount of stores for us. The last time we opened up around the same number was in 2004 and that was really a major watershed year for us that allowed us to balance the store growth with also a whole change in our marketing strategy and we think similarly this is very manageable for us and opportunity for us to expand our reach in important markets for our guests and not cannibalizing existing stores.

Michael Corelli – Barry Vogel & Associates

Okay, and then I just had a question about the inventory. Obviously it was a pretty dramatic reduction which was good to see in this environment. Did you do it because of the economic environment, did you end up selling out of certain products, or what was the reason for such a substantial decline there in the inventory?

Scott Seay

This is Scott. We’ve really been watching it throughout the year and we’ve taken a look at our core product by store and made adjustments each month based on what we saw in the forecast of our sales and in the current trends so we’ve pretty much been doing it all year in a very systematic method and we feel like this is the right place for us to be given the current economic situation and where our store sales are.

Operator

Our next question comes from the line of Evan Wilson of Pacific Crest. Please proceed.

Evan Wilson - Pacific Crest

Good morning, thanks for taking the question. I was wondering if you’re prepared at this time to provide any other metrics on BuildABearVille.com other than the 1 million registrants that you disclosed a couple weeks ago. Particularly I would be interested in the number of repeat users, the stickiness of the site, average concurrent users, or anything else you can provide. Thanks.

Maxine Clark

We haven’t really... we just look at those internally but we will eventually be putting those together as we can start to see comparability between months because it’s all on such a zero base but we are really encouraged, there’s a lot of repeat visits, there’s people with multiple animals and very high point scores and condos decorated as you could see if you went on there and we’re very, very positive about it. The goal, as I said, the really important part, it looks great, it is great, kids are having a lot of fun. Now how do we use it to drive sales and traffic back and forth to our real world stores? That’s our main focus.

Evan Wilson - Pacific Crest

Let me jump in with a follow up then. You said in your prepared remarks that the site is aimed at driving both in store and in game revenue. Right now it appears to be mostly in store. Do you think that in game revenue is something that is a possibility in calendar 2008?

Maxine Clark

I don’t think I mentioned that we were meaning revenue on the website. Children really can’t buy online. In BuildABearVille.com we expect that people will be excited about products and want to buy them and then their parents will go to BuildABear.com to buy new animals and things as they always have, that’s an important part of our business, but there probably are some revenue opportunities in co-branding and co-marketing, some things that we are working on that you might see down the road in late 2008 but probably more likely in 2009 as the technology allows us to do that. We have a lot of developmental things that are about Build-A-Bear Workshop that we want to make sure are there and functioning and there’s constantly every week new things coming out, so we don’t think that they’re actually going to buy online in BuildABearVille.com but they will go to BuildABear.com and make purchases as well as go back to the store because everything’s about the animal and there are other things that you’ll be getting in our store like, this past Valentine’s Day we had Valentine’s cards and included in the Valentine’s card for everyone that you would give a Valentine to is an online gift so when you go online and you have a registered avatar online, you can in fact pick up the gift and have one for you and have one for all your Valentines, and you’ll see that happening also as we expand in our licensed products, products sold with the Build-A-Bear Workshop name on them like our Nintendo DS game and other products. They’ll also feature an attribute that could take you back to BuildABearVille.com and then hopefully drive you to sales to buy things in our stores and online.

Operator

Our next question comes from the line of Brad Leonard of DML Capital Management. Please proceed.

Brad Leonard - BML Capital Management, LLC

Hi, thanks for taking my call. I’ve got a question and follow up. How much do you think it hurt you guys in Q4 to run out of the Rudolph and Clarisse so early?

Tina Klocke

Well we had it into the early part of the second week of December and we bought more than double what we bought of Mumble the prior year. It was well over double. So I don’t know that we could have been much more aggressive in light of the economic situation. I think what the good news for us was what really happened was that people were early on, I think we bought enough quantity, but what we didn’t anticipate was that people were going to be buying both of them, so our average transaction in the early weeks of November when it launched and into December were double their normal levels because people were buying Rudolph and Clarisse and actually, because we have this data on our customers, we looked at our existing customers from 2004 when we had Rudolph before and we figured a certain amount of them that were still our customers, a lot of them, but that they wouldn’t buy it again, but surprisingly, they also bought it again and that was a good thing but also it didn’t help us in our projections towards unit transactions so I think that where the opportunity was in this case was that we can sell two animals to a customer in the right time frame that go together as a key holiday story and we’re working on some of that as we go into 2008 holiday. That was really the miss there. We sold very well our polar bear and our winter bear and all of those things were online and then we launched our Valentine’s Hearts For You Puppy 12.26 as we always do and it was a huge success so I think that it hurts you because it’s what people wanted and it was really cute and successful and if we had it we would have sold more things but I don’t know that anybody would have suggested that we buy more than 50% more than what we sold of Mumble and it was significantly more of course than what we sold of Rudolph the first time that we had it out a few years ago.

Brad Leonard - BML Capital Management, LLC

Okay and then my other question, you know, we didn’t really talk about this, and I didn’t hear anything about the sales per square foot. It looks like the stores that are younger than 3 years had the biggest percentage decline in sales per square foot. Is there something I’m missing in there or is that just that new stores are opening up weaker or does it have to do with them being smaller or?

Tina Klocke

It actually has for the fact that there’s two really large stores in there and those are the New York City store and the [Santa Mall Hall] store which are both significantly larger. New York is about 20,000 square feet and [Santa Mall Hall] is almost 7.000 square feet. So those are in there and not necessarily performing at the Build-A-Bear $600 a foot that you we’ve done in the past but some of the smaller stores... there’s a real good cross section in there because we have stores at $1000 a foot and more too but it did weigh us down.

Operator

Our next question comes from the line of Brian Tunick of J.P. Morgan. Please proceed.

Analyst for Brian Tunick - J.P. Morgan

Hi, it’s [Evron Copeland] for Brian. A couple of questions. First, can you give us your thoughts on your competitive positioning online given the success of some of the already established players like Webkinz?

Tina Klocke

Well, we think that obviously we have a... They’ve been very successful at this project of creating a brand that sells online, sells in stores, and then has kids take it online. There’s no doubt about it, and along with Club Penguin, which also has been successful but doesn’t really sell any products yet. So I think that they opened the door for lots of us to have a new platform and I think that our 60 million animals that have been sold to customers, not that we’ll be able to awaken all of those customers, because many of them now are much older and starting to have kids of their own after 10 years of being in business, but that there is a strong hold there with those customers. They like their Build A Bear stuffed animals. They still have them, but the play pattern with the Webkinz or the play pattern online at Club Penguin is different and we think we’ve combined the best of those. For our first month out, a very, very significant growth rate, more significant, took them much longer to get there to 1 million than it took us, so I think we’ll really be seeing that ramping up as we do every day and especially as we drive more marketing around it, you’ll start to see every single piece of marketing that Build-A-Bear Workshop has adding the BuildABearVille.com marquee as well and kids getting more and more and more familiar with it and also the idea of the Stuff For Stuff so I think we have opportunities because we control our four walls in the real world to really drive this differently than competition. We’ve also done a lot of survey work on this and we know what kids think about BuildABearVille.com vis a vi the others and we are doing quite well in all of those metrics.

Analyst for Brian Tunick - J.P. Morgan

Great, and then a follow up to that is you said you’re going to make some changes to your marketing plans. Can you give us any details I guess can especially on what kinds of things maybe to drive traffic to the stores and the relationship between BuildABearVille.com and your stores?

Tina Klocke

A few things, as they’re unfolding. Last year we realized that we spent significant dollars in marketing and we’d like to remind everybody that that is our version of markdowns, that we don’t offer markdowns to our customers, so if you could put a big sign in the window that says “25 off” or “buy one get one free” although those are techniques that we could employ in the future, and so our marketing has to really build our brand. We conducted quite a bit of ongoing research, especially to the end of the year, and found that our customers really do, the people that know Build-A-Bear Workshop love it, and there’s still lots of people who haven’t yet to come, so we have to make sure that we’re rally driving the brand, so we’re going to continue to refresh our commercials.

You’ll see a new series of commercials coming out in the second quarter that reflect a much more modern approach, kind of the way kids are. They are changing rapidly but the way they’re thinking today and the way they’re playing today and instead of having product 15 seconds in the first half of they year like we had last year, there will be less of those and we’ll be focusing on part of those will be dedicated to BuildABearVille.com but also to some events that we have that drive traffic so next weekend we have our Leap Day weekend which comes once every 4 years. The last time we had it, it was a huge success, and we will be having a special gift with purchase, and it’ll be the first time we’ve ever promoted a gift with purchase on television, so we’re excited about that. It’ll start on Monday of next week and sort of build in power so that it drives the weekend traffic. I think that’s the first time we’ve done it and that’s or way of maybe getting some... I would use here Mom will drop her dish towel and get the kids in the car and get to the mall and we think that will be a good opportunity for us and we’ll see how that one does because we have other gift with purchases as we always have but we’ve made them bigger and better than the past and I think we can, in fact, if that’s a successful tactic, we’ll use our 15 seconds like that.

The other is that we’re doing online advertising because the customer is online. Moms are spending time reading and visiting information websites and we are in front of them for that. Wherever we can be to be where they are today. We also use magazine advertising, selectively, so while we’re still spending a significant portion on television advertising, we’re changing up the mix and maybe not so much in the first half as we would have had before working more on the second quarter, I mean the second half for what we’ve learned in the first half, but there’s some risk to that too because we did run a lot of advertising last year and we may not be running the same levels to the same audience this year and there’s some risk but we think that it’s worthwhile, taking the risk and switching some of the emphasis to driving traffic specifically on a weekend and getting customers to come in for something special that they wouldn’t get otherwise, and not lowering the price of our merchandise to do it.

Operator

Our next question is a follow up from the line of Paul Lejuez. Please proceed.

Paul Lejuez - Credit Suisse

Thanks. Tina, I just wanted to go through what it costs to build a store, just going back to that CapEx question. I was under the impression that it cost under half a million from a CapEx perspective to open a store.

Tina Klocke

It costs between $450,000 and $500,000 net of tenant allowance.

Paul Lejuez - Credit Suisse

So more than half the CapEx sounds like it’s going to things other than new stores.

Tina Klocke

As we had said on the call, we’re going to have some investment in the virtual world. We’re also going to invest in some additional IT systems such as our time and attendance system with work that will go in mid year this year, and some other just initiatives that from a maintenance perspective on our IT such as new planning abilities in our merchandising systems.

Paul Lejuez - Credit Suisse

And then just one clarification on the inventory write down. What happened to those units? Did you sell those units or did you get rid of them or are they still in stores and you just took a write down on them? Where are those units?

Tina Klocke

A sizable portion of them were donated to the Marine Toys for Tots and the remaining portion was destroyed.

Operator

Our next question is a follow up question from the line of Brad Leonard. Please proceed.

Brad Leonard - BML Capital Management, LLC

Hi. Could you tell me, did you say the merchandise margin was stronger and that the Q4 gross margin looks like it really came down. Was that just all of deleveraging on the occupancy?

Tina Klocke

Well, it’s deleveraging on the occupancy in the North American stores plus it includes the $2.3 million write off and so the initial merchandise markup still remains strong on our products.

Brad Leonard - BML Capital Management, LLC

So the merchandise margin’s the same? Or was it higher?

Tina Klocke

It was slightly higher.

Brad Leonard - BML Capital Management, LLC

Okay, thanks.

Operator

Our next question is a follow up question from the line of Michael Corelli. Please proceed.

Michael Corelli – Barry Vogel & Associates

I had a question, kind of a follow up to the question. Are you allowed to buy stock at all during this strategic alternative review?

Tina Klocke

No.

Michael Corelli – Barry Vogel & Associates

Okay, and has the company considered, obviously you talked about the economic environment and the credit environment, and I know you haven’t commented that a sale, the company is the focus, but obviously it’s one of the options. If the company is not able to accomplish that, I would hope that they are considering maybe a major share repurchase program because you could probably take out 25% of the current shares outstanding with the cash balance and I think that’s something that should be considered with your stock down at these levels if you can’t accomplish something else.

Maxine Clark

Thank you, Michael. It is a broad review of strategic alternatives.

Michael Corelli – Barry Vogel & Associates

Okay, thank you.

Operator

Ladies and gentlemen, this does conclude the question and answer portion of today’s conference call. I’d like to turn the presentation back over to Ms. Molly Salky for any closing remarks.

Molly Salky

Just to say thank you, everyone, for your participation today. Feel free to give me a call if you have any follow up questions. Have a great day. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. This does conclude your presentation and you may now disconnect.

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