Build-A-Bear Workshop Inc. (NYSE:BBW)
Q3 2012 Earnings Call
October 25, 2012 9:00 am ET
Maxine Clarke – Chief Executive Officer
Tina Klocke – Chief Operations and Financial Officer
Tom Filandro – Susquehanna Financial Group
Gerrick Johnson – BMO Capital Markets
Greetings and welcome to the Build-A-Bear Workshop Third Quarter Fiscal 2012 Results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Alison Malkin of ICR. Thank you, Ms. Malkin. You may begin.
Alison Malkin – ICR
Good morning. Thank you for joining us. With me today are Maxine Clarke, Chairman and Chief Executive Bear, and Tina Klocke, Chief Operations and Financial Bear.
Before I turn the call over to management, I want to remind members of the media who may be on our call today to contact us after this conference call with their questions. We ask that you limit your questions to one questions and one follow-up. This way, we can get to everyone’s questions during this one-hour call. Feel free to re-queue if you have further questions. Please note our call is being recorded and broadcast live via the Internet. The earnings release is available on the Investor Relations portion of our corporate website and a replay of both our call and webcast will be available later today on the IR site.
Before we get started, I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties and our actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the risk factors section in our annual report on Form 10-K, and we undertake no obligation to update or revise any forward-looking statement.
Now I would like to turn the call over to Maxine. Maxine?
Thank you, Alison, and good morning everyone. Thank you for joining us to discuss our 2012 third quarter and first nine months results. On our call today, I’ll review the progress that we’ve made on our key strategies as well as update you on our store, marketing and product initiatives; then I’ll turn the call over to Tina Klocke, our Chief Operations and Financial Bear, to review the financial results in more detail. After my concluding remarks, we will open the call to answer your questions.
Clearly we are disappointed with our third quarter results. We were up against a difficult comparison from last year when product tied to the release of the Smurfs movie drove traffic and transactions throughout the quarter. Our product and marketing events were not strong enough to offset the strength of last year’s product, which was supported by tremendous studio marketing and advertising.
As you know, we are in a turnaround phase. Build-A-Bear Workshop has historically produced very high sales per square foot and profitability, and we are taking steps that are needed to regain that position. For more than a year, we’ve had bold actions in play to deliver our long-term strategies and objectives. As a reminder, our objectives as well as our recent progress include, first, introducing a new store design to reinvent our experience that gives our stores destination appeal. We have opened three of the six stores scheduled for this year. Second, improve store productivity by reducing our store base and overall square footage to drive traffic and sales to fewer stores that are overall more profitable. We are in the midst of executing aggressive store closure and repositioning plans.
Third, increase shopping frequency by rebalancing our marketing to emphasize brand advertisement as opposed to strictly product and promotion messaging. In mid-October, we launched our new national brand TV advertising campaign in the United States which I will add is already seeing positive guest reaction. Fourth, reinforce Build-A-Bear Workshop as a great place for gifts. We have built a strong holiday product and marketing plan. Fifth, grow our global presence. We continue to expand internationally primarily through our franchisees. And sixth, continue to improve cost efficiencies. We saved an additional 1 million this quarter, bringing our year-to-date savings to 6.3 million. We are on track to achieve 7 million in savings this year for a total of 10 million over the past 18 months.
In today’s call, I’ll go into more detail on three of these objectives with particular attention to the aspects of our real estate strategy. As you know, we’ve been working on reinventing our store experience with a new format store with destination appeal. Our competitive advantage at Build-A-Bear Workshop is our hands-on bear-making experience, and we now have successfully opened three of six stores planned for this year in our new design. We have added new experiences for our guests by merging the power of technology with our signature process. Sales at all three locations are up 30% or more, exceeding our expectations. Build-A-Bear Workshop has always had strong openings, but these stores have also exceeded their original grand opening performances which occurred in much better economic times and when Build-A-Bear Workshop had lower market penetration.
The sales increase is a result of higher traffic and transactions, which was our goal. The stores are driving repeat and new guest visits and keeping strong average transaction value. We know that it is early, but by all metrics these stores are off to a great start. We remain on track to have all six newly imagined stores open this year. Given the strong initial results, we are moving forward with plans to update additional stores to incorporate key elements of our new design. We are working on getting the costs in line with our recent historical averages and our landlords have been very supportive financially with these initial stores. By the end of 2014, we expect to refresh our store design in at least 40 to 50 locations with either full or partial elements of our new design.
The other side of optimizing our stores is reducing our store base and overall square footage to drive traffic and sales to fewer stores, again building on our destination appeal. As we have discussed in previous calls and in our most recent 10-Q, the evaluation of our real estate is an ongoing process. Over the past few years, we have aggressively renegotiated rents while retaining kick-out and termination rights so we would have maximum flexibility to manage our portfolio. We currently believe the optimal number of Build-A-Bear Workshop stores in North America is between 225 to 250 locations. We have determined what we believe to be the appropriate number of stores in each market and will close underperforming locations while repositioning our most productive stores to incorporate features of our new design.
We are building on a solid base. On a trailing 12-month basis, over 80% of our stores were contribution-positive on average at 15%. By the end of 2014, we plan our store base to be more productive as we see the impact of the combined effect of store closures and remodeling key stores in major markets. We have given particular focus to the stores that are contribution negative or marginally profitable on a trailing 12-month basis. Some of these stores have already been addressed with completed closures, and we expect to close 50 to 60 more stores in the next two years in conjunction with natural lease events. We are also projecting to move our remaining stores to a profitable position as a result of rent renegotiations or the transfer of sales from one of the closing locations. This essentially will put 98% of our stores in a profitable position based on current performance. Our net retail sales will be impacted by the store closures but the remaining stores should be more profitable.
On an annualized basis, we currently project the impact of store closures net of sales transfer to be a reduction of 30 to 35 million in net sales. This includes transfer of 20 to 30% of the sales from closed markets to other locations, which is based on preliminary results in select markets. We are forecasting a 2.5 million to $4 million benefit to overall store profitability by the end of 2014, which comes from both the closure of unprofitable stores and the transfer of a portion of sales into other profitable stores.
I should also add that this is an ongoing evaluation and we will continue to refine and adjust our strategies to maximize our store and market profitability. I also want to note that while we are reducing our store count in North America, we see opportunity to continue to expand internationally, predominantly through our franchisees.
As our work with real estate shows, we are committed to improving our business across our store base. We have also recently made a significant move toward our objective to reinvigorate our marketing by emphasizing brand advertising, particularly on television, which will help raise the performance of our entire store base. We have a multi-dimensional marketing program, but TV as a media remains important to maintain high brand awareness and keep our experience top of mind.
Build-A-Bear Workshop started advertising nationally in the United States on television, primarily targeting kids’ programming in 2004. While we initially featured our brand and experience, our messaging evolved to most recently focusing strictly on product and promotion ads. While it was appropriate to feature product and promotion during the height of the recession, we think that it is imperative that we rebalance the messaging at this point to speak to our experience, which is important to bring in new guests, and our products which tend to resonate strongest with repeat guests.
Our advertising is designed to reach both kids and moms. We want to show kids our fun store and interactive experience and make it easy for moms to say yes. While we will continue to offer select promotions and value-add offers, our research shows that moms also respond very positively to brand marketing, specifically messages that get at the emotion of the shared store experience.
We began our new advertising campaign on October 15 and will continue through December. Essentially, kids that are entering our target age range for guest acquisition – those children ages 3 to 6 – have never seen a Build-A-Bear branded message. Those in our core demographic – age 7 to 12 – have not seen a brand message in four years. At a time when we are focused more than ever on our experience, this advertising will renew consumer excitement and our overall brand profile, and drive incremental traffic to our stores. I encourage you to check into our new spots, which can be viewed on our website in the About Us section and on our investor website.
Let me wrap by speaking to our holiday merchandise. We have put significant work into rebalancing our holiday inventory and merchandise mix with innovative, proprietary products and classic characters. Our proprietary products for this holiday include a collection of animals that each come with a scented plush accessory. We first introduced scented products with our highly popular Ice Cream Bear collection in 2011 and have since added scent chips that can be inserted into any animal. This year’s holiday animals will have seasonal scents of mint, sugar cookie, and gingerbread.
On November 7, we will launch our core Christmas story with nostalgic but updated favorites of Rudolph the Red-Nosed Reindeer and Clarice, both with light-up features. In North America, we will have a new addition to our classics with the Grinch who comes with a heart that lights up and glows. In the U.K., we will offer the Snowman in lieu of the Grinch. The Snowman is a beloved character from a classic children’s book that is also featured in an animated special that airs on television each year in the U.K. We follow with the addition of Paddington Bear, another British icon who will remain part of our core assortment post-holiday.
We are planning gift card sales to be strong this holiday. A gift card from Build-A-Bear Workshop allows you to give the gift of the experience and we expect the emphasis on our store experience in our advertising to bolster demand for this category. In total, we believe our short-term product and marketing strategies will deliver a solid fourth quarter.
I also firmly believe that our longer term strategies to elevate our store experience, optimize our store base and broaden our customer base with brand building marketing will drive improvement in our sales and profitability. We continue to have a strong balance sheet to support our strategies, and despite our third quarter results I remain very optimistic about our prospects and outlook for the future.
And now I’ll turn the call over to Tina to recap the financial results in more detail.
Thanks, Maxine, and good morning everyone. I will highlight the key components of our third quarter and first nine months results. The full details can be found in our press release.
For the quarter, total revenues were 86 million, a decrease of 12% excluding the impact of foreign exchange. Consolidated net retail sales decreased 11.9% excluding the impact of foreign exchange. This decrease was driven by a comp store sales decline of 11.1% due to the decline in transactions as our average transaction value was flat. Ecommerce sales declined 7.6% excluding the impact of foreign exchange.
Retail gross margin declined 370 basis points to 36.5%. We had benefits from reduced packaging costs; however, this benefit was offset by de-leverage of occupancy cost of 270 basis points and merchandise margin pressure of 130 basis points. SG&A decreased to 37 million or 42.5% of total revenues compared to 39% in 2011. The dollar savings were a result of lower store payroll. The increase as a percent of sales was driven by the de-leverage of advertising and corporate expenses.
Pre-tax loss was 4 million compared to pre-tax income of 2 million last year. Our effective tax rate was 4.5% in the third quarter compared to 54% last year. Our tax rate continues to have high volatility due to the valuation allowance established on all of our U.S. deferred tax assets at the end of 2011. Net loss was 4 million or $0.26 per share. This compares to net income of 900,000 or $0.05 per diluted share last year. Net loss for the quarter was negatively impacted by $0.14 per share related to the changes in the effective tax rate and $0.02 per share resulting from a change in share count due to repurchases that were made in the fourth quarter of 2011.
Turning now to our first nine months results, total revenues were 263 million, a decrease of 4.5% over last year excluding the impact of foreign exchange. On a consolidated basis, comp store sales declined 4%. Retail gross margin declined—
I apologize. Our power went off at our office, so I will begin at retail gross margin. Retail gross margin declined 110 basis points to 37.3%. In the fourth quarter, we expect to have a slight expansion versus the prior year. Compared to 2011, SG&A decreased by 6 million to 114 million, remaining flat as a percent of total revenues. Included in 2011 SG&A was 3 million in consulting costs. Excluding these costs, SG&A as a percent of revenue decreased 210 basis points driven by decreases in store payroll and advertising costs partially offset by increases in corporate expenses.
Pre-tax loss for the first nine months was 14 million compared to a pre-tax loss of 12 million last year. Net loss was 13 million or $0.79 per share compared to net loss of 8 million or $0.45 per share in the first nine months last year. 2012 was negatively impacted by $0.24 per share related to the change in the effective tax rate and by $0.07 per share resulting from a change in the share count due to repurchases that were made in the fourth quarter of 2011. Net loss in 2011 included $0.11 per share in consulting fees.
We continue to have a strong balance sheet with no debt and consolidated cash of 22 million. Total inventory at quarter-end was 54.9 million and on a per-square foot basis was flat with the prior year period. Capital expenditures in the third quarter were 5 million primarily to support our real estate strategies and to build our infrastructure. We expect capital expenditures for the full year to be approximately 18 million with about half to the capital supporting store activity and the balance for IT updates.
Depreciation and amortization for the quarter was 5 million compared to 6 million in 2011. We continue to expect depreciation and amortization for the full year to be approximately 21 million.
As Maxine mentioned, we see the opportunity to grow internationally. In October, we opened two stores in the U.K. where we continue to believe the market potential is about 70 stores. We currently operate 60 stores, so while we have room to grow, we are not pushing to hit a store count especially with the economic pressures in Europe. We will open stores on an opportunistic basis in this market. For example, the two stores we opened this year were on a short-term basis in order to validate sales plans. Both are in new markets which will not impact other existing stores.
In international franchise operations, our franchisees operated 87 stores in 14 countries at the end of the quarter. Our revenue from franchise operations was 800,000 for the quarter and 2 million for the first nine months.
Now I’ll turn the call back to Maxine.
Thank you, Tina, and I apologize again for our loss of electricity. We’re both using our mobiles, so I hope you can hear us.
At the end of our last quarterly earnings call, I wrapped up by saying that I’m confident we will post improvement in sales productivity and profitability when 2012 is complete. I still feel that way. Our brand is a favorite of kids and moms, which we have seen clearly in the initial response to our new store design. I want to emphasize that our plans are not just about closing stores. We are changing our business dynamics across the board.
What does success look like for Build-A-Bear Workshop? Success means positive comps starting in the fourth quarter driven by a balanced assortment and supported by our brand advertising. Success means consistent annual profitability. This will come from elevating our experience and reducing our store count to have destination locations in each market. For the end of 2014, we expect to have between 225 to 250 locations in North America. These stores will have higher sales and profitability as they benefit from the transfer of sales from closed locations.
The other essential piece of our plan is to refresh our store design in at least 40 to 50 locations, and we expect to continue our global expansion particularly with existing and new franchisees. I am optimistic as we begin the fourth quarter. We continue to drive all of our long-term strategies in order to return our company to its leadership position for the benefit of our shareholders, our associates and our guests.
And with that, I’ll open the call for your questions.
Question and Answer Session
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Tom Filandro of Susquehanna Financial Group. Please proceed with your question.
Tom Filandro – Susquehanna Financial Group
Hey, thanks. Maxine, can you please first confirm – you guys are paying your electric bills, right?
Yes! The whole place is dark, the whole office complex outside and all around us. It’s not just us here. Somebody must have cut a cable.
Tom Filandro – Susquehanna Financial Group
Okay, well hopefully everybody’s safe. So two quick questions – I want to really hone in a little bit more on the new store design. Can you be more specific about what’s going on in that store that’s different than your core stores; and more important is from a merchandising point of view, what are the variances there? And then my second question is also related to that. If you can more deeply explain what you said about that 30% pop, is it possible that you’re a little premature in identifying 50 to 60 store closings if you’ve just identified what potentially can be a big productivity boost to your core base? Thank you.
Thank you, Tom. That’s a good and long question. So let’s just say that we’ve always said at Build-A-Bear Workshop, the story for the customer, what they’re paying for when they come into our stores, is half of it is the product and half is the experience. While our product has changed over time a lot, meaning every couple of months or every couple of weeks sometimes we’re changing and bringing in new products, we really haven’t changed our experience in 15 years. And that’s pretty amazing when you think that we’ve stood the test of time that way with children who are constantly being bombarded with new and different all the time.
So we have been aware, obviously, when we added Bearville that that was something that kids liked, and gaming is a big part of our engagement after the Build-A-Bear Workshop experience. But we really wanted to figure out how to incorporate that love of the technology with their love of a soft, cuddly stuffed animal, and we’ve worked hard on that for the last 18 months, including our guests—I mean, totally including our guests to help us do that.
So the store—you know, you’ll basically go through the same processes, but we’ve enhanced several of them. The first one that’s been enhanced is the opening of the store. You can actually see into the store, you’re not blocked by signing. Everything is wide open and bright. We have interactive digital signing at the door that greets you and tells you about the new merchandise, but we can also convert it into a game that kids can play with on the front door if there’s lines, which fortunately in these new stores – in some ways, that’s fortunate, anyway, they have been – and they’re playing with that and keeping them active in the line.
The next big difference is Build-A-Bear’s core trademark and what moms and kids tell us they loved the best about Build-A-Bear is putting the heart inside the bear and making that special. We’ve created a special heart station which really begins your process of customization now, and when you put your heart in you add attributes to it through a gigantic tablet that’s turned into two heart stations and allows you to personalize with different kinds of smart, silly, funny, cute, strong – all kinds of different attributes, and actually we will also be able to—when you get a special barcode come up on your mailer, come in in the future and just scan it and get special attributes also.
The stuffing station is the same for the most part; however, there are some different interactions that now our bear builders can perform with you because they know exactly what’s inside your bear. When they scan your barcode, it pops up on their screen right there in front of them what the attributes are about your bear, and if today is your birthday, they now know that and they’re able to go through the birthday experience. The other is that there’s a squishometer on there, and you can decide how soft and fluffy you want it or how hard you might want your bear to be stuff.
The next big change, and I think it’s still the most—personally, I love it, is the bear bath. We’ve always had a bear bath at Build-A-Bear Workshop, but this one has tabletop top on it that makes it look like it’s really a bathtub. And the different toys that you play with on the bath tub, the little toy boat, the soap, the soap causes it to bubble, the little toy boat goes across it and toot-toot-toots, makes a noise, and then the little duck swims across. And then a few seconds later, it starts to tell you that it’s getting ready to—your bear is getting cleaner and cleaner, and now it drains and you move onto the next station, because kids would stay there. We learned that in the testing – they would have stayed there forever. That and the heart station are what they say right now are their favorite stations.
You go into Dress Me, and beginning with your Dress Me transaction is now what we call Match Me, which allows you to scan the barcode of your animal and it will show you a picture of the most popular outfits for your bear, and it will also—it’s being refined as we go, and as more and more kids scan their barcodes and get to know what the most popular outfits are, but right now it’s showing you the most popular outfits that we know of, and it also can break down the accessories and tell you where to go find the—what the accessories actually are. So kids are printing that out, taking that with them, taking it home, giving it to grandma – that’s been a popular station.
And then the Dress Me is different in two ways. One, it’s divided in half so half is on the right side of the floor and half is on the left side, and each one of them has a seam on the top so for lack of a better description, I’m going to say it’s half—one side is mostly boys and the other side is mostly girls, which allows boys now to have their sort of own section which they’ve requested over time, and we’ll see if this really makes a difference. Boys have always been about 30% of our business, and we haven’t seen a marked change in that. But it’s still 30% of our business, but on a bigger base of customers that are coming into these stores.
Name Me is slightly different. Now that it has—it’s still Name Me and you still get to add on your name and address and participate, but now that your bear has these special attributes, when you start the naming process and you put your bear on the top of the tablet, it scans the bear and it tells you—defines all the things that are inside your bear, and when you find it, you get some extra benefits as well. And then it tells you about Bear Grow and it prints your birth certificate and it tells you to go to Bearville and register your bear. It also—when the birth certificate prints out now, each one prints out individually. It will print out with the attributes and a picture of your bear, which we’ve never had that before. You can see a virtual tour of the store, by the way, online, and Take Me Home is just basically the same.
So the other important part of your question is is the merchandise any different? The merchandise is exactly the same as merchandise in every other store that we have. There’s only one product that’s different, which we made a little bath kit to mimic the bath kit that’s on the (inaudible) station. That’s the only difference, and in St. Louis for instance, we can see all the other two mall stores that we have, and we can see the St. Louis, at the West County store which has the new store design, and we can see that it’s exactly the same and presented in an attractive way, but the new store is doing so much better and that is, I think, a testament to the fact that merchandise isn’t our problem, really. It is the experience had not been refreshed. And this has been consistently now on our third store—actually, the fourth one opens tomorrow, but it’s been every single one of these stores has shown the exact same thing. When you compare it to other stores in the market, it’s the same. So I think that that is a really—that just bodes incredibly well for this.
Your last question about the number of stores, are we being too soon on this – well, we’re not closing them tomorrow and if we see that there’s a difference, certainly we can adjust. But I believe this is the right number. When I wrote my business plan in 1997, I said that we would have 250 stores, and as we got bigger and we got to the marketing, we saw how the advertising was growing, also the encouragement of our investors and business partners – such a great concept, why don’t you bring it to more places? I think that in some ways, we’ve actually maybe saturated some markets more than we should have or needed to, and we saw that when we closed West County to remodel it how much business went from West County to the Galleria. Just because we were closing it temporarily, that store had a huge boost and it just says that maybe we don’t have to have three to six stores in a market. We can have fewer stores and make them more destination stores, as I had originally planned.
And as we know, Disney has about 210 stores, (inaudible) has about 64. Of course, they’re adding more, but I don’t think they’ll be much more than probably 150, maybe 200. And then American Girl only has 14 stores, and they said possibly they’re going to have 16 stores so those are the most competitive—directly competitive to Build-A-Bear, even if you could call them that.
So I believe that when you’re in this kind of discriminating and discretionary product category and the malls and everyone is going through so much economic changes, and the Internet is part of our life to stay, that we are smarter to think about a 250 store or less footprint, and right now I think that’s a really comfortable number. It’s funny that it came back to the exact same number I said originally, but that’s through refinement store by store, not by just saying oh, let’s go back to that number.
So it’s a long answer to your question, but I think it’s important to understand where we’re coming from on that.
Tom Filandro – Susquehanna Financial Group
Thank you, and again as a reminder, if you would like to ask a question at this time, please press star, one on your telephone keypad. Our next question comes from the line of Gerrick Johnson of BMO Capital Markets. Please proceed with your question.
Gerrick Johnson – BMO Capital Markets
Hey, good morning. I was wondering if you could talk about the impact of the Olympics on the U.K. business. Was it a positive or was it actually a negative, considering the change in shopping dynamics over there?
I’d say it was probably a negative. In some places, like in Stratford Mall where we have a store, they actually closed it off. They had tight security so people were having their bags checked, so it was probably not as well executed in the retail space. They also told people to stay home, so in some parts of central London it wasn’t nearly as busy as it should have been, and we know this to be true also from our concessions that we have in other retail stores, not just Build-A-Bear but how other stores fared. So I think it was really good leading up to it, and the Queen’s Jubilee and all of that was really fabulous for business, and especially in London stores where that was tourist and traffic driven. But when the onslaught of tourists came, they weren’t shopping as much as any of us had hoped in the retail area.
But quite frankly, we had started the British products category starting at Boxing Day this past year, so we actually had a phenomenal year in selling product that related to I Heart London, I Heart Great Britain, the Union Jack, all kinds of fashion products that revolved around the patriotism going on in the U.K. Bu those couple of weeks of the Olympics were quite difficult.
Gerrick Johnson – BMO Capital Markets
Okay, great. Thank you. Can I ask two questions?
Gerrick Johnson – BMO Capital Markets
All right. Excluding the stores that you guys are planning for closing, do you know what your 3Q same store sales result would have been for the rest of the portfolio? I mean, I understand there’s going to be different dynamics after those closures, but right now how are those other stores excluding the, was it 50 or 60 or so that are planned for closing, how are those comping?
We haven’t actually determined all the stores that we’ll exactly close, just the ones maybe in early stages of the decision-making process, so we can’t tell you that by market. But we’re really looking at the stores on—they aren’t closed, so they aren’t having an impact on the other stores yet except in stores that we’ve closed in prior years and earlier this year, where we did have an average of about a 20 to 30% transfer sales, so that helps that store that’s receiving the sales. But otherwise, we haven’t closed those stores and there’s no way to tell you their comps, because the other stores are still open.
Gerrick Johnson – BMO Capital Markets
Okay, all right. Thank you.
Thank you. We do have a follow-up question from the line of Tom Filandro of Susquehanna Financial Group. Please proceed with your question.
Tom Filandro – Susquehanna Financial Group
Hey, just one quick one on the marketing, sort of a two-part question. One, I think I heard Tina say that the ATV for the quarter was basically flat, so what I’m curious about, Maxine, is why the change in strategy on the marketing where I think you had said previously that the marketing was more tied to pricing, and now you want to tie it more to branding if you didn’t see a downward pressure on ATV, and maybe AUR was there – maybe that’s the reason. And then the second part of that question is how do you leverage television advertising and marketing overall, and if Tina, if you could put some numbers around this when you’re going to have 30 to 35 million, I think you said, of lower volume as you close these stores over time. Thank you.
Well, that’s a challenge that we’re working on because the marketing is working, and we can see that already in the change in our trends even since it started, and that’s pretty much what we had back in October of 2003 when we started testing television. We were—we turned a significant negative into a positive by telling people about the brand of Build-A-Bear Workshop, and so the same thing has already started to happen so we can see that this is different. And it really is – when you look at the commercial, I think you’ll see. If you can remember back to our first commercials, it’s a child engaged in the Build-A-Bear Workshop experience and mom is present, and that is the way the Build-A-Bear Workshop experience happens most of the time and we never show that. We haven’t shown that in years, in four years, and so the customer—the young customers who have been growing up with us, they don’t remember, four years is a lifetime to them. But the little kids that are just coming into our age, the 3 to 6 year olds, have never seen it, so if they don’t want that Hello Kitty that we had on television or they don’t care about—children don’t care about 29.99, mom cares about that. That’s all they’ve really seen, and we had to do that in 2008 in response to the recession and cutting back advertising dollars pretty dramatically. We’re nowhere near those numbers, by the way. While we might end up a little bit higher in dollars for the quarter because we want to invest in this, you remember when you first met us, we had turned those dollars into huge sales and profitability by investing in the marketing.
So we can’t exactly tell you the whole model and what the advertising—how we’re going to manage the national advertising on a smaller footprint, but we started national advertising when we had 150 stores, and so I think that we’ll be able to figure it out like we figure out most things. It’s critical to our brand. I mean, you don’t see a sale advertisement on television. If you see any TV from Lego and Disney, you don’t; and American Girl does branded TV, and I think it’s the right place for a premium brand like Build-A-Bear Workshop. If we aren’t continuing to remind each generation of child, this is fun, this is important, this is cool, they’re not going to know it on their own. They’ve got a lot of other cool things being thrown at them all the time, not necessarily from advertising but just from what they’re playing on games, et cetera. And our research shows that the brand ad has about two times more impact on sales overall than a product commercial. I mean, we’ve done a lot of testing on this, so the money works harder for us when it’s on our brand because it appeals to everyone. It doesn’t appeal to just somebody who wants that Hello Kitty or a frog. It doesn’t even tell them what products we have.
And when we did those brand advertising, we also saw customers come in and buy a broader range of products. It’s about transactions – we’re driving transactions. We always have seen when Build-A-Bear Workshop has high transactions, we have the sales as we want and the comps we want and the flow-through that we want, and so we’re really focused on that. I think we started in October 2003 with this test, the same exact time. We kind of tried to mimic it so we could project the results, so we feel really encouraged, Tom, about how this is—not that we felt we should have definitely been out of the market for four years. We did what we had to do that was appropriate for business, and we thought we were doing the right thing refocusing the advertising. But in retrospect, we probably should have had a much stronger balance and maybe not cut back as severely as we did.
Tom Filandro – Susquehanna Financial Group
Okay. Tina, would you be willing to give us the AUR specifically for the quarter, and what’s the outlook of AUR for the fourth quarter?
I mean, it’s historically been around $35 a transaction, and I think that we’re projecting it to be fairly consistent through the fourth quarter. Again, we’ll see slight variations over time, but as Maxine said, the real thing that we need to do is drive transactions and that’s one of the things that not only brand TV advertising did for us, it also reignites customers that may not have been in our store in a while. So again, it brings new and then brings the current customers back.
You know, one of the things, Tom, that I think is important just to highlight here is that we ran—for the grand opening of the St. Louis West County store, we ran television advertising around that, not the first two weeks but the second two weeks after it had opened. We let the normal buzz start on that. And the good news here is that we haven’t seen the dissipation of the sales at the St. Louis Galleria, which was about 8 miles apart. They’ve actually held their own and that’s pretty impressive, and I think that the only reason that’s happening is because of the brand advertising. It’s elevating the brand, and so people are going to their St. Louis Galleria, the Fairview Heights store, and the West County store, which is exactly what we wanted – again, another vote for brand advertising.
Tom Filandro – Susquehanna Financial Group
Understood. Thank you.
Thank you. And as a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star, one on your telephone keypad. One moment, please, while we poll for any additional questions.
It appears there are no further questions at this time. I would like to turn the call back over to Ms. Clarke for any closing comments.
Thanks again for joining us today. I wish all of you a happy holiday and look forward to speaking with you when we report our year-end results in February. Thank you.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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