Build-A-Bear Workshop, Inc.

Greetings and welcome to the Build-A-Bear Workshop first quarter 2019 results conference call. At this time, all participants are in a listen-only mode. A 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. I would now like to turn the conference over to your host, Ms. Allison Malkin with ICR. Thank you. You may begin.

Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Voyne Todorovich, CFO. For today's call, Sharon will begin with a discussion of our 2019 first quarter performance and review the progress made on our strategy. After, Voyne will review the financials and share our guidance. We will then open the call to take your questions. We ask that you limit your questions to one question and one follow-up. This way, we can get to everyone's questions during this one-hour call. Feel free to re-queue if you have further questions. Members of the media who may be on our call today should contact us after this conference call with your questions. Please note the call is being recorded and broadcast live via the Internet. The earnings release is available on the investor relations portion of our corporate website. A replay of both our call and webcasts will be available later today on the IR site. Before I turn the call over to management, I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the risk factors section in the company's annual report on Form 10-K. We undertake no obligation to revise any forward-looking statements. And now I would like to turn the call over to Sharon.

Thank you, Allison, and good morning, everyone. We are pleased to announce a solid start to our fiscal year. As total revenues increased $1.2 million to $84.4 million, retail gross margin expanded over 90 basis points, and SG&A as a percent of total revenues improved by 130 basis points, all of which contributed to a first quarter pre-tax income of $2.4 million and which is a $1.8 million increase compared to the same period in the prior fiscal year. We also maintain a strong balance sheet, ending the quarter with over $20 million in cash and no debt. As noted in this morning's press release, we are reiterating our previously stated annual guidance for total revenues and pre-tax income. We feel that this quarter's results reflect the impact of the successful execution of our stated objectives for the year, combined with our ongoing efforts to create new ways to leverage the power of the Build-A-Bear brand. I am particularly pleased with the team's focus on delivering these results following a 2018 full of bumps and transitions caused by much of what we believe to be unusual impacts, such as Brexit and the Toys R Us closure. On today's call, I will discuss the drivers of our revenue growth and highlight the actions we are taking to build upon this promising trend through our efforts to diversify sales and income streams beyond the four walls of traditional mall retail stores, as well as other key initiatives. From a top line perspective, the overall growth in total revenues is due to a significant increase in commercial revenue, which includes wholesale and outbound licensing fees, reflecting some of the work that has been done to evolve the business model beyond traditional retail. Our consolidated net retail sales were positive in North America, This momentum was offset by Europe, which posted a double-digit decline. This decrease is largely attributed to continued challenges in the UK associated with Brexit and the implementation of the new privacy laws. Accordingly, the North American region generated a profit for the quarter, which was partially offset by the loss in Europe. On a positive note in the UK, as a part of our focused effort to mitigate some of the issues in the market, We recently implemented a new technology-based bonus club enrollment process that is compliant with the new European privacy regulations. Since then, we have seen significant growth in the option rates of bonus club members, which we believe will benefit the business on a go-forward basis. We also saw sales from our e-commerce channel continue to gain momentum, posting a strong double-digit growth rate, continuing our trend of double-digit growth every quarter since the new site launched in October of 2017. Our Build-A-Bear.com strategy to expand our consumer base and increase the levels of gift-givers and fan-driven affinity purchases is paying off as we leverage our improved digital capabilities. These are large, addressable markets that tend to prefer to shop online. We are engaging through unique merchandising efforts and promotional events by primarily highlighting gifting occasions and licensed products. It is important to note that licensed products were one of the key contributors to the overall growth in revenue in the quarter as well. This expected benefit was the result of a slate of family-centric movies that premiered throughout the period. Highlights included an immediate positive response in the quarter to the products associated with the How to Train Your Dragon movie franchise, which significantly contributed to our sales throughout the period. Although there were moments when we were not in perfect inventory situations, for the most part, we were able to leverage our omni-channel capabilities to support our brick-and-mortar retail store sales with an order-in-store, ship-to-home option. This was followed by the positive impact of the record-setting Avengers Endgame that drove sales of our products associated with the film, which were further enhanced by Marvel's generous and welcomed nod to Build-A-Bear in the movie's first ten minutes When Tony Stark commented to Rocket the Raccoon, I thought you were a Build-A-Bear. This serves as just one more example of Build-A-Bear's pop culture presence and power. And later in the quarter, the Pokemon movie Detective Pikachu brought renewed interest to this product line, which has been a consistent top performer for our business. This property is a favorite of our fan-based affinity segment, and they have responded positively, resulting in an average transaction value of over $70.00. more than 50% higher than our overall average. Throughout the year, we have planned a wide array of promotions and product launches to take advantage of several highly anticipated major films, including the recent release of Aladdin and the upcoming releases of The Secret Life of Pets 2, Toy Story 4, The Lion King, Frozen 2, and Star Wars Episode IX. As we have shared, it is important to note that a strong family-centric film lineup tends to positively impact our business in multiple ways. First, traffic tends to increase in our stores as millions of dollars in movie marketing stirs interest to give families and children a reason to go to the theater, which is often located in or near a mall. In fact, for the quarter, traffic to Build-A-Bear stores outpaced national trends with the highest positive impact noted at times when the movies launched. With 80% of Build-A-Bear workshops located within two miles of a movie theater, it would be reasonable to expect this trend to continue if films launch throughout the year. Second, many of these popular movie properties tend to broaden our purchaser profile to include affinity consumers who are over the age of 13 and, as noted, tend to prefer to shop online. Our goal was to launch products and marketing efforts to strategically leverage this fan-based audience as each film rolled out. As such, we saw our e-commerce business gain momentum at an increasing rate versus prior quarters with the strong sales of movie-related products. Third, we have seen that movie properties often contribute to higher conversion rates both in-store and online. This hypothesis held true in the first quarter as brick-and-mortar and e-commerce conversion rates improved across both North America and Europe. We believe this benefit is a result of more consumers tending to shop with a mission to buy a beloved character, perhaps having just seen the movie or shopping in advance with the intent to take the character to the movie with them, as is often suggested in our marketing communications. And fourth, select movie properties tend to generate more spend per transaction, with our first quarter results remaining consistent with past trends. In fact, our average transaction value on purchases that included movie-licensed products was 20% higher than the average transactions without licensed products in the period. This higher ticket is driven by a combination of premium retail pricing that character properties generally command and the tendency for the consumer to include incremental items, such as a sound chip with the music from the film or the voice of the character. In addition to the movie property benefit, we also had a successful Valentine's Day, which is historically our second largest holiday time period after Christmas. In addition to our typical in-store family approach, this year we increased our efforts on the gifting business. To reach beyond our core consumers, recognizing that our brand is beloved on a multi-generational level, we developed a new product line for Valentine's Day that took on a more romantic, grown-up voice to encourage gift givers to think outside the chocolate box and give a personalized furry friend to someone they love. We achieved some impressive metrics with our break-frame Build-A-Bear After Dark email, which had high engagement with an open and click-through rate rivaling those of key movie launch messaging. We kept the adult gifting momentum going by launching an April Fool's activation, teasing young adults to enroll in the new Build-A-Bay dating app designed for people who love Build-A-Bear. At the reveal of the April Fool's joke, guests were bounced to an e-commerce site, driving incremental sales. Our April Fool's campaign ultimately hit many of the best April Fool's pranks lists, helping it deliver nearly 250 million media impressions, likely driving top-of-mind awareness with this emerging consumer segment. Next, I would like to update you on some longer-term key strategic priorities. Our primary, broader strategic objective is grounded in the recognition of the ongoing and significant shifts in the retail industry. As such, we have been evolving our experiential retail model to include, one, the use of lower capital flexible formats like concourse shops, which are designed to help navigate the market uncertainty and which can be used as a tool to drive favorable lease discussions, particularly in traditional malls. Two, the use of a kit-of-parts fixture solution designed to be able to open stores in non-traditional retail locations, then increase the overall accessibility to Build-A-Bear beyond traditional malls. And three, an enhanced offering of retail and branding options designed to take advantage of the unique nature of tourist locations. On the traditional mall front are lower capital options like concourse shops, have been beneficial in the negotiation of favorable rent deals, often on a percent basis, and or securing short-term lease extensions. Negotiating on a case-by-case basis has resulted in Build-A-Bear now having over 60% of leases coming up for renewal in the next two to three years, providing us with tremendous brick-and-mortar retail flexibility and leverage. Beyond traditional malls, our goal has been to broaden consumer accessibility to our brands, I am pleased to let you know that we are actively working with Walmart to add up to 25 locations this year on top of the six initial pilot stores that opened last fall, which is intended to expand the reach of Build-A-Bear to a broader array of consumers. Additionally, we believe the combination of our unique retail experience with the power and presence of the largest retailer in the world at a time when both the retail and toy industries continue to recalibrate and redefine themselves presents a very exciting opportunity. We are also happy to share, thus far, that shoppers at the Walmart locations are largely incremental to the Build-A-Bear consumer base, as the data indicates that approximately 60% of guests that purchase were not previously enrolled in our bonus program. And finally, on the tourist location front, we continue to prioritize tourist areas as a target for Build-A-Bear workshop locations. given that our stores tend to over-index on nearly every key metric in those environments. Some recent examples include the continued success at FAO Schwartz in New York City that opened last holiday, as well as the promise results in a new location near the London Eye. In this vein, last fall, some initial locations opened in select Great Wolf Lodge sites, the largest operator of family-focused indoor water park resorts in North America. Based on the positive initial results, Great Wolf is on track to expand to 17 locations this year. Of note, this is a wholesale relationship which is reported in our commercial revenue. As a reminder, in our wholesale model, as with our successful Carnival Cruise Lines relationship, the partner purchases inventory from Build-A-Bear for resale, in addition to furnishing and operating the location. Our second overarching priority, has been to invest in infrastructure and talent to more effectively take advantage of the growth in the digital economy. We believe we are gaining momentum in our digital transformation, as exemplified by our e-commerce growth, as we leverage enhanced capabilities such as AI merchandise recommendations, CRM improvements, advanced digital marketing programs, and enhanced SEO efforts. As we have refined and strengthened our capabilities We are seeing our investments contribute to stronger site traffic, higher conversion rates, increased order value, as well as engagement with guests prior to store visits and improved bonus club enrollment. We also expect to launch an upgraded mobile-first consumer experience, introduce new site features allowing us to further penetrate the gifting space both online and through omni-channel options for stores, and simplify our online checkout process as we lead up to the key holiday season later in the year. Third, we have prioritized the acquisition, engagement, and increased lifetime value of consumers, primarily through the optimization of our bonus club. We have continued to benefit from the high bonus club enrollment rates resulting from our Count Your Candles birthday program, which began with the Pay Your Age Day events last July. This new program, which requires a bonus club membership, allows children to pay their age during their birthday month for our birthday treat fair any time of the year. In fact, we have helped celebrate over half a million birthdays with this new program, and this fair has consistently been our top-selling furry friend and unit since it launched. Since the program began and impressed 50% of the birthday treat transactions, have originated from new Bonus Club accounts. As these accounts continue to increase, we expect to expand our focus to improve retention with the goal to drive incremental visits and expand lifetime value from the broader membership base. And our final stated priority is to monetize the awareness and trust that consumers have for our brand into incremental revenue streams, including expanding our global footprint, driving our outbound brand licensing and building our presence in entertainment. Regarding our ongoing efforts to expand our global footprint, our franchisees in India and China continue to move their business forward, and we expect our new franchise in Chile to begin to open stores later this year. And while the restructuring of the company and related business disruptions by our Australian franchise negatively impacted this quarter's international results, they have emerged from the reorganization process. On the branded outbound licensing front, we now have programs covering over 25 product categories, ranging from slippers to electronics, including the recent addition of a new subscription box partner with Culturefly and a new bedding partner in the U.K., similar to our bedding deal in the U.S. We are also looking forward to extending our brand presence at the upcoming licensing show in Las Vegas. And on the entertainment front, Build-A-Bear Radio continues to engage hundreds of thousands of listeners each week, which we believe gives us an efficient and sustainable marketing platform to communicate store events and product launches while deepening brand affinity. Separately, we are pleased to note that we are in the late stages of finalizing a number of entertainment agreements, which I expect to share with you in the coming months. In summary... the first quarter marked a solid start to what we continue to expect will be a productive year for Build-A-Bear. We believe that much of the infrastructure is in place to support the comprehensive strategies we have outlined for our company to achieve long-term profitable growth via the broad monetization of over 20 years of earned brand equity. After more than five years of preparation and investment amid one of the most disruptive times in retail history, Our goal is to continue to maintain the same financial discipline that has allowed us to stay debt-free and cash flow positive while simultaneously pivoting the business model to diversify locations, consumers, and revenue streams in our ongoing effort to deliver long-term value for our stakeholders. Looking forward, the promising movie slate, in addition to our hard-fought lease favorability, combined with strategic retail expansion and our enhanced e-commerce efforts, should offset some of the global uncertainty. With first quarter's improved results and our current favorable second quarter sales trend, we remain energized about the future of this remarkable brand and look forward to sharing our progress throughout the remainder of 2019. Now I would like to turn the call over to Voyne to review our financials in more detail.

Thanks, Sharon, and good morning, everyone. As previously mentioned, We believe first quarter performance has us on track to achieve the annual guidance we provided on our year-end call in March. We generated top line growth and progressed on the initiatives that are assisting us to capitalize on the power of Build-A-Bear brand. While the UK economy remained a headwind to our performance, other revenue inclusive of commercial, licensing, and franchising income grew 88% to $3.3 million. Notably, we improved our net retail sales trend versus fourth quarter in both North America and Europe, with North America being positive. This included our sixth consecutive quarter of double-digit e-commerce growth. We maintained a solid balance sheet and remained focused on achieving our objective of long-term profitable growth. Now, I will review the first quarter financials in more detail. Total revenues were $84.4 million, an increase of 1.4% compared to the first quarter of fiscal 2018. Retail gross margin expanded to 45.2%, increasing more than 90 basis points, mainly driven by merchandise margin expansion and lower occupancy costs. We continue to control costs in a number of ways to improve our retail gross margin, including managing our real estate portfolio to lower average store occupancy expense and reducing our supply chain costs. SG&A decreased $500,000 to $35.8 million, or 42.4% of total revenues, as we continue to maintain disciplined expense management and remain focused on our controllable spend. GAAP pre-tax income was $2.4 million compared to GAAP pre-tax income of $600,000 in the prior year. Income tax expense was $1.2 million with an effective tax rate of 50.3% compared to an effective tax rate of 45.2% in the fiscal 2018 first quarter. The income tax expense in the first quarter of fiscal 2019 was higher than the statutory rate, primarily because no tax benefit was recorded on the losses in certain foreign jurisdictions. Net income was $1.2 million, or eight cents per diluted share, compared to two cents per diluted share in the fiscal 2018 first quarter. Turning to the balance sheet, at quarter end, cash and cash equivalents were $20.2 million, up $1.4 million compared to the end of the first quarter last year, and there were no borrowings under our revolving credit facility. We ended the quarter with approximately $56 million of consolidated inventories, representing a $6.6 million increase compared to the prior year. The inventory increase is driven by timing of product launches supporting our second quarter. Opportunistically, we are increasing investment in our key licensed movie product inventory, and front-loading our buys to take advantage of the typical spike around movie release dates. This strategy also increases our flexibility to meet ongoing demand, as many of these properties are expected to have prolonged selling windows consistent with historical trends. Capital expenditures total $2.7 million for the first quarter of fiscal 2019, and for the full year, capital expenditures are now estimated to be in the range of $13 to $15 million, reflecting up to 25 additional Walmart locations. We expect the capital investment for these stores to approximate $150,000 per location. With regards to revenue and pre-tax income, on a gap basis, we are reiterating the previously shared guidance. We continue to expect total revenues for the year to increase in the range of mid to high single digits and pre-tax income to be slightly positive, reflecting increased sales as well as improved gross profit margins. As noted in this morning's press release, this guidance assumes that there are no material changes to current tariff rates or policies. If the potential for tranche of tariffs is put in place covering all products out of China shipped to the US, we would likely see an impact later in the year. We are continuing to analyze the situation and have taken some actions to mitigate the anticipated increase in tariffs, which unfortunately, includes retail price increases. Finally, our full year guidance includes an improvement in second quarter results versus last year's $2.5 million pre-tax loss. This concludes our prepared remarks, and we will now turn the call back over to the operator for questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 key. Our first question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thanks. Good morning, everyone. Thank you, Sharon and Boyne, for all the information. I just have a few questions. Maybe we're housekeeping-oriented questions first. The first is, Bojan, if you can just update us on the site by format. I want to make sure we're managing the model correctly. So the mall-based, concourse-based, and then if you're willing to give us the percentage that you consider tourist, given that was one of the initiatives you talk about.

Sure. So from the store count perspective, you know, we have, we ended the quarter with 366 locations. We have about 37% of our locations in the discovery format. We have about 33, 34 concourse locations open at the end of the quarter. We still continue to work on modifying and creating flexibility with our real estate portfolio. And concourses represent a big part part of that plan, as they give us flexibility in our negotiations with landlords either to change to this format or stay in line. As we talked about the tourist locations, we do have probably from the store count, like maybe it's a smaller percentage, but from the volume it's a bigger, so probably someplace 10 to 20% of our sales are coming from the tourist locations that are coming in variety of different formats. from traditional stores to shopping shops or concourse locations.

Okay, that's helpful. And then just on the concourse locations, I want to make sure we have the arithmetic correctly. So even though it's considered a site or a location, a store, it does do lower volume. So if you convert a four-wall workshop into a concourse, you do have a revenue headwind. Are we thinking about that correctly, even though the margins actually can improve?

Yes, absolutely. So what we have shared in the past, Stephanie, was that typically we expect our concourse locations to do about half of the volume of our traditional mall locations. We expect from the four-wall contribution percentage to be a higher percentage because the economics are different, but absolutely from the overall total revenue and total EBIT those numbers are going to be smaller. So roughly you will need two concourse locations to make up each one traditional location.

Yeah, when you think about it, though, we're going typically when we're in the same mall from 2,500 square feet to 3,000 square feet to a 200 square feet concourse shop. So even though there's a decrease in the total revenue, the dollars per square foot makes it more of a positive story.

That's helpful. The reason I was asking is that you do naturally have an inherent headwind built into your revenue model currently as you locate. Yes, that's correct. But to still report revenue growth would imply that your existing, we think about kind of organic like-for-like stores are performing better, particularly in North America. So can we maybe just deconstruct that a little bit? What are you seeing on the site level basis that is generating such a nice step up? Is it a combination of properties? improvements in the marketing, or do you feel like you're starting to get a better cadence or rhythm to the business that some of these things might be sustainable as we move into the next few years?

So definitely, you know, we are seeing improvements in our North America performance compared to what we have seen in prior few quarters. especially as we have seen some of the movie releases that came out earlier in the quarter and that helped elevate traffic trends that we have seen in our stores. We believe based on some of the data that we have internally in tracking our stores that are in the malls where we have theaters, we tend to see stronger traffic than in stores that don't have these adjacent to them. So further away, theater locations are, the traffic impacts more challenging. Overall still, we are experiencing, or the national traffic, it still continues to be very challenging. We are beating some of those trends, so that's helping some of the results that we are seeing. But overall, there is a lot more focus spent on our controllables in form of managing the promotions and driving dollar-per-transactions. really to help us offset some of the traffic headwinds.

Also, just to add a little bit of additional color there, yes, we're certainly benefiting from the film releases and our adjacency to theaters, as we addressed in the year-end remarks, actually, that we expected to see that. But the longer-term real estate objectives of diversification into different types of formats, locations, leaning into tourists, whether that's direct revenue for us from a retail perspective like FAO or indirect through the wholesale relationships with something like Great Wolf where we're opening additional 17 locations. All of that is about preparing us for a longer-term success rate. You know, and then you add in this Walmart situation where we're, you know, discussing upwards of 20-odd stores, inclusive of the six pilot stores that we already had. What we've been looking for is a feasible, financially beneficial way to scale the business on the retail side that is not completely beholden to a traditional model format. And I think between those three different types of approaches that we outlined in the prepared remarks of having some options for traditional malls like a concourse shop, having some options like a kit of parts for something like a Walmart, and creating options that are more specific to a tourist type of location, like we created in the whole new branding approach, for an example, in FAO, are voting well for us as we look out to the future. So even though we've got this tailwind this year from the traffic situation with licensed properties that is helping our overall business to some degree, I want to be cautionary to note that we're not just relying on that. We're building a longer-term solution on how to make retail a sustainable engine for us as we pivot the company forward. to create revenue streams in these other areas, which we saw growth in, as we noted, in the commercial revenue on a number of other different fronts. So, you know, it's been a bumpy road, as we noted, but, you know, we feel like we're moving in the right direction.

Okay. That's helpful. And then on sourcing, just as we think about the cost side of the business, I know you're not embedding any incremental tariffs into the plan for the year, but can you just remind us what percentage of your business comes from China? and how we should think about tariff exposure within your COG, so the landed cost versus your total cost?

So, sure, I can start with that. As we mentioned, guidance assumes there is no material changes to the tariff rates or policies. We do import a lot of our product from Asia, with most of that coming from China. Currently, we are looking at ways, and we've been looking for a period of time to diversify our sourcing base more. It is not an easy task, and it's not one that's gonna happen overnight, but we continue to make some progress there. Some of those potential tariffs could have, again, assuming it's across the board, 25% in this fourth tranche, that could definitely have meaningful impact on our overall cost. We are working and exploring different options, how to mitigate some of that stuff. Short term, you know, one of the few ways it's unfortunate as we shared in our prepared remarks was it's by raising prices. But, you know, over the long haul, we would be looking to further diversify our sourcing base as well as work with our factories and partners to find some additional synergies in supply chain to offset some of those increases.

Okay. And the last one is just on the UK. I want to understand a little bit more about what you think might be happening there in the context of the Brexit overhang. Are you seeing any signs of hope or improvement? It sounds like you are maybe in some of your prepared remarks. So, maybe just give us a sense of how long can that drag persist at this degree, a double-digit decline? Or are you anticipating that that drag lessens as the year progresses?

Yes. So, you know, when we first talked about where we thought we would head for the year, we had a lot of great hope that on March 29th that there would be some solution for Brexit and that we could start to plan accordingly with the facts on the table. You know, and as everyone recognizes now, that's been delayed to October the 31st on making a decision about the approach that the UK intends to take in regard to the EU. So, you know, that delays some of our direct and specific ways to mitigate because we don't know which way everything's going to go. But in the meantime... We did see in the first quarter, although still negative, some improvement versus the fourth quarter. And then quarter to date, we're actually seeing a much greater improvement in the U.K. Now, some of that has to do with they're in half term and they have some bank holidays piled into this, but most of that being anniversary. So there is that gap. separate element where the UK tends to over-index on moving properties, and we've seen that over the course of time, over the years, and that is holding true right now. Additionally, they are building their e-commerce business at a very rapid pace and are not that far off par of what's happening in the US when we talk about this double-digit growth. That's actually across the board. We believe that the improvement in our ability to capture names now post the GDPR implementation, and we're capturing them in our stores and immediately getting the second opt-in, which is the critical part of being able to communicate directly with the bonus club members, is helping us both in stores and online. So that's been a very, very material shift for us on being able to capture those names and use those names to market specifically to that consumer base. And finally, one of the things that we just find so interesting in the U.K., and it's not that dissimilar to the U.S., is it about who we are as a brand and what we're doing, or is it about where we are? And many of the same things from a traffic perspective. in traditional mall locations that are happening in the United States and North America, also happening in the UK. So when we pick up a Build-A-Bear and put it in a tourist location, like within steps of the London Eye, we are seeing very positive results. We're actually outperforming our performer there, which was, you know, we're very pleased to announce that, that there is some positive news coming out of the UK from, again, the e-commerce some improved trends, and our current performance at the London Eye. Now, all that being said, it is very hard to predict what's happening. And we also have the FX fluctuation as well that impacts us and runs through our balance sheet.

Okay, that's helpful. And just to tie that up with Boyd, your comments on Q2, I think you mentioned the phrasing was improvement from the $2.5 million pre-tax loss last year. Are you expecting to be profitable in Q2?

Sorry. Yeah, our goal is always to be profitable. You know, some of the stuff that we are talking about, Q2, just want to remind everyone, like last year, we did have a lot of – shifts and you know like first couple of months of the quarter were very challenging then we had the pay your age day event that really drove significant number of transactions at the lower margin so really as we go into this year and trying to understand what kind of impact the prolonged use of vouchers that we have after pay your age day event is going to have on our business we currently believe that our margin is going to improve but you know there is still some unknown related to the impact on the overall transactions. What we have going into our favor, some of the things that Sharon talked about from the overall econ perspective, there are some positive trends, but we also have launch of the Lion King property in July that should help offset some of the headwinds that we are having from these prolonged voucher uses. We expect to be better. Definitely the goal would be profitable, but, you know, we just don't have enough information because it's the first time we are anniversarying some of these big shifts from last year.

Okay, very helpful. Thank you both.

Thank you.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Eric Bedder, with SCC Research. Please proceed with your question.

Good morning. Good morning. I'd like to talk a little bit about online. I know you gave in Q4 that online was about 10% of sales. What was it like in Q1 in terms of that? And when you look at it, what are the economics of that customer? How are they different and how can you maximize that going forward?

So Yeah, so I can help you maybe with some of the stuff. Definitely in Q4, our e-commerce business is a bigger percentage of sales, but it continues to grow as a percentage of sales every quarter. Some of that is driven by a really strong double-digit performance that we are seeing in that particular channel. It hasn't been like to double-digit in a quarter, but we are seeing meaningful improvements versus the prior year. In addition to that, one of the things that's important when we talk about our e-comm channel, it's different than for a lot of other retailers because we don't necessarily have very many returns, which is, you know, so our profitability in a channel, it is profitable. And, you know, from the economic perspective, the transaction value that we see on the web is very comparable to what we see in stores. often we do have special bundles that are available for sale online only that tend to be in a much higher price point, $60, $70 for those bundles, so that helps overall elevate the dollar per transaction in that particular channel.

Yes, and what's interesting about it, too, is that when we first started, redefined our strategy for e-commerce and relaunched the e-commerce platform in October of 2017, we recognize that, yes, we do have some overlap with consumers in our store, but perhaps one of the bigger opportunities for us is to shift our approach to appeal to this, as we noted in the remarks, gift giver and affinity consumer, and what they're often doing is buying either for themselves and in many cases another adult, not just a gift giver like a grandma giving it to a kid. These are collectors in some ways, and that is a much larger addressable market than the child consumer market. Plus, they tend to want to shop online. The experience of Build-A-Bear is not why necessarily they are engaging with Build-A-Bear, where our in-store transactions are all about the experience. So we've identified, we believe, this potential consumer base that acts very differently and also tends to have a larger dollar per transaction as well, much to what Boyne was referring to and being able to pull these bigger bundles together that are, most of them associated with desirable licensed goods and licensed products. Pokemon, as we mentioned in the remarks, is a good example of that. It has an average $70 retail, which is 50% higher than our normal dollars per transaction. So it's serving an additive opportunity for us, where in a lot of cases I think from brick and mortar to e-commerce, there's an overlapping type of strategy where we have some of that, but we see this as a way to build an entirely different type of business model. And these early stages, we feel pretty good about it between Valentine's and some of this license effort that we've done. So that's, and as Royne said, which is really just of great benefit to us, we do operate profitably there. It's not that dissimilar to the rest of our business model on the retail side and you know we we feel like that we are in the early stages from mastering a lot of these technological advances that I shared from the augmented or actually the AI And our SEO efforts as well as our CRM database and being able to drive that lifetime value So we're coming at it from two ways Driving it through the bonus club with our core consumer core consumer base trying to drive transactions average transactions And also a whole new consumer base That we feel like we're getting a little bit of traction with with some of the strategies that we've implemented in the last few months Great

A follow-up on international franchising. So the number of units went down. I assume that's because of Australia. And when you look at the new Chile, India, and China, how should we be thinking of those rolling on, and are there opportunities to add even more countries to the mix?

Yes. The decrease for the last quarter was Australia's restructuring. Okay. We are, you know, of course, pleased that they are out of the reorganization, you know, and certainly hopeful that a much more stable and healthy entity posts that. And we are working very closely with them to assure that we maintain and grow our second large or actually our largest franchise relationship. They've been with us for many years, and we expect us to continue to move forward there. On the second front, In India and China, we're still in the early stages. You know, those are obviously massive countries with tremendous opportunity, both with emerging strong middle classes. And we're with very stable and in many cases particularly, or in one case particularly in India, a multibillion-dollar company that's well, you know, well-capitalized to drive this business. So we expect to see, you know, stores continue to open. I think that we've mentioned this in the past, but the Lulu Group, who we are partners with in India, also has the Toys R Us franchise there, which is actually a separate and distinct, you know, entity versus the portions that had the trouble last year here in North America. And there's a strategy of shop side-by-sides, which out of the gate have been doing very well, and they're incredibly pleased. pulled forward some of their expansion plans. Chile, we're in the early stages, but expect to see some stores open before the end of the year.

Okay. And last question. On the Walmart surge, you know, obviously this is a learning experience on the 6th. When you look at the potential for returns there, can it be as high, as strong as your regular stores? Do you staff them with your own people? How does that work in terms of this?

any expenses there so I'll start answering that for you Eric we are excited about you know opportunity with Walmart those are the stores that we own and operate stores where we are basically the deals are structured on person as a percentage of sales deal we do have control of our labor you know we do have flexibility as it relates to operating hours because again, a lot of these super centers are open 24 hours a day, and clearly we wouldn't be open all day long, but we do have flexibility, so that's gonna help with our payroll model. From the overall top line perspective, these stores are gonna be smaller, because again, their square footage is gonna be smaller. We expect them to be roughly 8,000, 9,000, let's say 1,000 square feet, $150,000 in capex investment for those. We are still trying to understand the full year sales. We only have about six, seven months under our belt. We are pleased with the performance that we are seeing. I would probably think that there are gonna be more around the performance of our concourse from the top line perspective than our traditional stores, but then again, as we continue to expand and be in different locations, we'll learn more about the overall program.

Okay, guys. Good luck and congrats on the quarter.

Thank you.

Thanks, Eric. Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. John for any final comments.

Yes. Thank you for joining us today, and we look forward to speaking to you when we report our second quarter results.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.