Build-A-Bear Workshop, Inc.

Greetings and welcome to the Build-A-Bear Workshop second quarter 2019 results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question today, please press star 1 on your telephone keypad. If anyone to require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Schmidt of 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 second 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 your questions. We ask that you limit your questions to one question and one follow-up. This way, we can get 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 webcast will be available later today on the IR site. Before I turn the call over to management, I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties. 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, Jessica, and good morning, everyone. In the quarter, even with the anticipated decline in retail revenue given the comparisons to last year's remarkable traffic-driving pay-your-age events, we improved operating results with gross margin expansion and expense management versus the second quarter last year, even with the backdrop of global and economic uncertainties. With the focus of our dedicated team, the quarter also saw growth in new revenue streams as we continued to execute our business diversification initiatives which we believe demonstrates the progression of our stated strategy. We also continue to build necessary infrastructure and to solidify relationships with best in-class partners, which we expect to further leverage the awareness and power of our brand across categories. In short, our long-term goal remains to evolve the company beyond the traditional mall-based retail concept among which it was established over 20 years ago. To that end, We recently completed the execution of some noteworthy agreements in the entertainment states, which I will outline shortly, that are expected to build on our brand strength and contribute to the advancement of our overall evolved business model. With U.S.-aided brand awareness over 90% and comparative brand metrics that are for parental trust and kid love that rival other family brand BMS, we understand the potential value that is inherent in our company. It is that same value that allows us to have a list of over 8 million opted-in email addresses for direct marketing and communication, 4 million active loyalty club members that represent an estimated 20 million household members, and nearly 45 million guests each year that come into a Build-A-Bear workshop, a level that is comparable to attendance at global recognized theme parks. On top of that, On a combined basis, there are over 110 million unique visitors to our website, YouTube channel, and other social media platforms annually, not to mention the millions of brand interactions generated by digital posts, often featuring heartwarming stories that go viral that are shared directly by our guests through user-generated content. With that in mind, we are focused on four key priorities this year that are intended to better leverage our brand assets and contribute to long-term success. These include... more efficiently taking advantage of growth in the digital economy, increasing acquisition, engagement, and lifetime value of loyal program members, diversifying retail locations to broaden consumer accessibility to our brand and reduce our reliance on traditional malls, and finally, monetizing the awareness and trust that consumers have for our brand through incremental profitable revenue streams such as outbound licensing, wholesale, and entertainment. As it relates to growing in the digital economy, we once again delivered double-digit e-commerce revenue growth, marking the seventh consecutive quarter of growth at those rates, a pace that has been consistent since the launch of our new web platform supported by Salesforce in fall of 2017. Even with these results, we believe there is significant opportunity for further growth in e-commerce when we benchmark our e-com as a percent of total revenue against other companies. While we started as an experiential retailer, we believe this consistent online advancement proves that our brand power extends beyond hands-on retail experience. As a result, in addition to the core family segment, we have become multigenerational and diversified our consumer base. We have seen teens and adults who prefer to shop online move to our enhanced site to purchase affinity and gift products. With nearly 50% of our e-commerce occurring historically in our fiscal fourth quarter, We've been laying the groundwork and building capabilities to take advantage of the ongoing macro trend of online shopping, leveraging our progress to date and adding enhanced site features, digital marketing programs, and improved search efforts to drive growth in this critical period. With over 85% of our site traffic on average originating from personal devices, we recently upgraded our mobile capabilities. We have seen reduced cart abandonment and higher conversion rates since the mobile enhancement were released. We've been refining both our paid and natural search with SEO-enhanced product descriptions, campaign optimization, and branded search terms leading to higher traffic and improved conversion with a roadmap of planned future developments. Closely tied to our digital priorities is the focus on integrating and expanding our Bonus Club loyalty program membership. As noted, we have over 8 million opted-in email addresses with over 7 million of those associated with a Bonus Club account that now includes a more robust contactable database in the UK that has been rebuilt in compliance with our recently enhanced GDPR regulation. We have advanced our capabilities to segment this database in personalized messages, which has helped to improve engagement levels with marketing communications as evidenced by higher average open and click-through rates, which benefits both in-store and online channels. We also continue to emphasize birthdays with Bonus Club members, recently adding an option that allows for the input of birthday data to receive additional benefits. We added this feature in conjunction with this year's Pay Your Age events, and we now have birthday data on approximately 2 million individuals associated with Birthday Club accounts. This includes the data we have from the Birthday Treat Bear that was introduced last year, which allows a child to pay their age for a collectible bear any time they visit a store during the month of their birthday. This bear has been our number one unit seller since it launched and birthday continues to be the top reason for visits to our stores all year long. By having this data, we can customize marketing messages and encourage store visits tied to an occasion in which families are more likely to seek out our unique interactive experience and thereby add incremental lifetime visits. Therefore, when turning to our next priority of broadening consumer accessibility at retail, Our data, ranging from guest satisfaction scores to generally increasingly robust dollars per transaction and conversion rates, indicates that our current challenges are not about who we are, but more about where we're located. And it's important to understand that we are well on our way to pivoting the retail business to venues that more align where today's families go for fun, entertainment, and to make memories. We have understood the challenging dynamics of traditional mall-based retail for a number of years, and we continue to deemphasize traditional mall locations. That is why we now, with purpose and planning, have optionality on nearly 70% of leases in the next three years, with additional leverage given due to Build-A-Bear's tendency to generate mall traffic because many of our visits are planned. With our focus on growing brick-and-mortar retail locations that allow us to diversify access to more consumers in places where they prefer to shop, we are on track to have approximately 23 lease spaces within Walmart stores by the end of the year. We believe that this relationship gives us the opportunity to expand the accessibility and convenience of our brand to a wider consumer base and reach incremental shoppers beyond those in traditional mall stores. Beyond the store locations, Walmart is currently the top distributor of Build-A-Bear outbound licensed products from plush toys to flippers. We are also pleased that this year Walmart will be the exclusive partner for our annual National Teddy Bear Day celebration on a national basis. That means that nearly all U.S. Walmart stores will offer the same collectible teddy bear that is featured in our stores with approximately 2,000 of those locations hosting local retail attainment events over the weekend of September 7th through the 9th. Separately, in line with positioning Build-A-Bear workshop stores where families go for fun and entertainment, Tourist locations, such as the successful shop within FAO Schwartz in New York City or the location near the London Eye, continue to be a focus. We have completed the expansion into 17 Great Wolf Lodge resorts, which operate on a wholesale basis like the model we have with Carnival Cruise Lines. By this holiday, we expect to have nearly 150 non-traditional mall retail locations, including tourist venues through a combination of owned, seasonal, and third-party wholesale agreements. As it relates to monetization of our brand assets, we believe we made progress to leverage the awareness and trust that consumers have for our brand through incremental profitable revenue streams. In the quarter, we had an increase in commercial revenue, and we executed multiple agreements tied to entertainment and content development, which is intended to be the foundation for a new branded production entity called Build-A-Bear Entertainment. With that in mind, we are pleased to announce that we recently signed an agreement for a multidimensional relationship with Sony Pictures Worldwide Acquisitions that includes the creation of movie content based on some of Build-A-Bear's best-selling proprietary intellectual properties. The first property in the pipeline is expected to be based on our popular music-oriented girl empowerment line, The Honey Girl. The Sony contract comes on the heels of our recently announced music partnership with Warner Music Group, to develop a Build-A-Bear record label under Arts Music, as well as a publishing deal with Warner Chapel Music, both of which are synergistic with the continued expansion of listenership on Build-A-Bear Radio. Other notable progress in this area includes the finalization of an agreement with RWS Entertainment Group, a full-service production company that creates award-winning custom entertainment, live events, and branded experiences worldwide, and we are currently in development for two holiday movies with the Hallmark Channel, the first of which is scheduled to air during the upcoming Christmas season. We believe that many of these best-in-class entertainment partners recognize the value of the high awareness, trust, and emotional connection that consumers have with our brand, but also the unique asset that comes with our retail locations that allow for direct interaction and additional storytelling when consumers who have engaged with the entertainment content visit our stores. We expect to start to realize some direct benefit from these new entertainment initiatives as revenue-generating channels in 2020. However, we believe that the ultimate opportunity within this business model lies in the full circle of leveraging the branded entertainment content to also elevate and monetize our retail channel and experience, which should then drive additional brand engagement across diversified channels. In regard to the recent second quarter, results included total revenue of $79.2 million, a decline of $4 million, with sales growth across geographies in the first two months of the quarter offset by a decline in the final month reflecting the prior year's benefit of a significant traffic and transaction growth driven by our inaugural Pay Your H.D. events and the subsequent voucher redemption. The retail sales growth in May and June was not enough to offset one of the biggest revenue weeks in the history of our company that occurred with the groundbreaking Pay Your Age promotion that was launched last July, even with a strong Lion King offering and a strategically planned repeat of the Pay Your Age event. Because of our continued belief that the unprecedented response in the original Pay Your Age event last year demonstrated the passion that consumers have for our brand and helped launch the aforementioned popular birthday treat there, We felt that the awareness and popularity of the promotion warranted the development of a plan that would allow us to repeat the offer in a format that, with appropriate constraints, would allow us to deliver a positive experience for participating consumers. With a number of adjustments, we held our second Pay Your Age event in June of this year with strong consumer response, enhanced loyalty member data collection, and overwhelmingly positive media coverage with nearly 2 billion impressions in the weeks leading into and immediately following this year's promotion. Last year's prolonged activity included high levels of post-promotion voucher redemptions, so we knew the comparisons would be challenging on a top-line basis. Therefore, we focused on preserving profitability in the quarter, which was reflected in the improvement from the prior year's results. Separately, as noted, we continued to advance in the digital economy, once again posting double-digit growth in e-commerce as well as an increase in commercial revenue that includes wholesale and outbound licensing fees. Our quarterly results also included retail gross margin expansion of 160 basis points and a reduction of $2.2 million in SG&A expenses, all of which contributed to a $1.8 million improvement in second quarter pre-tax loss of $700,000 despite the unfavorable currency exchange rates. From a balance sheet perspective, we ended the quarter with $15 million in cash and no debt, in contrast to a number of other more leveraged mall-based retailers. And for the first half of the year, Build-A-Bear Workshop is profitable, generating $1.7 million in pre-tax income, an improvement of $3.6 million from the first six months of fiscal 2018. It is important to note that these results were achieved despite lower total revenues that included the currency headwind just mentioned. As we look toward the balance of the current fiscal year, we expect to benefit from an enhanced celebration of National Teddy Bear Day in September, a favorable backdrop of family-centric films, including the highly anticipated release of Disney's Frozen 2, with merchandise launching in October, and later in the year, the next installment of the Star Wars series. Of note, the licensed product tied to the original Frozen film has generated the most sales of any license in our history. Our popular Merry Mission holiday collection will feature updated characters and kick off the Christmas season, which will offer an expanded gifting assortment, both in stores and online, helping to leverage the current e-commerce momentum. Separately, as another proof point of consumer interest of Build-A-Bear and other categories, we are also pleased that our new Build-A-Bear Workshop Stuffing Station Kit, developed by our outbound licensed partner Just Play, has been chosen to be on Walmart's high-profile, top-rated toy list for Holiday 2019. In conclusion, We remain energized about the long-term future of this brand and our business as we advance the monetization plans and new partnership opportunities that are now at hand to deliver stakeholder value. I will now turn the call over to Voyn to review additional financial details.