Build-A-Bear Workshop, Inc.

Greetings, and welcome to the Build-A-Bear Workshop first quarter 2020 earnings 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, Allison Malkin of ICR. Thank you. You may begin.

Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Voyn Todorovich, CFO. For today's call, Sharon will begin with a discussion of our first quarter 2020 performance, as well as our positioning and actions in response to the COVID-19 pandemic. After, Voyn will review the financials in more detail. 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 their 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. The COVID-19 pandemic continues to have a significant impact on our operations, cash flow, and financial position. The uncertain and dynamic nature of current conditions and its ongoing impact could materially alter our outlook. 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.

Good morning. Thanks for joining us today. I would like to update you on the current status of our business and our plans for the coming months. As you're well aware, globally, COVID-19 has disrupted the way families, friends and colleagues interact with each other, including how they shop and what they do for entertainment. This has significantly impacted not only our business, but the global economy overall. However, we believe that Build-A-Bear is well-positioned to both manage through this crisis and to emerge for future growth as we work to accelerate strategic changes that have been previously initiated. In fact, as we've consistently shared, we've been executing a strategy to build on our brand strength and diversify our retail channel, expand digitally, and add incremental profitable revenue streams. Our goal has been to leverage the synergy between retail and intellectual property initiatives to profitably grow the entire business. We have been methodically upgrading systems, adding talent, and aggressively managing change within the organization given the backdrop of a rapidly evolving retail, consumer, and geopolitical environment. That fluidity and flexibility has never been more relevant than in the circumstances that we currently face. in addition to a sound strategy, upgraded foundation, and enhanced infrastructure. On the onset of the pandemic, we were in a positive cash position with no borrowings on our credit facility. We believe that our strategic repositioning that has been underway will be vital to surviving and ultimately thriving in a new world normal. Our advantages include our powerful brand with high consumer awareness and affinity, a passionate and engaged consumer base with over 8 million accounts opted in for marketing communications, high optionality on our retail store portfolio with over 70% of leases up for renewal in the next three years, a rapidly growing e-commerce segment that is leveraging the expanding digital economy and reaching a broader demographic of affinity and adult gifting segments, and the groundwork in place to further leverage our intellectual property through new revenue streams, including outbound licensing, wholesale, and entertainment. As we discussed on our year-end call in March, in addition to a stronger cash position, we ended fiscal 19 with growth in total revenues and improved profitability. We were building on the momentum of last year's fourth quarter as we started fiscal 2020 with a positive sales trend, and we had expected to deliver profit growth for the year. As the severity of COVID-19 became apparent, we put plans in motion to comply with new international governmental recommendations regarding health and safety, which led to the temporary closure of all of our North American and European corporately managed retail stores. This in turn necessitated the furlough of over 90% of our workforce and a reduction in salaries for all other staff. We moved to a work-from-home model for our remaining corporate associates and quickly instituted aggressive cash preservation and expense aversion policies. Simultaneously, we shifted our focus and remaining resources to support our e-commerce channel. Since the store closures, we have seen triple-digit e-commerce growth with high volume of key affinity products, including record-setting demand, when we launched an initial offering of a furry friend based on the child from the Disney Plus series, The Mandalorian. We quickly modified processes and enhanced capabilities to more efficiently respond to the digital demand, which I will discuss further in detail in a moment. While we made meaningful progress in moving forward, we were not able to offset the complete closure of our store base. Historically, e-commerce has represented less than 10% of our revenues, So even with aggressive growth in that channel, we will still need to reopen a significant number of stores and regain traffic patterns to return to a position of overall growth and profitability with the current business model and mix. Our expectations for the balance of the year continue to evolve as we collect additional data and monitor government decisions and actions. Let me update you on progress regarding our retail stores and retail portfolio key digital initiatives. and cash generation and preservation. First, as it relates to our retail stores, which, as noted, are a vital component of our revenue stream, we have started to reopen retail stores on a staggered basis in select areas with a goal of delivering a modified version of our beloved retail experience, recognizing the new guidelines that are now standard to essentially all public businesses. In preparation for the reopenings, we modified our in-store experience to accommodate these new standards, including limited occupancy based on the store size to allow for social distancing, protective face coverings for our store associates, floor markings, directional signage, and new processes in interactive areas such as the stuffing station to limit personal contact, heightened sanitation processes throughout the store, and associate training focused on the consistent delivery of these new requirements and safety practices. Thus far, with approximately 40 stores reopened, the modifications have been well received based on the positive feedback from both our associates and our guests. We have seen varying levels of business recovery compared to the prior year at stores that have reopened, with tourist locations generally faring better than traditional mall sites. Most recently, a limited number of select locations have also been impacted by protests and social unrest in certain areas. Separately, in the UK, the government has announced June 15 as a day for retailers to begin to reopen, and we are planning accordingly. At this time, we expect to continue to roll out store openings as restrictions ease while we monitor the business rebound and consumer traffic patterns over the upcoming weeks. As I previously mentioned, we began the year with high levels of lease optionality with over 70% of locations having a lease event in the next three years. A strategic position we took as we recognized the shifts that had been underway in consumer shopping patterns away from traditional malls into places where families increasingly spend time, including the digital space. We've been working to leverage this position with our landlords to achieve more favorable and flexible terms. In the discussions and negotiations with landlords, we believe that Build-A-Bear is perceived to be a valued tenant that has also seemed to be a part of the long-term outlook and the new retail landscape. Thus far, we have maintained the lease optionality that has been so important to our strategy to diversify and evolve our real estate portfolio and will continue to aggressively manage this process. There are many scenarios that we continue to review and modify, which may include selective store closures, if terms are not able to reflect the impact of reduced traffic and changing mall performance going forward. Turning to our digital progress, including e-commerce, the investments in platforms, systems, and talent that we have systematically made in recent years enabled us to deliver our 10th consecutive quarter of double digit growth in online sales. After the temporary store closures, the rate of increase grew to triple digit rates on a sustained basis. With reliance on our e-commerce channel as our primary revenue source during this crisis, we took several actions. These include reworking processes at our fulfillment center to incorporate recommendations of governmental and health agencies. While this initially negatively impacted our order processing time, as the teams adapted to the new requirements, we also made additional changes to improve our processing, such as Heightening with our heightened e-commerce volume, we quickly made modifications to a fulfillment approach to expand dedicated assembly lines, utilizing simplified bundle offers specifically designed to service certain high-demand items, which increased throughput and overall efficiency. After recording the largest single e-commerce demand day in our history, with initial quantities of the stuffed animal version of the child from the Disney Plus series, The Mandalorian, which sold out within hours, we added new features to support high demand product launches. These include a virtual waiting room and a chat bot. We have now had two additional sold out events of the child. Notably, the second event set another record demand day, already eclipsing the level previously set in the first quarter. We intend to use these enhancements to support additional business capabilities going forward including ongoing releases of the child and other affinity products. In addition, we expedited the infrastructure to be able to buy online and ship from store in order to supplement e-commerce fulfillment while leveraging labor that we would already have available in retail stores after they've reopened. We continue to review all aspects of e-commerce with the goal of driving further growth on both a short and long-term basis as we expect demand to remain high even with the reopening of stores. Separately, as a tool for consumer engagement and platform for key digital marketing messages, we introduced a program called Workshop Wednesdays as a resource for families to find entertainment activities and fun product ideas. This platform further positions Build-A-Bear in the entertainment space, suggests options for gift-giving, and increases awareness of key products while helping you stay connected to our valued guests. We garnered almost 100 million media impressions when we announced Workshop Wednesdays, indicating the continued interest in our brand. Importantly, the concept is one that we plan to transfer to our retail channel in the future to increase destination-driven traffic when appropriate. We also plan to continue key actions that were immediately instituted to address the initial crisis, including assertive cash preservation, tight inventory management, a revised marketing strategy, and a reduced workforce. As we look forward to the balance of the year, we are focused on accelerating our digital transformation inclusive of e-commerce, content development, CRM advancement, and entertainment platforms. While we are actively executing a staggered store reopening plan, we believe that our future state will reflect the business transformation that has been the underlying driver of our strategic plan. In closing, these are clearly unusual times that necessitate innovation and flexibility, as well as the reevaluation of a wide array of previously held business models, beliefs, and corporate constructs. Even with that standard, I continue to believe that our stated strategy of evolving our company to better monetize the innate value of our brand across more channels to more consumers remains directionally on course. In fact, shifting our business focus to the acceleration of our digital transformation will be key to our future as new consumer shopping patterns and preferences are expected to also accelerate at an even more rapid rate to an online space. Build-A-Bear has weathered storms before. We have proven ourselves to be a resilient organization with an authentic, emotional brand that continues to be meaningful to consumers. And while I am truly moved by the devastating impact of this pandemic, I still have great hope for the future and remain genuinely proud and grateful to not only lead, but to be a part of a team that has proven time and again that they are passionately believers in this company and that this brand and this brand by facing and emerging from a wide variety of challenges in recent years. I'm also pleased that through the efforts of the Build-A-Bear Foundation, we've been able to support organizations that have been providing assistance to those in need during this time. Finally, even as life and business move forward in a very different world, recent events clearly indicate that we are likely to face continued uncertainty on many fronts. Our goal is to emerge in a position of growth, understanding the need to remain flexible while accelerating these key initiatives of our strategy we mentioned to take us into the future, whatever form that may take. For our company, it circles back to our mission statement of adding a little more heart to life and choosing to believe that people will still want to experience joy and special moments by creating their own furry friend for life and having the comfort of a teddy bear hug, maybe now more than ever. And now I would like to turn the call over to Voyn to review our financials in more detail.