Build-A-Bear Workshop, Inc.

Greetings. Welcome to Build-A-Bear Workshop, second quarter 2020 earnings 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 from your telephone keypad. Please note, this conference is being recorded. At this time, I'll now turn the conference over to Allison Malkin with ICR. Allison, you may begin. Thank you.

Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Voin Todorovic, CFO. For today's call, Sharon will begin with the discussion of our second quarter 2020 performance and our positioning and actions in response to the COVID-19 pandemic. After, Voin 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 your questions. Please note the call is being recorded at 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.

Thank you, Allison. Good morning, everyone, and thanks for joining us today. As we continue to move forward in a very different and challenging world, after initially focusing on responding to and managing the immediate circumstances driven by COVID-19, including the closure of all of our retail locations, we have rapidly shifted our attention to leverage the current situation to accelerate our strategic initiatives to successfully operate in both the near and long term. During this time of accelerated change, we have increasingly relied on our experience, data resources, and technological capabilities to drive our strategy forward with the goal to profitably diversify and monetize the power and affinity of our brand. Our belief in the value that the Build-A-Bear brand brings to the world and the opportunity that it presents remains strong, even in an ongoing era of uncertainty, uncertainty, that demands agility and flexibility from companies everywhere. As we continue to operate with a reduced corporate workforce that is primarily working from home, we have grounded the organization to remain focused on three key areas that we believe are critical to steer us through the current environment while also positioning the company for the future in line with our stated strategic objectives. These initiatives are... to accelerate the digital transformation of the company, to not only rapidly grow e-commerce, but to more effectively use technology and digital capabilities throughout our entire organization, inclusive of marketing and leveraging digital content, to utilize the strategic positioning and high optionality of our real estate portfolio, to revise the terms of our leases and overall operations to reflect the acute shifts in brick-and-mortar shopping patterns, and evolution of the consumer shopping behaviors, and to maintain a solid financial position with the liquidity needed to support our business, including assertive cash management and meaningful cost reductions. To that end, we made progress in each of these areas in our fiscal second quarter. Let me highlight you on a select detail. In the digital area, consolidated e-commerce revenue increased by nearly 300% over the prior year's quarter. We saw strong consumer demand for key licensed products, such as a furry friend based on The Child from the Lucasfilm series Star Wars The Mandalorian on Disney+. Notably, even excluding sales of The Child product, e-commerce showed a triple-digit increase. Other key affinity products and gifting options were also popular online. Reflective of the merchandise mix, we have seen increased demand from our teen and older consumer segments during this time. We expanded our omni-channel capabilities, leveraging store locations to supplement e-commerce fulfillment through buy online, ship from store programs. And we completed the initial phase of our expanded engagement with Salesforce, which is designed to enhance our CRM capabilities and drive sales by creating meaningful consumer journeys, managing multiple touch points with a 360-degree view with the goal of ultimately increasing our guests' lifetime value. From a real estate and store perspective, even though our retail locations were closed approximately 60% of the quarter, we were able to modify our bearer building experience to meet COVID safety recommendations, with the well-being of our associates and guests foremost in our approach, and initiate a staggered reopening plan if local restrictions were lifted. At this time, we now have reopened approximately 90% of our stores, many, however, with shortened hours of operation. Notably, much of the California market still remains closed due to governmental restrictions in place in that area. While traffic levels have been below the prior year, we are seeing higher conversion and spend per transaction. As I've mentioned previously, recognizing the trend of declining mall traffic several years ago, we made the strategic decision and took action to infuse a high level of flexibility and optionality into the management of our store leases. We've been able to leverage that position and renegotiate contractual terms that include rent reductions, deferrals, and abatements for approximately 95% of our locations. Importantly, we have maintained much of our optionality with over 70% of locations continuing to have a lease event in the next three years. This allows us to remain responsive to future movement in consumer traffic patterns in brick-and-mortar stores. As it relates to our financial health and liquidity, I believe our disciplined approach to expense management and willingness to take decisive action is evident with over $14 million in reductions in SG&A for the period compared to the prior year. a solid cash balance, and no borrowings under our credit agreement. Recognizing the need to operate as a leaner, simpler organization, we recently completed a long-planned corporate reorganization that aligned key functions and leadership roles with our stated strategy, inclusive of our intended future digital positioning versus our past traditional specialty store structure. Accordingly, The decrease in expenses reflects the reduction in workforce from both furlough activity and position elimination, as well as reduced marketing costs combined with tight overall expense control. In addition, we saw continued expansion in merchandise margins with less promotional activity and intensified supply chain oversight. Assertive cash management allowed us to end the quarter with a higher cash balance and lower inventory compared to the same period in the prior year. And importantly, as we previously reported, we have finalized a five-year asset-based credit facility for up to $25 million, increasing our financial flexibility. As we look to the back half of the year, let me highlight some opportunities that we expect to realize, particularly in the area of accelerating our digital transformation. Consumers have demonstrated that they're willing to order almost anything online. as well as engage in entertainment and family activities virtually. Our teams are embracing these trends and working to capitalize on them and leverage our investments to be more digitally focused organizations. For example, we recently announced that we had canceled our highly popular annual in-store pay-your-age promotion due to COVID-19 and replaced it with our first no-line online bear building sell event. This event resulted in online order volume in the top five days of our e-commerce history. We were able to make use of new capabilities such as our virtual waiting room to manage the high demand. And over 70% of the orders were fulfilled from a store location versus our central warehouse. This paves the way to plan for other traditionally high traffic store events such as National Teddy Bear Day, which we are moving to a primarily digital format featuring a live streaming virtual store event later this month. Another example is our new Party in a Box offering that is available online for families that want to celebrate special occasions, from birthdays to thanking the hero in their lives, with a curated product collection that simulates the party activity that we had previously had in store. As I noted, we have completed the initial planning phase of the Salesforce engagement and are actively implementing key initiatives. The technology and capabilities that we have added from Salesforce, combined with the data that we have collected through various consumer touchpoints, including our Bonus Club program, are being used to expand guest profiles and segmentation, improve the consumer experience, and drive current and future demand. This includes developing and deploying sophisticated multi-channel buyer journeys. New guest journeys are being designed and activated that engage consumers at different touch points in their relationship with Build-A-Bear with the goal to drive additional incremental future purchases. In addition, the tools and data are being used to develop lead generation and efficiently reach lookalike consumers with increased accuracy. Closely related, our marketing program has significantly shifted media mix and embraced a digital-first approach. We have restructured our key campaign and post-campaign tracking around journey-based outcomes with algorithms to optimize key metrics and reach target audiences. We are actively working to increase brand consideration and conversion while focusing on driving a higher return on ad spend with lower overall investment. This digitally focused approach will be evident as we launch key affinity products such as the new Harry Potter collection that is planned for release tomorrow. This is one of the most successful overarching licensed properties on record and one of the most requested from our own guests as we anticipate a high level of excitement when it comes to market. With the expectation that it will have strong appeal to the teen plus age segment, reflecting interest from the fans that grew up with this property, the offering will be exclusively online for a limited time before expanding distribution to our stores. With the anticipation of strong online demand during the holiday season as well, we have been reimagining and reconfiguring our warehouse operations in order to increase order fulfillment capacity and efficiency. This has resulted in several key changes including accelerating our omni-channel competencies of buy online, ship in store, and buy online, pick up in store. Effectively, this allows us to use over 200 of our currently operating stores as mini distribution centers. An efficient shift, particularly given the ongoing challenges in traditional retail traffic. This allows us to leverage the geographic proximity of stores as well as available labor to help fulfill strong e-commerce demand. both seasonally and associated with popular product releases such as Harry Potter. In addition, we are featuring select merchandise offerings that have a limited number of predefined bundles that are more quickly assembled and reconfiguring the layout of certain areas of our warehouse to improve speed and efficiency to support our expanding e-commerce business. We also have continued to emphasize and focus on liquidity, cash management, and expense reductions as the year progresses. And finally, a key tenet of our strategy has been to develop entertaining content to build further brand equity and consumer engagement. As I've previously noted, we believe that our business model will benefit on multiple fronts, including the synergy of leveraging the branded entertainment content, which effectively acts as marketing tools. to drive our own retail as well as outbound licensed product sales. We expect the interaction with our iconic retail experience to, in turn, drive additional interest across multiple entertainment platforms in an ongoing circle of engagement and value creation, reflective of a model that has proven to be successful for other branded companies. We recently saw the release of our first music offering through our agreement with Warner Music Group's Arts Division with an album entitled Workshop Jam, This soundtrack delivers a Build-A-Bear spin on classic songs that are expected to appeal to kids of all generations. The music is available on iTunes, Spotify, Amazon, or your favorite streaming service. The songs have been added to the mix on Build-A-Bear Radio on the iHeart media platform. Notably, we recently saw the largest monthly increase in listenership for Build-A-Bear Radio since the beginning of the iHeart relationship as we added new programming designed to appeal to families looking for engaging entertainment. Separately, we are also excited to share that our first movie, through our relationship with the Hallmark Channel, is slated to release this holiday season as a part of the ever-popular Hallmark Channel countdown to Christmas. Build-A-Bear Entertainment is a production partner on the film, which features a heartwarming storyline and is called Delivered by Christmas. In closing, I think it is important to reiterate that many of the moves we are making in response to COVID also play into our long-term strategies. In fact, we've been able to accelerate key initiatives during this time, taking on activities that were once slated for 2021 and beyond, but are now underway in an aggressive manner with the goal to drive sales both online and in our reopened stores. As you may recall, before the pandemic, when we announced our 2019 year-end results, we also noted that our fiscal first quarter 2020 year-to-date sales were positive versus the prior year. Turning to the present, as we noted in this morning's press release, we have seen sequential improvement in sales trends compared to the prior year, with our operating stores recapturing over 80% of sales in August and improvement from the 70% levels that we saw in July. I am pleased to add that the improvement has continued, and we have recently seen positive year-over-year consolidated daily sales for the first time since the mid-March COVID-driven closures. Finally, I want to thank our associates for their continued dedication to our mission and long-term goals. During this time, we have been reminded of the importance of the core values and purpose that we have as a company. These include collaborating and learning as a team in totally new, technologically advanced ways, and embracing the value of each diverse individual that is touched by our brand, particularly with the backdrop and heightened dialogue around social justice. We have been reminded of both the need for and responsibility that we have to achieve our mission of adding a little more heart to life as a generational brand that truly, in our opinion, makes a difference in the world. I believe that we are in the process of strengthening our company by developing additional core competencies while enhancing others. That will be critical to evolve and ultimately achieve our strategy. We are committed to remaining flexible, agile, and innovative in order to succeed and return to a position of sustained profitable growth with the goal of creating long-term value for our stakeholders. Now let me turn the call over to Voim.