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spk04: Welcome to Build-A-Bear Workshop 2020 earnings 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, Allison Malkin of ICR.
spk00: Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Boyne Taborovich, CFO. For today's call, Sharon will begin with the discussion of our fourth quarter and fiscal year 2020 performance and highlight our priorities as we begin fiscal 2021. After, Boyne will review the financials and our outlook 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 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 our 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.
spk01: Thank you, Allison, and good morning, everyone. Thanks for joining us today as we share our results for our fourth quarter and fiscal year 2020. In reviewing the year, I think it's accurate to see it as a tale of two halves. In the first half of the year, we rapidly responded to the onset of a global pandemic that forced a governmental mandated closure of all of our corporately operated stores, as well as many third party and franchise locations. We took immediate action to maintain the financial well-being of the company, including aggressive expense management and cash preservation, while pivoting to drive e-commerce demand, even as our headquarters shifted to full virtual mode. As we moved into the second half and stores reopened on a staggered basis as guidelines transitioned, our focus turned to accelerating key initiatives to drive digital transformation and evolve retail. I am proud of the resilience shown by this organization with a headquarter staff that continues to work virtually and its ability to rapidly adapt to lead the change that drove us to deliver a profitable second half a stronger year-end cash position compared to the prior year-end, and no borrowings on our credit facility. Looking in more detail at our fourth quarter, we exceeded our previously issued guidance across a number of key metrics, even with the ongoing negative impact of COVID-19 on retail store operations. This included an 18% reduction in store operating days driven largely by the forced reclosure of all stores in Europe, for most of the quarter, as well as restrictions on operating hours and the number of consumers to be in stores, with achievable sales on key days during the holiday season. Even as the brick-and-mortar retail situation remained in flux, we continued to drive triple-digit growth in e-commerce demand, accelerate our digital transformation, and stepped up the rollout of key initiatives to expand our consumer base and purchase frequency that we expect to have ongoing benefits and position our company to achieve our stated goal of profitable growth, assuming a more stable economic and retail environment. Finally, we also kept an eye on the future of the business by delivering on brand initiatives beyond the retail model. In the fourth quarter, we reported total revenue of $93.7 million, exceeding the guidance we provided in January, but still representing a decline compared to the prior year. Our brick-and-mortar stores, while negatively impacted, showed improvement in weekly trends to finish the year and digital performance remained strong with another triple-digit increase, giving us momentum in our business as the period ended. Gross profit margin also exceeded the previously guided range with an increase in merchandise margin and benefit from rent reductions leading to an almost flat gross margin rate in the quarter compared to the prior year. This is despite lower leverage on occupancy expense due to the reduction in total revenue partially offset by the benefit of pandemic-driven government-assisted programs in the United Kingdom. GAAP pre-tax income increased by over 20% compared to the prior year to $9.2 million. While on the balance sheet, we finished the year with higher total cash of $34.8 million. up 30% versus the prior year. As I noted, we saw positive momentum as we finished 2020, yet we remain cautious as we begin fiscal 2021 given the ongoing uncertainty. Underlying both our pandemic response and future outlook is a strategy to leverage the power and emotional connection of the brand created by the one-to-one retail guest engagement and marketing model. that can monetize in categories and channels beyond traditional retail. Our discipline focus on the execution of this strategy has centered on three key platforms. As a reminder, they include, one, further digital transformation, including content and entertainment initiatives, two, rapidly evolving our retail capabilities, which includes significantly expanding our e-commerce capacity, and three, maintaining financial stability and managing the liquidity so we can both support our business and make strategic investments designed to drive future growth. Regarding the acceleration of our digital transformation, we sustained our trend of triple-digit growth in e-commerce demand in the fourth quarter, and we intend to build on this business with more effective use of technology, and improved and enhanced fulfillment capabilities while leveraging our expanded digital platforms to inform and drive marketing and content efforts. In the fourth quarter, we continued to see robust demand for key licensed products, including those inspired by the child from the hit Star Wars series, The Mandalorian, and an expanded Harry Potter collection, plus new Pokemon characters. We entered a new space with the launch of a product line created in collaboration with TikTok influencers, We Wear Cute. And we also saw robust demand for our proprietary Merry Mission holiday collection, as well as gifting products, which carried over into the new year with a strong Valentine's performance. Separately, we advanced our overall digital capabilities across the enterprise, including our CRM program. With the digital technology and capabilities from Salesforce, that were added in 2020 combined with robust consumer data, we have created new multi-channel buyer journeys designed to efficiently acquire new customers and drive lifetime value of existing guests. We have refined and expanded our communication tools and expect to benefit from both having these platforms available for the entire year as well as making further progress in our execution. We also saw innovative developments in our effort to evolve and accelerate consumer engagement in their preferred digital platform as we seek to leverage our 10 million-plus opted-in consumer base across social channels and through direct communication. Throughout 2020, we hosted a number of online streaming events, adding new ways for consumers to interact with our brand, as well as capabilities to transact with new in-app purchase options, which proved successful, and we are planning to expand that in the new year. In addition, we continue to use digital media, content, and entertainment as marketing and brand-building tools to engage consumers and drive sales. Build-A-Bear Radio on the iHeart platform has grown steadily and most recently surpassed 500,000 monthly listeners while our first live action film delivered by Christmas was seen by millions of viewers on the Hallmark Movies and Mystery Channel. As Build-A-Bear Entertainment continues to develop, we are pleased to be wrapping production on our first live action film through our agreement with Sony Pictures Worldwide Acquisition. As part of this agreement, the film Honey Girls, which is expected to be released in fall of 2021, is inspired by our popular intellectual property and successful product line. It uses the power of music as a way to celebrate individuality while recognizing that we can also be better together, all wrapped up in a fun girl empowerment journey of discovery. We expect to see heightened consumer engagement with the branded entertainment content when the film is released, with the movie and original music effectively acting as marketing tools to drive increased interest for Honey Girl's products across channels. Our second initiative is to rapidly evolve retail capabilities as we extend ways to connect with and meet the changing needs of consumers by driving omnichannel engagement and expanding delivery options. In 2020, we made strong progress in the second half with over 100% growth in online demand for both new guest acquisitions and incremental purchases from a previously lapsed account. We plan to continue to broaden our addressable market and expand our consumer base with omni-channel engagement using occasion-based offerings and high appeal licenses. As such, I'm pleased to announce plans to initially launch products exclusively online later this quarter based on the highly popular Nintendo Switch game Animal Crossing New Horizons. Accordingly, With the increased digital demand, we needed to expand our fulfillment capabilities to efficiently deliver the increased order creation by improving warehouse throughput and adding omnichannel capabilities. We have been able to leverage our stores to effectively act as mini distribution centers, leveraging labor and optimizing inventory. In 2020, we added diversified omnichannel options to more than double our fulfillment capacity by improving warehouse efficiency, developing buy online, ship from store, buy online, pick up in store, and curbside pickup capabilities, as well as partnering with Shipt to provide a same-day delivery option for our guests. And finally, we remain keenly focused on maintaining our financial stability with the liquidity needed to support our business while managing working capital as COVID uncertainty continues. During the pandemic, we have leveraged our strategic high lease optionality to renegotiate over 90% of all store leases. Importantly, we maintained that optionality with over 75% of leases continuing to have an event in the next three years. We expect to further negotiate our real estate portfolio as the disruption continues. Separately, we plan to invest capital, particularly in the digital space, to drive acceleration and transformation goals. In closing, 2020 was indeed a tale of two halves, but I believe that ultimately we will look back on the year as one that called on this organization to take action to not only survive a pandemic, but to be able to thrive in the future. I would like to once again thank our associates for their resilience and commitment to our company's mission. As they know, the comfort of a hug from a furry friend from Build-A-Bear can provide. We believe our back half results demonstrate the benefit of a solid strategy and the disciplined focus and execution from a responsive and driven management team. We are committed to monetize the power of our beloved brand to deliver future profitable growth as the challenging times stabilize and consumers return to more normal activities. Now, let me turn the call over to Voing to further discuss the year and our outlook.
spk03: Thanks, Sharon, and good morning, everyone. As Sharon noted, the year was a tale of two halves. The actions taken to navigate the pandemic in the first half of the year combined with the reopening of stores Acceleration of key initiatives to transform digitally and rapidly evolving our retail channels in the back half of the year allowed us to deliver profitability growth in both our third and fourth quarters. We ended the year with improved momentum and a solid balance sheet, reporting fourth quarter sales and earnings ahead of the guidance we shared in January. This was accomplished even with ongoing restrictions negatively impacting all of our reporting segments. We finished the year with about $35 million in total cash, a 30% increase over the prior year, and no borrowings on our credit facility. Turning to our fourth quarter results, which were negatively impacted by the pandemic, and in particular, temporary stores closures. Total revenues were $93.7 million, a 10.4% increase compared to the prior year. This includes an 8.7% decrease in net retail sales, primarily driven by an 18% reduction in store operating days, about 25% fewer operating hours, and an impact from capacity restrictions. Consolidated e-commerce demand rose 104% over the prior year, which reflects online generated orders, including those fulfilled through our stores. Commercial and international franchise revenues were $1.8 million compared to $3.9 million in the 2019 fiscal fourth quarter. Gross profit margin was 50.1%, down 30 basis points from the prior year's fourth quarter. This included the negative impact from non-cash asset impairment costs and the rent recorded for our European stores for the full quarter despite the locations being closed for two-thirds of the period. Partially offsetting this were positive benefits from gift card breakage that flows through revenue with no associated cost, and reduced occupancy expenses due to our rigorous efforts to renegotiate lease terms earlier in the year. On the expense side, SG&A was down $7.3 million. or 16.3% from the fourth quarter of 2019, driven by decreased payroll expenses as a result of reduced store operating hours and lower corporate expenses as part of our cost containment initiatives. We also saw positive impact of currency fluctuations and a significant reduction in marketing expense as part of COVID mitigation efforts to manage store traffic levels given ongoing temporary closures and capacity restrictions. Overall, SG&A was 40.3% of total revenues, representing a 280 basis point improvement compared to fiscal 2019 fourth quarter. During the quarter, we benefited from government assistance programs and grants that reduced our SG&A costs. Some of these programs will continue in 2021, predominantly in UK market, and it helped offset... Pre-tax income during the quarter was $9.2 million, $1.6 million improvement as compared to the prior year quarter, or a $400,000 increase compared to the prior year period on an adjusted basis. For the 2020 fiscal year, total revenues were $255.3 million compared to $338.5 million in fiscal 2019. This includes net retail sales of $249.2 million, a decline of 23% from the 2019 fiscal year, which reflects a 33.4% decline in store operating days driven by pandemic-related store closures. Sales were also negatively impacted by reduced operating hours and capacity. On a positive note, we generated a 133% increase over fiscal 2019 in e-commerce demand. We were able to support this growth through our efforts of improving throughput in our warehouse, accelerating omnichannel initiatives, and driving our last-mile delivery, including buy online, pick up in store, or ship from store programs. For the year, we had a GAAP pre-tax loss of $21.8 million, or a loss of $15 million on an adjusted basis. This reflects a decline in revenue due to temporary store closures, as well as the full burden of annual rent expense partially offset by a reduction in SG&A. Turning to the balance sheet, at year end, total cash was $34.8 million, an increase of 30% or $8.1 million compared to the prior year. As part of our disciplined approach to working capital and strong management of vendor relationships, inventory was down $6.6 million, a decline of 12.3% year over year. While we are comfortable with the receipt flow, level, and composition of our inventory, we are managing our supply chain to mitigate logistic disruptions and delays in product shipments. Capital expenditures for the 2020 fiscal year were $5 million compared to $12.4 million in 2019 fiscal year, reflecting our tight working capital management and reduction in planned capital expenditures with the backdrop of the pandemic. For fiscal 2021, we currently expect capital expenditures to approximate $5 to $10 million, and for depreciation and mortization to be in the range of $13 to $14 million. Regarding our outlook for fiscal 2021, we currently expect EBITDA to be higher than the EBITDA we generated in 2019 of $8.3 million. In addition, we expect to achieve EBITDA in the range of $20 to $30 million by fiscal 2023. This outlook assumes the reopening of our European locations by the end of the first quarter and no additional significant closures due to government mandates in fiscal 2021. Please keep in mind that while we expect to see annualized savings from expense reduction initiatives implemented in fiscal 2020, we will incur higher payroll and marketing expenses as we have reinstated salary levels at historical levels brought back furloughed employees and resume marketing activity to support sales growth. Furthermore, our EBITDA outlook assumes a more stable economic and retail environment in fiscal 2020 and beyond. Also due to our tax valuation position in both United States and the United Kingdom, we expect to pay minimal cash taxes in 2021. In closing, I would also like to take a moment to thank our team for their commitment to discipline, expand management while serving our guests under extraordinary circumstances throughout the year. We appreciate their dedication to the brand and their ability to manage through these challenging times while still finishing the year on a positive note. This concludes our prepared remarks, and we will now turn the call back over to the operator for questions. Operator?
spk04: 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 keys. One moment, please, while we poll for questions.
spk05: And our first question is from Eric Bader with SCC Research. Please proceed.
spk06: Good morning. Congratulations on Q4.
spk05: Good morning, Eric. Thank you.
spk06: Could you fill us in a little bit on the international markets in the UK? Are you basically closed until April? How should we be thinking about that market and the chance for it to start to revive after a what has been a very crazy and somewhat sloppy year in terms of lockdowns?
spk01: Thank you, Eric. Hi. Right now, the governmental mandate is in place until the middle of April for closures for non-essential businesses, so to speak. And we are preparing and expect to open as soon as we are allowed to. Our store associates, therefore, are still on furlough. But we do have a very robust e-commerce business in the UK that has picked up since those closures. You are right that it has been choppy. We were closed in November. We were open in December. And then we were closed down again in the beginning of January. And just recently, it was announced that we would remain closed through the mid-April time period. But the good news of that is we have a sense of how consumers respond post being closed and opened. When we reopened in December, people did come back out and they did want to come to Build-A-Bear and experience our special retail attainment. And so we're quite hopeful that they will want to do that again once we start to reopen and things start to stabilize.
spk03: And just to add one more point, Eric, as you know, this may help. As we think about Q1 for UK, we expect to have 13 weeks of rent expense that's going to be impacted on our P&L with basically revenue only coming for the last couple of weeks of the quarter. So definitely that's going to be a big headwind for the organization. But some of the government assistance programs that our team in UK has been applying for will help offset partially some of those losses. But still, we expect to be a challenging quarter in UK this time around.
spk06: OK. In the US, Are you starting to see, and we saw pieces of this in our store visits, people starting to come back to the mall and wanting to shop with their kids. Are you starting to see that momentum coming through? Is that part of the reason why January was stronger? And when you look out for the year, are you kind of seeing that right now?
spk01: And, yes, Eric, we are. And we are seeing that people are coming back out. They want to shop. do something a little more normalized. They want to spend time with their children. They want to have an experience together. But that does also beg the comment that both Voyne and I alluded to in our prepared remarks that as people do start to come back out, we are under restrictions beyond those things of having a store closure. We're under restrictions of how many people can be in our store at any given time, for example. So we have to be very cognizant of that. And in fact, we're already seeing it particularly during some higher traffic periods like the weekend where we have limited throughput capacity at the store itself. So, you know, we have to be conscious of that. We have to be cognizant of crowds and management of crowds, maintain the six-foot rule, and things still do vary by state and jurisdiction, so we're very aware of that. But it does cause limitations even though the stores are open. Boyne?
spk05: I think you're correct. Great.
spk06: And last question. You guys have done, you know, last year basically was no movies. You've done a lot of nostalgic-driven products, and I think a lot of products driven by TikTok and other pieces. How do you see kind of the new world here where you have streaming services, which obviously was part of the child, but I'm assuming that there'll be other kind of characters in those streaming services that you can leverage. You have TikTok with We Wear Cute. How do you look at the opportunities, I guess, going forward, I guess, with movies somewhat normalized and these other different packets of potential furry friend character driven customers or pieces can move forward here.
spk01: Right. The entertainment model had been evolving already for quite some time. And it, you know, clearly the pandemic, like with so many other things that touch our life, it just accelerated certain aspects of it. And things being available on video on demand or anything like that, now it's even more prevalent. And many studios and films are launching first and only in that forum. But things are moving around. Minions was supposed to be out, for example, I think many of you know, in 2020, that was delayed. I think the announcement is now that it will be 2022. We do have a Disney film that just recently launched of Raya and the Last Dragon. But the key pieces of entertainment for us right now are more related to, you know, in big news, the Animal Crossing product that I mentioned and the continuation, as we noted, I believe, on the last call, we think there's a long tail on things like the Child from the Mandalorian, which will, you know, expect to have a new season. and things like Harry Potter, which are just evergreen. So those types of products and those types of properties are also more stable for us. When you think about it, there's not this spiky demand. But that also leans into why we have been in this long process of creating our own intellectual property to have some control over when things are launched and how they're launched, such as hunting. Honey Girls, of course, is a property that's been in our line for quite some time, one of our best-selling assortments. And we will be launching the film in conjunction with Sony and worldwide acquisitions. And we expect that will be one of our biggest entertainment properties, if you will, of the year later in the fall. And then that's more in our control. And we, you know, our objective, obviously, is to sell more Honey Girl associated with that film. So, it is a changing environment, and we will expect to use all of the ways that people engage with content, whether it's TikTok to feature film. So, and we have a lot of opportunities in the pipeline. So, but that's a great question.
spk06: Great. Thank you, and good luck. Congrats to you.
spk05: Thank you.
spk04: And our next question is from David Cannon with Cannon Wealth Management.
spk07: Good morning. Congratulations. Great job. Good morning. Thank you. Thanks. So two questions. The first one is on your e-comm 2.0 strategy alluded to in the ICR debt. You talk about launching a 3D experience, although there aren't a lot of details on it. Could you give us an update on how that's tracking and the cadence of how it's going to be rolled out? If you can give us a timeline. And then also, if any color you can give on that, the augmentation of the experience and if there's an expectation of turbo boosting or changing ECOM from this experience.
spk01: On BearBuilder 3D, which we did share during the ICR conference as well as a bit of a video of where we're headed, we have beta tested it with some external users. We've learned quite a bit from the beta test, and we are taking those learnings into consideration, continuing to build toward a launch later this year. So it's very exciting, a lot of positive feedback from the beta, and still tracking for the timetable, which was a loose timetable. Of course, technology, you have to be, particularly when you're launching something in a brand new space, a brand new, fresh experience that's a completely engaging, interactive space for us that we've never done before, but we're still on track for this year, as we noted. I'm not quite sure I know what the turbo boosting is, but if you're referring to our accelerated digital transformation as it reflects our efforts to drive e-comm, indeed, we are continuing to build on our combination of driving demand through the relationship primarily with all the support systems and all the capabilities and all the clouds that we have access to with Salesforce and building out all of the new CRM capabilities as well as guest journeys to drive that extended consumer lifetime value as well as attracting and retaining new guests so we feel like we can drive our consumer base but also building on more occasions for our existing guests. And it all interrelates, actually, with your original question, the Bear Builder 3D, because we want to give guests not only many ways to engage with us digitally, whether it's our traditional format of e-comm, what we call our... Our Bear Configurator, which is kind of a Bear Builder light, whether it's our mobile-first approach where you can just get a quick bundle, or now this completely engaging, interactive Bear Builder 3D. And then on the other side of the equation, we want to give them many ways to receive the product, whether it's shipped directly to their home, they come into our store and pick it up, or they can get it delivered same day through our shipped relationship. So it's a consumer-first strategy that hopefully engages with a broader consumer base, but from the first engagement to the last engagement. And that's our plan.
spk07: Okay. Appreciate that. Yeah, what I meant by Turbo Boost is, you know, right now, essentially, it is a very traditional service. kind of dead experience, whereas the Build-A-Bear, the differentiator from my standpoint is, you know, it's an experiential retail purchase where, you know, magic occurs in the store, so to speak, between the sales associate and the child. Porting that over to the digital experience, you know, I believe, in my opinion, it would really turbo boost where now people are having an interactive experience you know, almost like a real life experience in the digital interface, as opposed to right now, for lack of a better word, you know, it's sort of a dead, lifeless experience. So that's really what I was referring to. And of course, connecting, making it more effective by using some of the tools that you have with Salesforce and marketing and so forth. So that's what I meant. The other question is in regards to what I call a remote retail or live streaming experience, uh, which sort of fits between there's the traditional, you know, brick and mortar in-person physical experience. There's, we all know about the digital one. This is somewhere in between. I see that during the year, uh, you did that. Could you comment on it? Uh, you know, was it successful and then, uh, how that's going to be incorporated into your standard operating procedures for this year? You know, did it yield results? And, you know, what does the roadmap look like going forward?
spk01: Yes. We, as I noted in the comments, we hosted a number of online streaming events and added new ways for our consumers to interact with our brand, as well as, you know, new capabilities to transact with the new in-app purchase options. So we are... continuing to work toward expanding those opportunities. We're using new launches to make those breakthrough to the consumer. They proved successful, as I noted in the comments, and we are expanding it into this year. We are actually launching a new forum, if you will, that we're calling the Premier Stuffing Events that are associated with these where we have brand new products. We just did it with Peeps, which was one of our leading Easter products to date, where we had a stuffing event, live streaming stuffing event for people to watch and participate in. So I think that it's both a good marketing tool as well as a sales tool as we start to master that part of the equation on the in-app purchases. We have a long way to go on that to make that credibly, you know, as effective as I think it can be. But the marketing side is definitely clicking people over to our e-commerce site, which, as you know, has been triple digit increase this year.
spk07: Okay. Thanks for the update. And, again, great job in navigating through an extremely challenging environment last year. You guys really did an incredible job, and please pass that commentary on to your team.
spk01: Thank you so much, David. Thank you.
spk07: You're welcome.
spk04: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. The 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk02: One moment, please, while we poll for further questions.
spk04: And ladies and gentlemen, we've reached the end of the question and answer session. I would now like to turn the call back over to Sharon John for closing remarks.
spk01: Thank you, and thanks for joining us today. We hope everyone stays safe and well, and we look forward to actually seeing some of you tomorrow on Zoom during our meetings at the D.A. Davidson Conference. Additionally, we look forward to seeing you in our first quarter results.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great morning, everyone.
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