Build-A-Bear Workshop, Inc.

Greetings. Welcome to Build-A-Bear Workshop's third quarter 2022 earnings call. At this time, all participants will be in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Alison Malkin of ICR. Ms. Malkin, you may now begin.

Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Voyn Tavorvich, CFO. For today's call, Sharon will begin with a discussion of our third quarter fiscal 2022 performance and update the progress we have made on our key priorities. After, Voyn will review the financials and guidance 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. 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 calls over to Sharon Johns.

Good morning, and thank you for joining us today. We're pleased with our third quarter and first nine months results as we continue to see momentum and consistency in our business with strong brand interest from consumers. Our retail store traffic continues to show double digit increases leading to year over year growth in transactions across geography. With our fiscal 2022 third quarter, we have now delivered seven consecutive quarters of increased total revenues compared to the prior year's period. with sustained profitability throughout that time. Given our fourth quarter and year-to-date positive trends, we are positioned to deliver the most profitable year in our 25-year history, building on the 2021 results, which marked our previous high. We believe this track record of successful growth reflects the consistent and disciplined execution of our long-term strategic model to leverage the awareness and affinity of our brand to fuel consumer interaction and drive more transactions through multiple retail channels with a broader addressable market. We believe that the foundation that has been built as this brand-leveraging diversification strategy has been instituted positions us to scale and drive further transformation and profitable growth. Specifically, highlights of the quarter include Total revenues of $104.5 million, an increase of nearly 10% over the fiscal 2021 third quarter, even with the unfavorable impact of foreign exchange of over $2.5 million. We saw growth across all reported segments, with solid increases in net retail sales, commercial revenue, and international franchising. Pre-tax income close to $10 million, an increase of over 25% compared to the fiscal 2021 third quarter. and we continue to have a solid financial position and strong balance sheet, ending the period with no borrowings on our revolving credit stability. Now let me review in more specifics the progress we have made on our strategic initiatives, which include accelerating a broad-reaching and comprehensive digital transformation, continuing to evolve our retail experience and footprint while taking advantage of our expanded omnichannel capability, and leveraging our solid financial position to invest in initiatives intended to drive growth and return value to shareholders. First, we are confident that the digital transformation of our company is providing benefits throughout our organization and to our business model. Today's consumers want to engage with brands that provide experiences and emotional connections when they want, where they want, and for whatever they want. Optimizing this omnichannel consumer dynamic requires multiple shopping channels and intelligent marketing engagements that elevate the offerings and services of these diverse consumer segments and their needs. As such, we continue to invest in digital technology to expand, develop, and refine these capabilities. We believe that each of our multiple channels provides value, both in driving profitable revenue and engaging and servicing consumer demand. In that regard, as the balance between digital shopping and in-person shopping continues to adjust in the post-pandemic era, we are generally agnostic to any single channel, with a focus on driving more visits and lifetime value to consistently deliver profitable total growth. Specifically, as it relates to our digital demand strategy, in the quarter we prepared for and launched the planned update of a new mobile-first version of our e-commerce site, with extended A-B testing and algorithm refinement being made throughout the period on multiple points from the landing page to checkout. While some sales disruption is expected during this type of upgrade, we saw a greater-than-planned decline in digital demand in the quarter, which could also be related to what seems to be a macro-consumer trend back to in-person shopping. simply shifting some of our demand to our retail locations given the strength of our total sales growth in the quarter. That being said, our most recent e-commerce trends have shown improvement and have returned to a positive trend in the current fourth quarter with growth from both the Black Friday and Cyber Monday periods as compared to the prior year. In addition to providing features for our core consumer base, One of the key objectives of the web redesign was to further engage with our multi-generational loyal brand enthusiasts with our new offerings ranging from gift giving and heart box, collectibles in the bear cave, and our new family pajama shop, as well as other web exclusive products and offerings. In conjunction with the updates to our e-commerce platform, We also advanced the technology, supporting our omni-channel loyalty program and have initiatives in place designed to increase enrollment and drive lifetime value. In the quarter, with these efforts, we had a higher number of active members in the program compared to the prior year, saw average annual transactions per active member increase, which we attribute to advancements in our consumer communications and direct marketing, as we more effectively use predictive analytics to refine specific buyer journeys and target personalized messages based on prior purchase patterns, occasions, or merchandise preferences, increased average revenue per member with greater than historical average spend from both new member enrollment and repeat purchases, and evolved member benefits, with features such as early access to new products, discounted shipping, and automated reward delivery intended to drive incremental transactions. The pattern of consumers shopping further ahead of key holidays has continued, and we have taken advantage of this trend by launching and marketing seasonal products sooner than we did in the past. For example, in the third quarter, we launched our holiday assortment for Halloween in early September and saw strong demand contributing to an increase in sales of over 60% compared to the prior year in this category for the period, a record for our Halloween products. Regarding our content strategy, we are developing viral posts, short-form digital content, and entertaining programming for various platforms, from sites like YouTube and TikTok to social media like Facebook and Instagram. as well as streaming platforms. From our live action film, Honey Girls, based on one of our historically best-selling product lines, which continues to air on Netflix, to the ongoing popularity of Build-A-Bear Radio on the iHeartRadio media platform, Build-A-Bear is in the content business, further driving awareness and brand affinity with multiple projects in the pipeline. These projects include a Build-A-Bear documentary with award-winning documentarian Taylor Morden launching next year, the recently announced partnership with Reese Witherspoon's production company, Hello Sunshine, and the development of an animated film called Glisten and the Merry Mission, slated for holiday 2023, based on our multi-year best-selling product line featuring Santa's reindeer and other characters that have been created by Build-A-Bear with more details to be shared in a press release slated for later today. Separately, as you may know, we recently entered the metaverse via our successful Web3 partnership with Suite to launch our first NFT commemorating our 25th anniversary, followed quickly by a unique NFT series. While we have exciting plans to continue to generate engagement with our adult enthusiasts and collectors in this way, We are also deep in the process of developing a new Build-A-Bear video game on one of the world's most popular platforms. While designed with our younger core consumer in mind, Build-A-Bear's first endeavor into gaming well over a decade ago through the DS and MMO platforms had very high participation from fans of all ages. And we are looking forward to sharing more information as we get closer to this launch date. Turning to our second pillar, which is to continue to evolve our retail experience and footprint and take advantage of our expanded omni-channel capabilities, I'd like to share that while we have digitally evolved the company, our physical stores remain an important component of our diversified business model, which has long been focused on a brand-building, consumer-centric integration of experiences to drive value. Although the multi-generational 25-year history and expertise of Build-A-Bear began in the brick-and-mortar space, we recognized the significant trend to online shopping, especially during the pandemic, and have simultaneously capitalized on the digital opportunity in e-commerce and our expanded omnichannel foundation while leveraging our high level of lease optionality to drive profitability in physical stores which positions us for further growth across multiple channels. Recall that we have long believed that our one-to-one relationships and emotional connections made at our workshops is our killer app, so to speak, and have diligently worked to evolve our meaningful and profitable retail footprint. Given our years of expertise with clear strategic intent and tenacity, we have created a multi-dimensional retail engine delivering over 25% average for-law contribution with essentially 100% of our locations being profitable, providing both the brand and the business significant leverage, ranging from exceptional loyalty club capture to free cash flow. Now, with consumers embracing both online and in-person shopping, we see this as an opportunity to continue to scale and grow in a diversified manner. In the quarter, we saw an increase of over 8% in net retail sales compared to the prior year, as growth in store sales more than offset this quarter's decline in digital demand. Again, the value of stores extends beyond the profitable revenue they deliver. We also fulfilled digital demand from our stores, leveraging on-site labor and inventory. As a reminder, the stores act as immersive brand touchpoints. marketing vehicles, and brand building site-based entertainment, engaging over 50 million consumers that cross the threshold of our locations each year. We have an emotional brand, and our stores often serve as the initial engagement that lays the foundation for a lifetime of connection. As previously shared, we see the potential to profitably expand our retail portfolio, including opening more than 20 locations in diverse settings, such as our Build-A-Bear Adventure Store, Six Flags Magic Mountain, and the Pro Football Hall of Fame, through a combination of corporate and third-party business models in fiscal 2022. We expect to finish the year with approximately 420 combined corporate and third-party locations compared to 407 at the end of 2021. The third-party retail locations, expected to be at 65 by the end of the year, tend to be in family-centric settings and are capital-like, allowing us to efficiently engage with consumers with minimal overhead. It is important to note, as this model is on a wholesale basis, that retail revenues are understated. We drove our over $4 million in commercial revenue in the 2022 third quarter and $12 million year to date, an increase over the prior year of approximately 50% and 60% respectively. This multidimensional approach to retail reflects our core belief that we are not over-stored as a brand, and the strong profit margins across essentially our entire portfolio supports the opportunity for further growth of our retail footprint in North America and beyond. And finally, regarding our third pillar, we remain intent on leveraging our solid financial position to invest in growth while generating sustained profitability and returning value to our shareholders. As we look to the critical fourth quarter of fiscal 2022, Because business trends remain positive, we have increased our annual guidance, which, as I noted, has us on track to deliver the most profitable year in our history. We continue to believe that we are in a stronger inventory position with sufficient depth in proven branded properties, such as Mary Mission, as well as updated licensed products compared to 2021, which was impacted by supply chain disruptions. Our store traffic patterns have remained positive, outpacing reported national trends on a quarter-to-date basis, inclusive of the Black Friday shopping period. We also expect our trend of higher levels of guest acquisition and retention to continue with our advanced digital marketing and loyalty capability. We have seen a positive response to a broad selection of seasonal products across canals, And on the licensing side, we look forward to the launch of products tied to the upcoming Puss in Boots movie and for the teen adult segment with our new Ted Lasso collection. In closing, I want to thank our associates around the globe, our suppliers, partners, and enthusiastic brand fans that are at the heart of the growth and success that we've achieved. In October, We celebrated our official 25th anniversary with events that ranged from ringing the opening bell at the New York Stock Exchange to sharing some of the stories of the almost 225 million furry friends that have been made since the company's inception. The celebration culminated with Build-A-Bear Foundation's anniversary gala honoring our founder and our mission to add a little more heart to life. Thanks to all of the sponsors and everyone that joined in that special event, to help raise funds for kids in need. While we have enjoyed celebrating our past quarter century during this momentous year that is once again expected to be the most profitable in our history, the real story is actually all about our future. Why? Because Build-A-Bear is a company that has recognized and executed change in the face of evolving consumer preferences, sweeping advancement in digital engagement, shifting geopolitical impacts, and a global pandemic to become a profitable and growing digital, multichannel, diversified, site-based entertainment and experience company featuring products in more categories that appeal to a broader consumer base than at any time in our 25-year existence. Although there are some continued predictions of economic concerns, We believe we have proven the resilience of our business model, the wherewithal of our team, and the relevance of our brand. Therefore, we remain excited, motivated, and determined to continue to drive long-term shareholder value as we take the next steps on our journey to further leverage this business model to monetize the tremendous value and emotional connections associated with the power of Build-A-Bear. Now I'd like to turn the call over to Voigt.