Build-A-Bear Workshop, Inc.

Greetings and welcome to the Build-A-Bear Workshop 4th Quarter 2022 Earnings Score. 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, Alison Malkin of ICR. Thank you. You may begin.

Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Bojan Tavorovic, CFO. For today's call, Sharon will begin with a discussion of our fourth quarter and fiscal year 2022 performance and update the progress we have made on our key priorities. After Boeing will review the financials in more detail and introduce our guidance. 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 the 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 call over to Sharon. Thank you, Allison.

Good morning, and thanks for joining us on our fiscal 2022 earnings call following the completion of our fourth quarter. Fiscal 2022 was successful on multiple fronts, and we finished the year on a high note with the key fourth quarter performance achieving growth in revenue and an increase in pre-tax income of over 30% versus the prior year. And as mentioned in this morning's earnings release, our positive momentum has continued into 2023. With that as a backdrop, some highlights of fiscal 2022 include total revenues of $468 million, an increase of 14% over fiscal 2021 with double-digit growth in all of our operating segments and across geographies, fueled by increases in traffic and transactions at our experienced locations. Pre-tax income of $62 million, representing the most profitable year in our company's 25-year history, a 22% increase over fiscal 2021, which was our previous all-time pre-tax profit record high. We also completed the year with a strong balance sheet, including over $42 million in cash equivalents and no borrowings on our revolving credit facility, which we believe positions us to continue to make key investments in initiatives designed to drive profitable revenue and enhance shareholder value. With our consistent fiscal discipline and the ongoing executional excellence of our multi-year strategic plan, We have built and are continuing to elevate a cross-functional foundation and business model designed to drive and monetize the expandable value of our iconic brand and its equity beyond our roots of traditional mall-based retail that was just for kids. 25 years and 225 million furry friends ago, Build-A-Bear was a toy industry disruptor, a plush category reinventor, a retail tainment pioneer, and a bellwether of the maker's movement where millennials and Gen Zers were empowered and inspired to create enduring memories and millions of cherished teddy bear best friends. Our intention is to continue to lead with legacy-creating insights as we kick off our next quarter century, having systematically rebuilt our IT infrastructure, evolved our organizational structure, elevated our talents, and executed an accelerated digital transformation across the company to unlock value well beyond simply building out our e-commerce business. These accomplishments were achieved while we were also integrating and expanding our physical retail footprint. Innately understanding that our Build-A-Bear workshop experience locations provide powerful memory-making personal engagements that create the basis of our meaningful, leverageable equity. and potential continued expansion of our consumer lifetime value due to the emotional connections we literally build with our guests, one unique heart ceremony at a time. With that understanding, our concerted business model evolution combined with our multi-generational audience, Build-A-Bear has worked to successfully capture an addressable market beyond kids, expand its brand access beyond malls to reflect the changing consumer shopping behavior, and drive mechanisms for further engagement beyond retail stores. We believe our multi-year systematic and tenacious execution of this brand-based, consumer-centric, and data-driven strategy has been the fundamental catalyst of our strong, ongoing performance. and that we have now built a scalable foundation to continue to drive the business in 2023 and beyond. As a reminder, our three key strategic initiatives have been, one, accelerating a broad-reaching and comprehensive digital transformation, two, evolving the experience location formats and footprint while taking advantage of our expanded omnichannel capabilities, And three, leveraging solid financial management to invest in initiatives intended to drive growth and return value to our shareholders. Highlights of our progress in the year include, regarding the acceleration of the digital transformation, we continue to expand our digital marketing capabilities to more efficiently reach a diversified and broadened consumer base to acquire new guests and increase the frequency of repeat purchases. This calculated action has led to a significant increase in our total addressable market beyond families with younger children to include teens and adults, which currently represent approximately 40% of our end users. We redesigned Build-A-Bear.com with the goal of improving the user experience and driving increased digital demand. We saw some softness in our web business during the site transition and testing period, and while we've returned to growth in digital demand for the fourth quarter, of 2022, we expect to continue to actively refine certain aspects of the site throughout this year as we work to optimize the performance of this channel. We had an increase in transactions from our bonus club loyalty membership of approximately 25% in fiscal 2022 with improvements from both new member enrollment and repeat purchases. With millions of first party contacts and loyal members We are leveraging personalized messaging, testing new perks, expanding the number of specific buyer journeys, and driving our targeted behavior-based marketing activities to continue to build brand loyalty and increase repeat purchases with a focus on growing the lifetime value of our broadened consumer base. Importantly, beyond the incremental total revenue generated by Build-A-Bear.com, our integrated cross-company digital efforts in social channels, performance marketing, and earned media are also contributing to our experience location's strong double-digit growth rate. That is, in addition to the eyeballs and sales the digital efforts are driving to our core e-commerce sites, as well as the multiple micro-sites like BearCave, They are also directly linked to successfully enhancing physical retail traffic by leading consumers to landing pages for planning a store visit or booking a party. Speaking of digital content, in addition to continuing to drive viewership and interest with films such as Honey Girls on Netflix, the fourth quarter 2022 launch of NFTs, and our new digital game, Build-A-Bear Tycoon on Roblox, which is already closing in on 4 million engagements, we are pipelining a number of new initiatives, including a Build-A-Bear documentary directed by an award-winning documentarian that is expected to be out later this year, and the GLSEN and the Merry Mission movie planned for holiday 2023 based on our successful intellectual property that has sold over $100 million in products since we created and launched it a number of years ago. Turning to our efforts to continue to evolve and expand our experience location points of sale while leveraging our enhanced omnichannel capabilities, we saw organic growth from our existing base of experience locations while opening over 20 new sites through a combination of corporately managed and third-party retail models, resulting in an increase in the total workshop count at the end of the year. In 2022, our profitable corporately managed locations with essentially all stores positive in North America with an average contribution margin of over 25%, improved in productivity with sales per square foot increasing nearly 20% compared to prior year. In second quarter of 2022, after a COVID hiatus, we relaunched our onsite and historically popular party program, which has shown improving trends in bookings as awareness and excitement around the reintroduction has grown. Our evolved omnichannel capabilities are benefiting from our retail locations, which act as hundreds of mini distribution centers supporting the fulfillment of digital orders, leveraging store-based fixed labor and inventory, while our refined routing algorithms use geographic proximity to provide consumers with shortened delivery times, which in turn also results in an extension of our shopping windows for important holidays. And our third-party retail model saw growth, finishing the year with 70 locations compared to 61 at the end of fiscal 2021. As an important reminder, this model is capital loss for Build-A-Bear, with the partner company building out and operating the workshops, including providing the real estate location and covering the cost of labor and inventory, which is purchased on a wholesale basis. The sites are heavily weighted to the hospitality industry, allowing us to further advance our focus on experience location expansion in non-traditional and tourist areas. For reference, the revenue from this business, along with corporate sales, outbound licensing, and entertainment initiatives, is reported in our commercial revenue segment, which was up over 60% in 2022 versus the prior year. The combined success in all of these areas resulted in record setting performance, putting us in a solid financial position to make further investments intended to drive growth and continue to return value to our shareholders as we look to the future. While we are planning to share more information regarding our key initiatives during our first quarter earnings call, our current expectations include Growth in total revenues primarily from our net retail sales and commercial revenue business segments. We expect organic growth in net retail sales to be generated from higher overall foot traffic reflecting the current trends and from an increased rate of onsite party bookings. We expect a positive impact from the annualized sales of the net new sites opened in 2022 as well as the addition of new Build-A-Bear workshop experience locations that are already in the pipeline for 2023 through a combination of corporately managed and third-party retail sites, which tend to be in tourist locations. It's important to note that although tourist sites have been and will remain a critical part of our overarching location expansion strategy, recent research data supports that Build-A-Bear also has an opportunity to re-engage in profitable expansion of our corporately managed experience locations on a more localized level, especially given the numerous and flexible store models we have created in the last few years. In fact, recent consumer feedback indicates that a localized expansion strategy is not counter to the tourist strategy, but actually synergistic of it. in that many of our guests who may actually experience Build-A-Bear for the first time at a theme park or on a cruise ship, for example, have a high desire to visit a local workshop when they return home, perhaps for an upcoming birthday party, if there was one within a reasonable radius, opening up opportunities for the business to expand and connect with a new generation. Next, we expect to see annual growth in digital demand, leveraging our updated e-commerce site and enhanced connected communication capabilities. As we have noted, our e-commerce business tends to over-index with the older teen and adult consumer who have diverse product and purchase occasions, thus representing a greater total addressable market with different reasons for engagement than our previous historically primarily kids-based model. For example, gifting, for more reasons than kids' birthdays, and collectibles, both of which are independently large consumer categories beyond plush toys, are growing areas of business for Build-A-Bear. This insight has prompted proprietary offerings like Heart Box and our popular After Dark collection, featured in the Age-Gated Bear Cave section of our website. which was created specifically for adult-to-adult Valentine's gifting and sparked breakthrough pop culture PR, driving even more interest and traffic, not unlike the social interest generated by our teen TikTok plush darlings Spring Green Frog and Axolotl. While these proprietary initiatives have been meaningful additions to our gifting and collectibles business, An important contributor to this area is also from our best-in-class and comparatively profitable licensed relationships, representing over 75 popular properties. Our experience has shown that the strategic management of these varied properties can not only attract and grow our core kids' consumer base, but play an instrumental role in broadening the overall addressable market for Build-A-Bear. often serving as the catalyst for the reintroduction of teens and adults to the brand. In 2023, our licensing plans designed to expand the business and harness partner-driven media and marketing attention include introducing newness in the evergreen Harry Potter, Pokemon, and Sanrio lines with additional feature film-inspired properties launching throughout the year. On the more adult-driven pop culture front, we recently launched a Ted Lasso collection and expect to share Dungeons & Dragons in, again, the very cool Age-Gated Bear Cave, which I encourage you to check out. We have demonstrated a consistently high level of profitable licensing and management since the introduction of the first properties nearly 25 years ago. and expect to continue to strategically manage the merchandise mix as we grow our business. Because we operate a vertical retail model in which we design, source, distribute, market, and sell our own products, both licensed and private label, we have relatively greater control and flexibility in managing inventory, which has contributed to the high merchandise margins that we have delivered. We expect to continue to fuel cross-channel growth via expanded data-driven digital marketing content and capabilities, enhanced by access to well over 20 million social media followers, loyalty members, and first-party data contacts that enable us to generate billions of impressions per year. In addition, the growing pop culture status of Build-A-Bear fuels high interest for PR as well, delivering approximately 10 billion incremental annual media impressions for the last few years. Through the combination of the above, the successful execution of our plans are expected to result in an overall increase in revenue and profitability in 2023 that surpasses that of 2022 to post yet another record-setting year for our company. While we believe the 2022 annual results alone are noteworthy, when also considering the external impacts over the last few years including the COVID-induced forced closure of our entire fleet in 2020, I believe it makes the fact that we just concluded our second record-setting year in a row calls for noting how immensely proud I am of this organization, the leadership team, and the board of directors. With that, I would like to thank the many Build-A-Bear associates, partners, and valued guests located around the world, as well as acknowledge that the company was included in the recently announced inaugural Forbes Consumer Experience All-Star List. which is a perfect exclamation point in a remarkable journey as we conclude our 25th year and begin our next quarter century of adding a little more heart to life. As we look toward the future with an even stronger brand and improved digital and organizational infrastructure, a proven multidimensional strategy, and a motivated, agile, and battle-tested team, I would like to reiterate from our last call that we remain highly excited and determined to continue to drive shareholder value as we take the next step to further leverage our evolved business model, which is designed to monetize the tremendous equity and emotional connections associated with the power of the Build-A-Bear brand. Now, I will turn the call over to Voyne to add further details on the financial side as well as some more specifics around our 2023 fiscal guidance.