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spk09: Greetings and welcome to the Build-A-Bear Workshop second quarter 2023 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, Gary Shinero, Vice President, Investor Relations and Corporate Finance. Thank you, sir. You may begin.
spk07: Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Voyn Todorovic, CFO. For today's call, Sharon will begin with a discussion of our second quarter performance and update the progress we have made on our key priorities. After, Voyn will review the financials in more detail and provide 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 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 websites. 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 unless required by law. Also during this call, we may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items which management believes can be useful in evaluating the company's performance. The presentation of non-GAAP financial measures should not be considered in isolation or substitute for results prepared in accordance with GAAP. If non-GAAP measures are presented, you will find information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the company's earnings release. And now, I would like to turn the call over to Sharon.
spk08: Thank you, Gary. Good morning, and thank you for joining us for Build-A-Bear's second quarter 2023 earnings call. We are pleased to report record second quarter and first half 2023 results, and we remain confident in our annual guidance for the year. At a headline level for the second quarter, revenues increased 8.5% to over $109 million. Pre-tax income increased 37% to $10 million, and diluted EPS grew 50% to 57 cents. For the first half of 2023, revenues increased 5% to $229 million. Pre-tax income increased 15.5% to $30 million, and diluted EPS grew almost 24% to $1.57 cents. We are pleased to note that each of these data points represent record levels for our fiscal second quarter and fiscal first half. Additionally, Boyden will address our revenue and profitability in more detail during his remarks. As we look forward to the second half of the year, we currently expect to see our strong sales momentum continue into the back half and the important holiday time period to be driven by traffic and ongoing interest in the brand by continuing to execute our strategy with the phasing of our growth initiatives, including additional new store openings, the launch of a variety of new products ranging from proven collectible license offerings to Build-A-Bear exclusive, the celebration of National Teddy Bear Day on September 9th, including a Buy-A-Bear, Give-A-Bear promotion in conjunction with our Build-A-Bear Foundation, and the introduction of a new elevated and integrated marketing and media program inspired by and designed to drive awareness of our new heartwarming animated film featuring our multi-year best-selling holiday collection, Glisten and the Merry Mission, which we expect to drive traffic and sales during the Christmas season. With our positive third quarter to date results and these important initiatives in place, we continue to remain confident that we will deliver total revenues for the fiscal year to increase in the range of 5% to 7% and pre-tax income growth of 10% to 15%. Our record first half 2023 results follow our record setting results for both 2021 and 2022 and demonstrate our ability to grow the Build-A-Bear brand at a sustainably higher level of profitability. We are able to profitably grow by continuing to execute on our three key strategic initiatives of one, expanding our experience location footprint, two, accelerating our digital transformation, and three, strategically increasing our investments to support these initiatives by leveraging our significant brand equity to diversify our appeal to a broader consumer base and expand in a new category to continue to deliver success. this sustained profitable growth as we enter into our next chapter. Our first strategic initiative is the continuing growth and evolution of our experience location footprint. Because our guests see workshops as a destination, up to 80% of trips to Build-A-Bear are planned, which is one reason why our retail traffic has outpaced the industry for 114 weeks in a row. Additionally, With 100% of our stores profitable and delivering on average greater than 25% store-level contribution margins, they generate a less than two-year investment payback. With top-tier store economics and research showing the opportunity for more stores, we began a concerted post-COVID effort to reach more potential markets by growing our corporate store footprint. As such, we continue to expand into tourist and hospitality locations, and we are also opening experienced locations on a more localized level, as many guests that experience Build-A-Bear for the first time at a vacation destination also desire to visit a local workshop closer to home. Over the past several years, we have created multiple flexible store models, whether it's our traditional models in different sizes and configurations or smaller concourse models, Our store within a store, allowing us to open highly profitable, corporately managed stores in many different types of locations and geographies. Our second quarter retail sales growth of nearly 8% reflects our continued growth in traffic at existing stores as well as unit growth. Our partner-operated store growth is in addition to our corporately managed store growth. Our wide variety of partners, such as Great Wolf Lodge, Carnival Cruise Lines, or Kalahari Resorts, continue to add stores in other specialized locations. Note that the partner operated store growth is captured in our commercial revenue reporting segment. Our second strategic initiative has been our digital transformation, which touches nearly every aspect of the company. This includes our ongoing website upgrade and redesign, CRM and loyalty optimization, AI tools for improved data management, and the current rollout of a new POS system and other integrated in-store technology. These are all designed to increase consumer engagement, sales, and our profitability across a number of areas ranging from optimizing our omni-channel capabilities to driving gifting and personalization programs to increasing repeat business and building the lifetime value of our dedicated guests. both in-store and online. To highlight just a few of our transformations, recall that to expand our e-commerce business, we focused on creating product offerings that had appeal beyond our core kid consumer, which is why Build-A-Bear.com is primarily driven by our teen and adult consumers who are looking for gifts and collectibles. Our ongoing website evolution is a large part of Build-A-Bear addressing these purchase occasions. enlarging our addressable market from predominantly kids at our inception 25 years ago to include teens and adults who now generate approximately 40% of total sales. Additionally, through our digital transformation, we have recently tested personalized messaging, new perks, and target marketing, which is delivering an increase in repeat business and new loyalty member acquisitions. both up double digits for the trailing 12 months. The majority of second quarter's 14% growth in web demand reflects these digital transformations as well as new product assortments targeted at our teen and adult consumers. Having consistently generated high returns on capital, we have been able to focus on our third key strategic initiative of increasing investment to support our growth areas that leverage the power of the brand. Specifically, in addition to the capital associated with our footprint expansion and systematic digital infrastructure evolution, we have been making investments in content and entertainment creation designed to raise awareness and drive sales, ranging from our Roblox Build-A-Bear Tycoon game with over 11 million players and a 91% approval rating to the Honey Girls live action film that has continued to endear guests while driving sales of these characters. Another key example of this type of investment is our upcoming animated feature film, Glisten and the Merry Mission. The movie, featuring a host of voice talent from Julia Michaels as the lead elf to Chevy Chase as Santa Claus, will include our furry fan favorite, Glisten the Magical Snow Deer. The film is based on the Christmas-themed storyline that has supported our best-selling holiday Merry Mission collection, which has generated over $100 million in revenue since its launch in 2015. The movie will be shown during the holiday season on over 100 Cinemark screens across the U.S., many within the same malls as Build-A-Bear workshops, allowing for significant co-marketing opportunities. For example, Build-A-Bear's plans include in-store ticket promotions to drive incremental movie attendance, plus physical marketing promotions inside these Cinemark theaters. In conjunction, GLSEN and the Merry Mission promotional activities are also planned as a part of our annual holiday pop-up store program at Gaylord Resort's ICE event in six major cities across the country. Our other Merry Mission marketing plans include multi-dimensional media and social campaigns and an in-store and online takeover, plus a Merry Mission digital game launch. To provide context, I believe it's important to highlight that we have managed these investments while continuing to expand our margins and return capital to shareholders. Specifically, over the past seven quarters, we have paid two special dividends and repurchased more than 1 million shares, returning $81 million to shareholders. We believe these efforts of both investment and capital return demonstrate our confidence in our future prospects. Before turning the call over to Voyne, I would like to thank all of the Build-A-Bear associates and partners for their efforts in working together to add a little more heart to life while focusing on achieving yet another record-setting year while setting the company up for a profitable long-term growth. Voyne?
spk03: Thanks, Sharon, and good morning, everyone. We are pleased to speak with you today to share our best-ever second quarter and first half of 2023. This performance was highlighted by growth across all our segments, expansion in gross profit margin, and a significant increase in pre-tax income versus last year. Combined with share repurchase activity, second quarter diluted EPS rose 50%, In the first half, 2023 EPS rose 23.6%. We attribute our ability to report ongoing positive results in a dynamic retail environment to the increasing resonance and strength of the Build-A-Bear brand and the successful execution of our strategic initiatives, including elevated marketing capabilities to drive strong traffic. Even with an increase in SG&A from higher wages due to inflation and adding talent, our strong store contribution margins and growth in our capital-like partner-operated business model provides us the opportunity to invest for our next chapter of growth while still delivering strong earnings and free cash flow. Our strong free cash flow also allows us to continue to return capital to shareholders year-to-date through dividends and share repurchases, we have returned over $33 million in cash to shareholders. Turning to a more detailed review of the second quarter. Total revenues were $109.2 million, up 8.5% year-over-year. Net retail sales increased 7.9% year-over-year with positive contributions from both stores and e-commerce. E-commerce demand increased 14.1% for the period. Store sales increased through growth in number of transactions as our traffic continues to significantly outpace reported national retail traffic data. We opened a net five corporate stores year over year, including two in the quarter. Commercial revenue, which primarily represents wholesale sales to our partner operators, and international franchise revenue rose a combined 19.9% versus the prior year. Our partners opened 11 stores year-over-year and six in the quarter, and our franchisees opened two stores year-over-year and one in the quarter. Gross profit margin was 53.7%, an improvement of 410 basis points compared to last year, benefiting from merchandise margin expansion, reflective of expected lower freight costs, and leverage of occupancy and distribution costs. SG&A expenses were $48.3 million, or 44.2% of total revenues compared to $42.3 million, or 42% of total revenues in the 2022 second quarter. The 220 basis point increase in SG&A was driven by higher wages, mostly at a store level from inflationary pressures, and at a corporate level from planned investment in talent. As a reference, the SG&A rate is almost 100 basis points lower than in second quarter 2019. Higher gross profit dollars and expansion in store contribution margin more than offset the increase in SG&A and led to pre-tax income growth of 37.1%, with pre-tax margin expanding 200 basis points to 9.6% of total revenue. EPS, aided by a lower share count and reduction in tax rate, was 57 cents per diluted share, a 50% increase. For the first half of the year, total revenues were $229.3 million, up 5% year over year. Our store traffic also outpaced reported national traffic for the first half of the year. E-commerce demand declined almost 20% in the first quarter before rebounding up 14% in the second quarter to finish down 6% for the first half. The volatility was primarily impacted by the timing of product launches as compared to last year. Driven by our current momentum, we continue to expect e-commerce demand to grow and be positive on a full year basis. Commercial and international franchise revenue rose a combined 43.2% versus the prior year. Gross profit margin was 53.9%, a 270 basis point improvement compared to last year, driven by merchandise margin expansion reflective of expected lower freight costs and leverage of occupancy and distribution costs. SG&A expenses were $94 million, or 41% of total revenues, compared to $85.9 million, or 39.3% of total revenues in the 2022 second quarter. The 170 basis point increase in SG&A was driven by higher wages, mostly at a store level from inflationary pressures, and at the corporate level from planned investment in talent. Higher gross profit dollars, more than offset increase in SG&A, and led to pre-tax income growth of 15.5% to $29.8 million for the first half, with pre-tax margin expanding 120 basis points to 13% of total revenues. Reflecting a lower share count and slight increase in the tax rate, EPS was $1.57 per diluted share, a 23.6% increase, and EBITDA increased 11.7% to $35.9 million, which is a record level for the first half of our fiscal year. Turning to the balance sheet, at the quarter end, we had cash and cash equivalents of $32.6 million, an increase of $18.2 million compared to the same period last year. we returned over $38 million to shareholders through dividend payments and share purchases over the last 12 months. Inventory at quarter end was $66.3 million, declining $21.4 million or 24% from the end of the second quarter last year and in line with our expectations. Keep in mind, last year's quarter end inventory was intentionally elevated to avoid potential supply chain disruptions. We remain comfortable with the level and composition of our inventory as we begin the third quarter and continue to expect inventory to finish the year below last year's $70.5 million level. Turning to the outlook, we are reaffirming our guidance for fiscal 2023. which is a 53-week year. And the full details of our guidance are included in the press release. But I'd like to highlight two key metrics. Total revenues to increase in the range of 5% to 7%, resulting in the revenue range of 491 to 501 million dollars. And pre-tax income growth of 10% to 15%, or 68 to 71 million dollars. In closing, we are pleased with our record-setting first half of 2023. I would like to thank all of our store and warehouse associates, as well as our corporate team members for contributing to our record results and their continued efforts, which has positioned us for another record-breaking year in 2023. We look forward to sharing our progress with you as we move through the year and seeing many of you at upcoming investor conferences, including the Piper Sandler Growth Frontiers Conference in Nashville on September 13th, the B. Riley Consumer Conference on September 14th, and the New York Stock Exchange Consumer Access Day on September 21st. This concludes our prepared remarks, and we will now turn the call back over to the operator for questions. Operator?
spk09: Thank you. We will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re-queue and those questions will be addressed, time permitting. If you would 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 would 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. Thank you. Our first question comes from the line of Eric Beder with SCC Research. Please proceed with your question.
spk05: Good morning. Congratulations on a great quarter. Thanks, Eric. Good morning. Great. I want to talk a little bit about
spk06: the potential with, let's talk about some of the pieces in the stores. Your anniversary, the rollout of in-store parties resuming, what are you seeing in terms of trends with that? And how should we be thinking about that going forward as a potential driver?
spk08: So celebrations such as parties and particularly birthday parties have always been a really important part of Build-A-Bear. And as I think many of you know, we did have to hiatus the parties during the COVID time period and recently restarted, as you noted. We are still in the building phase. That's a long pipeline, and although they are up versus prior year, we're still not at pre-pandemic levels. But we see a tremendous amount of opportunity, and it's actually started to be much more concerted in our marketing beyond what was the traditional birthday party. parties with some of our partners like Girl Scouts or even other types of theme parties. We're building into that, and we're very excited about the future of that. Now, in the past, as we've noted, that's been around 5% of total sales. And so, to be clear, we're still not back at that percentage. But as we noted in today's call and in the past few quarters, our total pie is growing at the same – is growing as well. But we still see a tremendous opportunity with the party business.
spk06: Great. And I know, you know, we have a lot of excitement coming with the GLSEN movie. How do you look at, you know, the opportunities rising for this year for regular movies? I know that you had a very successful release. offering with Barbie and some of the other movies coming out, we are seeing more movies for kind of your core customer. How does that all fit in, and how do you look at how you can best leverage that going forward?
spk08: Right. Thanks, Eric. So we've had a long history with best-in-class license partners, ranging from those types of high-impact movie events, as well as evergreen types of properties that are based on films. And that would be inclusive of, you know, a Star Wars, for example, or then a Pokemon product that maybe started with a different type of entertainment, which is gaming, but now also has films. You're right, we did have our Barbie item out this year, our collection rather, very successful, a lot of people looking for that, and that was a broad range of consumers. We recently launched Teenage Mutant Ninja Turtles, and we've had a long relationship with Paw Patrol, which is scheduled for movie release later this year. But that is just a part of our overarching plan, and we have a tremendous visibility and a lot of options because Build-A-Bear brings a special type of experience for consumers, and those licensed partners understand the value that we create, and we slot those in over the course of time, and we try to build them in in a way that it doesn't create such spikiness in our business plan by measuring that against our own powerful business. So right now, for example, even in a year of the return of film, our own Build-A-Bear intellectual property is higher than in total sales than our total licensed business.
spk04: Great. Thank you, and good luck in the back half of the year.
spk08: Thank you.
spk04: Thank you.
spk09: As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Steve Silver with Argus Research. Please proceed with your question.
spk01: Thank you, operator, and let me offer my congratulations on the quarter as well. This morning's press release continues to cite the ongoing effects of inflationary pressures and freight costs among the factors you considered in reiterating the full-year outlook. I was hoping you could provide just a little more color on the impact in the half-year results particularly whether inflation is impacting the business much beyond wages as they've come down on more of a macro level, and then just whether there are any supply chain issues of note going on in the business right now.
spk03: Thank you, Steve, and thanks for the question. As we reaffirmed our guidance on a full year basis, you know, to grow a revenue 5% to 7% and our pre-tax income 10% to 15%, That's been basically the same guidance we shared for the last several months. And, you know, the impact of inflation, the impact of freight that we have highlighted in the past was contemplated within that guidance. Just as a reminder, I'll start with freight really to provide some additional color. Last year in fiscal 22, during the second half of the year, we were starting to see just like the overall market reduction in our freight rates. So from the P&L perspective, this year in the first half of the year, we were seeing more of a benefit. As you know, second half of the year, it's going to be a little bit of a tougher anniversary in comping with benefits that we were starting to realize from freight in 2022. As we are talking about inflation, yes, you are absolutely right. We talked about inflation that we are seeing through wages, both from minimum wage increases that we have seen, across the country, as well as the wage compression as a result of those. In addition to that, we are making investment in talent that are reflected in our numbers, but the impact of overall inflation that's hitting across many other lines of the P&L is still reflected. We are contemplating some of that. Despite some of those inflationary pressures and increases that we are seeing, Even within the quarter, we were able to improve our pre-tax margin by 200 basis points. So we are able to offset some of those. And again, some of those things and some of those challenges we are dealing with, we are planning into them. There is definitely a certain level of uncertainty from the economic environment, how people may be reacting to what's happening and what we hear in the news. But we definitely feel good about things that are within our control, that we continue to manage, that we continue to execute. And we will keep to monitor on the external things that are outside of our control. And, you know, I think we have a good track record over the last several years that we were able to manage all the components of the P&L.
spk01: Great. That's very helpful. And just one follow-up, if I can. Historically, Q3 has been among the higher quarters in terms of inventory. I know that you said last year there was some buildup ahead of some potential issues. Just wondering whether we should anticipate more of a meaningful increase in inventories ahead of the holiday season as well as some of the new store openings and initiatives you discussed. Obviously, you've reiterated your intention to have inventories below year-end levels. Just curious as to what you think the trajectory would be in the third quarter.
spk03: Steve, you are right. Historically speaking, we would see a little bit more elevation in Q3 as we are building inventory levels for the holiday season. Some of that stuff, naturally, we would expect to see maybe some similar trajectories. However, I don't think they are going to be as profound as they have been maybe last year because of some of that intention to pull inventory forward. So we still expect to see some normal inventory builds, but as we mentioned, by the end of the year, we expect inventory to be below last year levels. We feel confident and good about our inventory composition level of inventory that we have. And, you know, one of the things that also is impacting us a little bit more than it has in the past is as we continue to grow our partner operated business, that inventory has a little bit of a different trajectory than our retail inventory. So, you know, again, we are bringing that inventory earlier and then we are selling and replenishing to our partner-operated locations, so definitely there is a little bit of a mix as we think about overall inventory, but that's all contemplated in that full year number that we have shared.
spk08: Right. I think that's a really important point to try to unravel a little bit, though, as our partner-operated business grows, that capital-like relationship with the companies like Great Wolf Lodge, as we mentioned, they buy that inventory as if we're a wholesaler because we're selling it. So they're buying it early and then they're selling through. And we usually sell it to them in bigger chunks, if you will.
spk02: Great. Thank you for the color and congratulations again.
spk04: Thank you. Thank you.
spk09: Thank you. We have no further questions at this time. I would now like to turn the floor back over to Sharon John for closing comments.
spk08: Thank you for joining us today. We look forward to sharing more information with you about our third quarter results and seeing you at some of the upcoming conferences that Boyne mentioned.
spk09: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day. you Thank you. Thank you. Thank you. music music Greetings, and welcome to the Build-A-Bear Workshop second quarter 2023 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, Gary Shinero, Vice President, Investor Relations and Corporate Finance. Thank you, sir. You may begin.
spk07: Good morning. Thank you for joining us. With me today are Sharon Price-John, CEO, and Voyn Todorovic, CFO. For today's call, Sharon will begin with a discussion of our second quarter performance and update the progress we have made on our key priorities. After, Voyn will review the financials in more detail and provide 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 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 unless required by law. Also during this call, we may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items which management believes can be useful in evaluating the company's performance. The presentation of non-GAAP financial measures should not be considered in isolation or substitute for results prepared in accordance with GAAP. If non-GAAP measures are presented, you will find information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the company's earnings release. And now, I would like to turn the call over to Sharon.
spk08: Thank you, Gary. Good morning, and thank you for joining us for Build-A-Bear's second quarter 2023 earnings call. We are pleased to report record second quarter and first half 2023 results, and we remain confident in our annual guidance for the year. At a headline level for the second quarter, revenues increased 8.5% to over $109 million. Pre-tax income increased 37% to $10 million, and diluted EPS grew 50% to 57 cents. For the first half of 2023, revenues increased 5% to $229 million. Pre-tax income increased 15.5% to $30 million, and diluted EPS grew almost 24% to $1.57 cents. We are pleased to note that each of these data points represent record levels for our fiscal second quarter and fiscal first half. Additionally, Boyden will address our revenue and profitability in more detail during his remarks. As we look forward to the second half of the year, we currently expect to see our strong sales momentum continue into the back half and the important holiday time period to be driven by traffic and ongoing interest in the brand by continuing to execute our strategy with the phasing of our growth initiative, including additional new store openings, the launch of a variety of new products ranging from proven collectible license offerings to Build-A-Bear exclusive, the celebration of National Teddy Bear Day on September 9th, including a Buy-A-Bear, Give-A-Bear promotion in conjunction with our Build-A-Bear Foundation, and the introduction of a new elevated and integrated marketing and media program inspired by and designed to drive awareness of our new heartwarming animated film featuring our multi-year best-selling holiday collection, Glisten and the Merry Mission, which we expect to drive traffic and sales during the Christmas season. With our positive third quarter to date results and these important initiatives in place, we continue to remain confident that we will deliver total revenues for the fiscal year to increase in the range of 5% to 7% and pre-tax income growth of 10% to 15%. Our record first half 2023 results follow our record setting results for both 2021 and 2022 and demonstrate our ability to grow the Build-A-Bear brand at a sustainably higher level of profitability. We are able to profitably grow by continuing to execute on our three key strategic initiatives of one, expanding our experience location footprint, two, accelerating our digital transformation, and three, strategically increasing our investments to support these initiatives by leveraging our significant brand equity to diversify our appeal to a broader consumer base and expand into new categories to continue to deliver success. this sustained profitable growth as we enter into our next chapter. Our first strategic initiative is the continuing growth and evolution of our experience location footprint. Because our guests see workshops as a destination, up to 80% of trips to Build-A-Bear are planned, which is one reason why our retail traffic has outpaced the industry for 114 weeks in a row. Additionally, With 100% of our stores profitable and delivering, on average, greater than 25% store-level contribution margins, they generate a less than two-year investment payback. With top-tier store economics and research showing the opportunity for more stores, we began a concerted post-COVID effort to reach more potential markets by growing our corporate store footprint. As such, we continue to expand into tourist and hospitality locations, and we are also opening experienced locations on a more localized level, as many guests that experience Build-A-Bear for the first time at a vacation destination also desire to visit a local workshop closer to home. Over the past several years, we have created multiple flexible store models, whether it's our traditional model in different sizes and configurations or smaller concourse models, Our store within a store, allowing us to open highly profitable, corporately managed stores in many different types of locations and geographies. Our second quarter retail sales growth of nearly 8% reflects our continued growth in traffic at existing stores as well as unit growth. Our partner-operated store growth is in addition to our corporately managed store growth. Our wide variety of partners, such as Great Wolf Lodge, Carnival Cruise Lines, or Kalahari Resorts, continue to add stores in other specialized locations. Note that the partner operated store growth is captured in our commercial revenue reporting segment. Our second strategic initiative has been our digital transformation, which touches nearly every aspect of the company. This includes our ongoing website upgrade and redesign, CRM and loyalty optimization, AI tools for improved data management, and the current rollout of a new POS system and other integrated in-store technology. These are all designed to increase consumer engagement, sales, and our profitability across a number of areas ranging from optimizing our omni-channel capabilities to driving gifting and personalization programs to increasing repeat business and building the lifetime value of our dedicated gifts. both in-store and online. To highlight just a few of our transformations, recall that to expand our e-commerce business, we focused on creating product offerings that had appeal beyond our core kid consumer, which is why Build-A-Bear.com is primarily driven by our teen and adult consumers who are looking for gifts and collectibles. Our ongoing website evolution is a large part of Build-A-Bear addressing these purchase occasions. enlarging our addressable market from predominantly kids at our inception 25 years ago to include teens and adults who now generate approximately 40% of total sales. Additionally, through our digital transformation, we have recently tested personalized messaging, new perks, and target marketing, which is delivering an increase in repeat business and new loyalty member acquisitions. both up double digits for the trailing 12 months. The majority of second quarter's 14% growth in web demand reflects these digital transformations as well as new product assortments targeted at our teen and adult consumers. Having consistently generated high returns on capital, we have been able to focus on our third key strategic initiative of increasing investment to support our growth areas that leverage the power of the brand. Specifically, in addition to the capital associated with our footprint expansion and systematic digital infrastructure evolution, we have been making investments in content and entertainment creation designed to raise awareness and drive sales, ranging from our Roblox Build-A-Bear Tycoon game with over 11 million players and a 91% approval rating to the Honey Girls live action film that has continued to endear guests while driving sales of these characters. Another key example of this type of investment is our upcoming animated feature film, Glisten and the Merry Mission. The movie, featuring a host of voice talent from Julia Michaels as the lead elf to Chevy Chase as Santa Claus, will include our furry fan favorite, Glisten the Magical Snow Deer. The film is based on the Christmas-themed storyline that has supported our best-selling holiday Merry Mission collection. which has generated over $100 million in revenue since its launch in 2015. The movie will be shown during the holiday season on over 100 Cinemark screens across the U.S., many within the same malls as Build-A-Bear workshops, allowing for significant co-marketing opportunities. For example, Build-A-Bear's plans include in-store ticket promotions to drive incremental movie attendance, plus physical marketing promotions inside these Cinemark theaters. In conjunction, GLSEN and the Merry Mission promotional activities are also planned as a part of our annual holiday pop-up store program at Gaylord Resort's ICE event in six major cities across the country. Our other Merry Mission marketing plans include multi-dimensional media and social campaigns, and an in-store and online takeover, plus a Merry Mission digital game launch. To provide context, I believe it's important to highlight that we have managed these investments while continuing to expand our margins and return capital to shareholders. Specifically, over the past seven quarters, we have paid two special dividends and repurchased more than 1 million shares, returning $81 million to shareholders. We believe these efforts of both investment and capital return demonstrate our confidence in our future prospects. Before turning the call over to Voyne, I would like to thank all of the Build-A-Bear associates and partners for their efforts in working together to add a little more heart to life while focusing on achieving yet another record-setting year while setting the company up for a profitable long-term growth. Voyne?
spk03: Thanks, Sharon, and good morning, everyone. We are pleased to speak with you today to share our best-ever second quarter and first half of 2023. This performance was highlighted by growth across all our segments, expansion in gross profit margin, and a significant increase in pre-tax income versus last year. Combined with share repurchase activity, second quarter diluted EPS rose 50%, In the first half of 2023, EPS rose 23.6%. We attribute our ability to report ongoing positive results in a dynamic retail environment to the increasing resonance and strength of the Build-A-Bear brand and the successful execution of our strategic initiatives, including elevated marketing capabilities to drive strong traffic. Even with an increase in SG&A from higher wages due to inflation and adding talent, our strong store contribution margins and growth in our capital-like partner-operated business model provide us the opportunity to invest for our next chapter of growth while still delivering strong earnings and free cash flow. Our strong free cash flow also allows us to continue to return capital to shareholders year-to-date through dividends and share repurchases, we have returned over $33 million in cash to shareholders. Turning to a more detailed review of the second quarter. Total revenues were $109.2 million, up 8.5% year-over-year. Net retail sales increased 7.9% year-over-year with positive contributions from both stores and e-commerce. E-commerce demand increased 14.1% for the period. Store sales increased through growth in number of transactions as our traffic continues to significantly outpace reported national retail traffic data. We opened a net five corporate stores year over year, including two in the quarter. Commercial revenue, which primarily represents wholesale sales to our partner operators, and international franchise revenue rose a combined 19.9% versus the prior year. Our partners opened 11 stores year over year and six in the quarter, and our franchisees opened two stores year over year and one in the quarter. Gross profit margin was 53.7%, an improvement of 410 basis points compared to last year, benefiting from merchandise margin expansion, reflective of expected lower freight costs, and leverage of occupancy and distribution costs. SG&A expenses were $48.3 million, or 44.2% of total revenues compared to $42.3 million, or 42% of total revenues in the 2022 second quarter. The 220 basis point increase in SG&A was driven by higher wages, mostly at a store level from inflationary pressures, and at a corporate level from planned investment in talent. As a reference, the SG&A rate is almost 100 basis points lower than in second quarter 2019. Higher gross profit dollars and expansion in store contribution margin more than offset the increase in SG&A and led to pre-tax income growth of 37.1%, with pre-tax margin expanding 200 basis points to 9.6% of total revenue. EPS, aided by a lower share count and reduction in tax rate, was 57 cents per diluted share, a 50% increase. For the first half of the year, total revenues were $229.3 million, up 5% year over year. Our store traffic also outpaced reported national traffic for the first half of the year. E-commerce demand declined almost 20% in the first quarter before rebounding up 14% in the second quarter to finish down 6% for the first half. The volatility was primarily impacted by the timing of product launches as compared to last year. Driven by our current momentum, we continue to expect e-commerce demand to grow and be positive on a full year basis. Commercial and international franchise revenue rose a combined 43.2% versus the prior year. Gross profit margin was 53.9%, a 270 basis point improvement compared to last year, driven by merchandise margin expansion reflective of expected lower freight costs and leverage of occupancy and distribution costs. SG&A expenses were $94 million, or 41% of total revenues, compared to $85.9 million, or 39.3% of total revenues in the 2022 second quarter. The 170 basis point increase in SG&A was driven by higher wages, mostly at a store level from inflationary pressures, and at the corporate level from planned investment in talent. Higher gross profit dollars, more than offset increase in SG&A, and led to pre-tax income growth of 15.5% to $29.8 million for the first half, with pre-tax margin expanding 120 basis points to 13% of total revenues. Reflecting a lower share count and slight increase in the tax rate, EPS was $1.57 per diluted share, a 23.6% increase, and EBITDA increased 11.7% to $35.9 million, which is a record level for the first half of our fiscal year. Turning to the balance sheet, at the quarter end, we had cash and cash equivalents of $32.6 million, an increase of $18.2 million compared to the same period last year. we returned over $38 million to shareholders through dividend payments and share purchases over the last 12 months. Inventory at quarter end was $66.3 million, declining $21.4 million or 24% from the end of the second quarter last year and in line with our expectations. Keep in mind, last year's quarter end inventory was intentionally elevated to avoid potential supply chain disruptions. We remain comfortable with the level and composition of our inventory as we begin the third quarter and continue to expect inventory to finish the year below last year's $70.5 million level. Turning to the outlook, we are reaffirming our guidance for fiscal 2023. which is a 53-week year. And the full details of our guidance are included in the press release. But I'd like to highlight two key metrics. Total revenues to increase in the range of 5% to 7%, resulting in the revenue range of 491 to 501 million dollars. And pre-tax income growth of 10% to 15%, or 68 to 71 million dollars. In closing, we are pleased with our record-setting first half of 2023. I would like to thank all of our store and warehouse associates, as well as our corporate team members for contributing to our record results and their continued efforts, which has positioned us for another record-breaking year in 2023. We look forward to sharing our progress with you as we move through the year and seeing many of you at upcoming investor conferences, including the Piper Sandler Growth Frontiers Conference in Nashville on September 13th, the B. Riley Consumer Conference on September 14th, and the New York Stock Exchange Consumer Access Day on September 21st. This concludes our prepared remarks, and we will now turn the call back over to the operator for questions. Operator?
spk09: Thank you. We will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re-queue and those questions will be addressed, time permitting. If you would 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 would 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. Thank you. Our first question comes from the line of Eric Beder with SCC Research. Please proceed with your question.
spk05: Good morning. Congratulations on a great quarter. Thanks, Eric. Good morning. Great. I want to talk a little bit about
spk06: the potential with, let's talk about some of the pieces of the stores. Your anniversary, the rollout of in-store parties resuming, what are you seeing in terms of trends with that? And how should we be thinking about that going forward as a potential driver?
spk08: So celebrations such as parties and particularly birthday parties have always been a really important part of Build-A-Bear. And as I think many of you know, we did have to hiatus the parties during the COVID time period and recently restarted, as you noted. We are still in the building phase. That's a long pipeline, and although they are up versus prior year, we're still not at pre-pandemic levels. But we see a tremendous amount of opportunity, and they've actually started to be much more concerted in our marketing beyond what was the traditional birthday parties. parties with some of our partners like Girl Scouts or even other types of theme parties. We're building into that, and we're very excited about the future of that. Now, in the past, as we've noted, that's been around 5% of total sales. And so, to be clear, we're still not back at that percentage. But as we noted in today's call and in the past few quarters, our total pie is growing at the same – is growing as well. But we still see a tremendous opportunity with the party business.
spk06: Great. And I know, you know, we have a lot of excitement coming with the GLSEN movie. How do you look at, you know, the opportunities rising for this year for regular movies? I know that you had a very successful release. offering with Barbie and some of the other movies coming out, we are seeing more movies for kind of your core customer. How does that all fit in, and how do you look at how you can best leverage that going forward?
spk08: Right. Thanks, Eric. So we've had a long history with best-in-class license partners, ranging from those types of high-impact movie events, as well as Evergreen types of properties that are based on films, and that would be inclusive of, you know, a Star Wars, for example, or then a Pokemon product that maybe started with a different type of entertainment, which is gaming, but now also has films. You're right, we did have our Barbie item out this year, our collection rather, very successful, a lot of people looking for that, and that was a broad range of consumers. We recently launched Teenage Mutant Ninja Turtles, and we've had a long relationship with Paw Patrol, which is scheduled for movie release later this year. But that is just a part of our overarching plan, and we have a tremendous visibility and a lot of options. because Build-A-Bear brings a special type of experience for consumers, and those licensed partners understand the value that we create, and we slot those in over the course of time, and we try to build them in in a way that it doesn't create such spikiness in our business plan by measuring that against our own powerful business. So right now, for example, even in a year of the return of film, our own Build-A-Bear intellectual property is higher than in total sales than our total licensed business.
spk04: Great. Thank you, and good luck in the back half of the year. Thank you. Thank you.
spk09: As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Steve Silver with Argus Research. Please proceed with your question.
spk01: Thank you, operator, and let me offer my congratulations on the quarter as well. This morning's press release continues to cite the ongoing effects of inflationary pressures and freight costs among the factors you considered in reiterating the full-year outlook. I was hoping you could provide just a little more color on the impact in the half-year results particularly whether inflation is impacting the business much beyond wages as they've come down on more of a macro level, and then just whether there are any supply chain issues of note going on in the business right now.
spk03: Thank you, Steve, and thanks for the question. As we reaffirmed our guidance on a full year basis, you know, to grow a revenue 5% to 7% and our pre-tax income 10% to 15%, That's been basically the same guidance we shared for the last several months. And, you know, the impact of inflation, the impact of freight that we have highlighted in the past was contemplated within that guidance. Just as a reminder, I'll start with freight really to provide some additional color. Last year in fiscal 22, during the second half of the year, we were starting to see just like the overall market reduction in our freight rates. So from the P&L perspective, this year in the first half of the year, we were seeing more of a benefit. As you know, second half of the year, it's going to be a little bit of a tougher anniversary in comping with benefits that we were starting to realize from freight in 2022. As we are talking about inflation, yes, you are absolutely right. We talked about inflation that we are seeing through wages, both from minimum wage increases that we have seen across the country, as well as the wage compression as a result of those. In addition to that, we are making investment in talent that are reflected in our numbers, but the impact of overall inflation that's hitting across many other lines of the P&L is still reflected. We are contemplating some of that. Despite some of those inflationary pressures and increases that we are seeing, Even within the quarter, we were able to improve our pre-tax margin by 200 basis points. So we are able to offset some of those. And again, some of those things and some of those challenges we are dealing with, we are planning into them. There is definitely a certain level of uncertainty from the economic environment, how people may be reacting to what's happening and what we hear in the news. But we definitely feel good about things that are within our control, that we continue to manage, that we continue to execute. And we will keep to monitor on the external things that are outside of our control. And, you know, I think we have a good track record over the last several years that we were able to manage all the components of the P&L.
spk01: Great. That's very helpful. And just one follow-up, if I can. Historically, Q3 has been among the higher quarters in terms of inventory. I know that you said last year there was some buildup ahead of some potential issues. Just wondering whether we should anticipate more of a meaningful increase in inventories ahead of the holiday season as well as some of the new store openings and initiatives you discussed. Obviously, you've reiterated your intention to have inventories below year-end levels. Just curious as to what you think the trajectory would be in the third quarter.
spk03: Steve, you are right. Historically speaking, we would see a little bit more elevation in Q3 as we are building inventory levels for a holiday season. Some of that stuff, naturally, we would expect to see maybe some similar trajectories. However, I don't think they are going to be as profound as they have been maybe last year because of some of that intention to pull inventory forward. So we still expect to see some normal inventory builds, but as we mentioned, by the end of the year, we expect inventory to be below last year levels. We feel confident and good about our inventory composition, level of inventory that we have. And, you know, one of the things that also is impacting us a little bit more than it has in the past is as we continue to grow our partner-operated business, that inventory has a little bit of a different trajectory than our retail inventory. So, you know, again, we are bringing that inventory earlier, and then we are selling and replenishing to our
spk08: partner operated locations so definitely there is a little bit of a mix as we think about overall inventory but that's all contemplated in that full year number that we have shared right I think that's a really important point to try to kind of unravel a little bit though as a partner operated business grows that capsulite relationship with the things with the companies like Great Wolf Lodge as we mentioned they buy that inventory as if we're a wholesaler because we're selling it. So they're buying it early and then they're selling through. And we usually sell it to them in bigger chunks, if you will.
spk02: Great. Thank you for the color and congratulations again.
spk04: Thank you. Thank you.
spk09: Thank you. We have no further questions at this time. I would now like to turn the floor back over to Sharon John for closing comments.
spk08: Thank you for joining us today. We look forward to sharing more information with you about our third quarter results and seeing you at some of the upcoming conferences that Boyd mentioned.
spk09: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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