Build-A-Bear Workshop, Inc.

Greetings and welcome to the Build-A-Bear Workshop third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Shinero, Investor Relations. Thank you. Please go ahead.

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 third quarter performance and update the progress we've 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. 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. The 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 of 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 a 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.

Thank you, Gary. Good morning, and thank you for joining us for Build-A-Bear's third quarter 2023 earnings call. We are pleased to again report strong results as we continue to execute against our strategic initiatives to evolve our business model by leveraging the power of the Build-A-Bear brand. As noted in this morning's press release, while we have revised our guidance to reflect some unexpected softness in the business starting in the latter part of October and continuing into November, we intend to stay focused on delivering our fourth quarter plan during the remainder of the most critical holiday shopping period, as we continue to expect to deliver our third consecutive record-breaking year. Our results represent the best-ever third quarter and first nine months revenue and pre-tax income in Build-A-Bear history. Specifically, for the third quarter, revenues increased nearly 3% to over $107 million and Pre-tax income increased almost 5% to $10 million. For the first fiscal month of 2023, revenues increased 4% to almost $337 million, and pre-tax income increased 12% to $40 million. We attribute our meaningful expansion and profitable growth over the past few years to the successful execution of our strategy and business model evolution. Note that the $337 million in revenue we generated over the first nine months of fiscal 2023 approximates the $339 million in revenue recorded for the entire fiscal 2019, the last pre-pandemic year. Additionally, this revenue is at a significantly improved level of profitability generating $40 million in pre-tax income over the 2023 fiscal nine-month period, as compared to less than $2 million in the 2019 fiscal year. As a reminder, the three key strategic initiatives we have focused on that have contributed to our results, such as those noted above, are one, the evolution and expansion of our experience location footprint, two, the acceleration of our comprehensive digital transformation, And three, the investment to support initiatives that leverage our significant brand equity to drive incremental growth. Some of the recent progress we've made across each of these initiatives include, first, Build-A-Bear experience locations are a critical part of what makes our valuable point of difference in the marketplace. We cultivate memorable and shareable one-to-one experiences with guests through our exclusive bear building process. We do this while capturing first-party and loyalty club data, enabling us to directly communicate to guests to drive further engagement and repeat purchases. Substantially, all of our stores are profitable and deliver on average greater than 25% annual store-level contribution margins. These top-tier unit economics, along with independent research, showing an opportunity for additional Build-A-Bear workshops has led us to our recent domestic and international strategic market expansion. This store expansion utilizes a variety of business models, including corporately operated, partner operated, and franchised stores. Last year, we saw net new unit growth of 13 corporate and partner operated stores. Through the first nine months of fiscal 2023, we opened 21 new stores and expect to end the year with 30 new corporate and partner-operated locations. Additionally, our existing international franchise partners have also started reinvesting in the brand's location expansion with the expectation of seven new franchise-operated locations by the end of this fiscal year, on top of the 63 that were opened at the end of our first quarter. Demonstrating both the business model evolution and global opportunity, in the third quarter, we opened our first location in Italy. It is a store in a store utilizing our partner-operated model. Recall our partner-operated stores require little to no direct investment, producing high returns on capital. The new location is in conjunction with the Milan opening of the famed toy store chain, Hamley, a longtime successful partnership for Build-A-Bear in their London location. We believe the strong initial success of this store further supports the potential broad geographic appeal of the brand, while expecting more stores in Italy, even as we are in discussions for additional continental European expansion. Our second strategic initiative is a comprehensive digital transformation that touches nearly every aspect of our company. and is designed to elevate our business efficiency, increase consumer engagement, and build incremental opportunities like gifting and personalization programs while extending the lifetime value of guests both in stores and online to ultimately increase overall sales and profitability. More recent examples include upgrades in our corporate-wide business system, further integration of our website, CRM, and loyalty programs, as well as the current rollout of our new POS system and other integrated in-store technology. Our third key strategic initiative is our increased investment to support growth. As we continue to generate favorable returns on capital, we are focused on driving our growth by leveraging the power of the Build-A-Bear brand. In addition to the capital associated with our footprint expansion and digital evolution, we have also been investing in content, product, and concept innovation. Given our broad, multi-generational audience, some of these initiatives take advantage of the increasingly publicized cadulting trend. Examples in the third quarter include launching a productive and creative Halloween collection appealing to kids and adults who often look for unique items in our age-gated Bear Cave e-commerce sites. Additionally, at the New York Toy Fair, we celebrated Build-A-Bear's first-time nomination for Plush Toy of the Year with one of our series of popular teen-centric TikTok-trend animals, the oxolotl. Also, as a part of our ongoing entertainment and content strategy, at the New York Toy Fair, we premiered our new documentary, Unstuffed, a Build-A-Bear Story. This star-studded film is available on demand through major digital platforms and chronicles the amazing 25-plus year journey of the company's evolution from a mall-based retailer for kids to a global iconic brand. During the quarter, we also pre-marketed the early November release of our first ever animated theatrical film, Glisten and the Merry Mission. The movie, based on the characters and storyline of our multi-year, top-selling holiday plush collection that has generated over $150 million in revenue since its launch, features Glisten, the magical snow deer that saves Christmas, voiced by multi-Grammy-nominated Leona Lewis and other top talent like Chevy Chase as Santa. While the film was originally expected to be distributed directly to streaming platforms as a holiday marketing catalyst, We were delighted to strike a partnership with Cinemark for a limited theatrical release in overlapping geography, featuring a unique, multifaceted consumer engagement program including in-theater stuffing events and co-marketing with a free children's movie ticket with the purchase of a furry friend at select Build-A-Bear workshops. The movie launched in approximately 250 theaters And while we strategically scaled down screens through Thanksgiving due to the competitive film landscape, we are returning to distribution across the country for this weekend, just as we kick off our core December Christmas marketing efforts. The film is also scheduled to be rolling out across a number of digital platforms in the US, Canada, the UK, and Australia starting tomorrow. Of note, the collective marketing and PR initiatives associated with this effort have already generated over 4 billion media impressions, likely increasing our top-of-mind awareness as we move into the critical holiday season. So, while we are excited about our content as pure entertainment vehicles, much of the strategic value is as a marketing tool designed to bring our entire consumer-facing communications to life. We believe our content will enhance and expand consumer engagement while supporting and even inspiring our product offering, ultimately driving sales. In the case of Merry Mission, assets ranging from the art style to the tagline of the film, it's about believing, are optimized across multiple consumer touch points, ranging from our Merry Mission music video and app to a holiday activation in our Roblox Build-A-Bear Tycoon game with over 12 and a half million players, to transforming of our Build-A-Bear workshops into temporary Santa's workshop, inclusive of our beloved bear builders donning elf costumes. In fact, as a final example of our ongoing investment in new and innovative concepts, we launched, supported by a dedicated commercial, our first animatronic interactive make-your-own Build-A-Bear called the Bear Leave Bear, inspired by the featured teddy bear in the Glisten and the Merry Mission movie. This unique bear-leave bear comes to life with blinking eyes, wiggling ears, and sound during the stuffing process, responding to the child's voice and touch as they exclaim, I bear-leave. Over the next two months, which typically represents the vast majority of our fourth quarter, we are intensely focused on delivering yet another record-breaking year for the company. We believe the combination of our integrated holiday marketing program informed by GLSEN and the Merry Mission, combined with a broad gifting message and a cadre of proven licenses from Sanrio to Stitch, provides meaningful tools to drive sales throughout December. Separately, as a reminder, unlike many traditional retailers, redemptions of gift cards given as stocking stuffers drives ongoing traffic even the week after Christmas. In closing, while our sales were negatively impacted simultaneously with the widely reported consumer spending softness during the last two weeks of our fiscal third quarter, which continued into early November, our web business was further challenged due to a disruption caused by a new platform implementation during the period. However, we are encouraged to see that our overall trend has started to show some improvements as we head into December. And as we look beyond the current macroeconomic situation, we continue to expect to execute against our top priorities into the future, including the evolution of our experience location footprint, the acceleration of our digital transformation, and while still returning cash to shareholders, continued investment in our strategic growth initiatives that leverage the power of the Build-A-Bear brand. Our mission to add a little more heart to life is never more evident than during the holidays, and I would like to take this moment to thank our associates, partners, and guests as we enter this magical season. Now, I would like to turn the call over to Boyd.