Build-A-Bear Workshop, Inc.

Greetings, and welcome to the Build-A-Bear Workshop second quarter 2024 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 Schneiro, Investor Relations. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to Build-A-Bear's second quarter 2024 earnings conference call. With us today are Build-A-Bear's CEO, Sharon Price-John, and CFO, Boynt Dorovich. During this call, we'll refer to forward-looking statements that are subject to risk and uncertainties. Actual results could differ materially. Please refer to our forms 10-K and 10-Q, including the risk factor section. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings release, which is distributed and available to the public through our investor relations website. And now, I'll turn the call over to Sharon.

Thank you, Gary. Good morning, and thanks for joining us for Build-A-Bear's second quarter fiscal 2024 earnings call. For the past several years, we have shared our strategy to evolve the company's business model with the goal of sustained profitable growth by leveraging the power and affinity of the Build-A-Bear brand. We have occasionally referred to this as approaching the business as a way to expand with new people, new places, and with new types of product offerings. With that in mind, over the past few years, we have worked to extend Build-A-Bear's consumer base beyond kids to take advantage of our growing multi-generational appeal. We have done this with primarily collectibles, trend products, licensing, and gifting, resulting in an increase in our teen and adult business now representing approximately 40% of our total retail sales. We have continued to drive our consumers' first engagement with Build-A-Bear at its experience locations by broadening our geographic reach and store types beyond our historical U.S.-focused mall-based traditional footprint. We have become more global with more store types in a variety of shopping environments with new business models. This effort has led to an acceleration of store growth And by the end of fiscal 2024, we expect to have opened nearly 90 net new locations over the past two years, all while continuing to maintain and integrate with a meaningful web business. And we are evolving product categories beyond the iconic make your own customizable cadre of characters with new introductions, like the successful mini beans collectibles, which have already sold over 1.5 million units since their launch earlier this year. These efforts have resulted in a more diversified business, which, when coupled with more efficient operations, has, as envisioned, delivered more products in more places to more people at a consistently higher level of profitability. With strong cash flow and no borrowing, the company has been able to both invest in the future and return capital to shareholders. In fact, over the past three-plus years, Build-A-Bear has enjoyed record-breaking results, including an unprecedented period of profitability compared to any other time in its quarter-century history. Aligned with this trend, I'd like to share some highlights of our 2024 second quarter. These results represent the best second quarter in the company's history. Revenues of nearly $112 million. an increase of nearly 2.5% and pre-tax income of more than $11 million, representing growth of over 10%. These results coupled with strong third quarter to date trends and robust back half plans support the reiteration of our full year guidance. Of note, even when compared to a strong second quarter in 2023, and in the wake of negative reported national retail traffic trends, our unique and memorable retail experience, which so often serves as the first step in the important lifetime consumer journey, remained solid. Conversely, given some of the ongoing systems enhancements and product launch timing, Build-A-Bear.com's overall web demand results were significantly down for the quarter. Fortunately, the challenges driven by shifts of popular online product launches versus 2023 are expected to be mitigated over the course of the total fiscal year, as we have already started to see in early third quarter. On balance, second quarter delivered strong earnings per share with a much higher level of profitability when compared to any pre-COVID second quarter over the past 15 years. We also remain committed to returning capital to shareholders via a combination of share repurchases and quarterly dividends, totaling over $12 million in the second quarter and $24 million through the first half of 2024. Again, overall, we believe these sustained results are largely associated with the continued focus on the execution of our multi-year, three-pronged strategy designed to deliver long-term profitable growth grounded in our most valuable asset, the Build-A-Bear brand. Our plans to systematically monetize the awareness and power of the brand include, one, based on the long-held belief of our founder that a teddy bear hug is understood in every language, our first strategic pillar is dedicated to expansion through the experience location. This well-researched global retail scaling effort represents not only the evolution of store types but also of financial models, including a corporately operated model, partner-operated model, and franchising. While the company has operated in select international markets for decades, a recent post-COVID effort has resulted in a multi-country rollout, mostly through our partner-operated business model in both continental Europe and South America. In Europe, beyond our long-standing corporate operation in the UK, we opened new locations across Italy and France via our Capital Light partner-operated business model. In Italy, we partnered with the well-known toy retail and entertainment company, Giochi Preziosi, with plans to introduce a combination of standalone workshops and shop-and-shops inside their own toy stores, as well as families' toy stores, through a shared relationship with the multibillion-dollar global conglomerate Reliance Industries. We also opened our first partner-operated location in France at the iconic Paris department store Galeries Lafayette in Champs-Élysées in conjunction with longtime partner FAO Schwartz, with whom we operate the recently expanded and very successful Rockefeller Plaza Shop and Shop in New York City. As a part of our continued U.S. expansion, And in conjunction with our successful tourist location strategy, we opened two Las Vegas shop-and-shops with our new partner, WH Smith, located inside their Welcome to Las Vegas gift shop at the Forum and Link Promenade. We also opened in the historic Wrigley Building on Chicago's famed Magnificent Mile. This store features a specially procured line of licensed, branded, and themed products to appeal to the Windy City guests, just as we do with many of our other tourist destinations, which generally serves as a meaningful contributor to our comparative overperformance in this type of location on almost every key metric. When you include new franchise locations with existing Gulf states and Chilean partners, we added a total of 17 net new locations for the quarter and 23 for the first half across all three business models, corporately operated, partner operated, and franchised. which keeps us on track with our guidance to open at least 50 new experience locations for the fiscal year, in addition to the 37 locations we opened last fiscal year, expanding our global footprint to over 20 countries. Two, the next initiative is the acceleration of a comprehensive digital transformation for the company ranging from overall corporate IT upgrades to website integration to content creation, which we began about a decade ago to unlock value from improved processes and new systems across the entire enterprise. One of the key objectives is to become a true omnichannel entity, which is when a company provides a consistent and synergistic shopping experience across all channels, including in-store, mobile, and online. While we have many of the tools in place to drive greater integration between Build-A-Bear.com and Build-A-Bear Workshop, especially when it comes to efforts like buy online, ship from store, we are still in the process of fully integrating our guest first-party data and shopping history with synergistic marketing and product offerings across the enterprise. The omni-channel model, when fully executed, has been proven to unleash combined power of in-store e-commerce, email, social media, loyalty, and traditional communications tactics through a more personalized, unified vision, ultimately driving repeat purchase. When you consider that each year, up to 50 million people enter a Build-A-Bear workshop, and we have an estimated 50 million annual visits to our website, combined with an 85% capture rate in stores and over 20 million first-party data records, you can understand why we believe This is such an important part of our strategic efforts. However, it is not uncommon for the learning curve associated with implementing and optimizing omnichannel integration tools to be somewhat disruptive. Therefore, we have been working with partners, such as Salesforce, as well as other consultants, to identify, prioritize, and implement opportunities. As an example, on our last call, we shared that we had a significant decline in our web traffic, which was deemed to be largely associated with a decrease in organic search linked to competitive conquesting. Since then, our web traffic has increased and we have enjoyed improved organic search results. We believe this is due to a combination of changes to our search terms, improvements to our SEO strategy, the viral popularity of key new product launches, and the positive trickle-down impact of the upper funnel investment we made in the Stuff You Love campaign earlier this year. While we are encouraged by these recent results, we also recognize we have more work to do to address the larger web opportunity and plan to continue to stay focused on our digital transformation and omnichannel integration improvements to drive the business. Three, our last pillar is our continued fiscal focus, designed to enable us to make strategic investments to leverage the brand to drive profitable growth while returning value to our shareholders. With this in mind, given the company's meaningful improvement in cash flow over the past few years, we've been able to make a large number of long-term strategic decisions across the company, touching product, brand, partnerships, content, talent, and infrastructure, all while returning over $116 million to shareholders through dividends and stock repurchases. As we look to the second half of the year, I'm pleased to share that with the backdrop of the ongoing implementation of the above strategies, our third quarter to date results have been strong. And driven largely by our Halloween product line, we have posted solid increases in store and double digit increases online. Interestingly, Halloween seasonal product in general has been growing in both interest and revenue in recent years according to the National Retail Federation. and Build-A-Bear has seen the same phenomenon. Having sold out of key items well before October 31st in 2023, the company made some strategic choices to focus on this year's Halloween season with more offerings, deeper inventory, and an earlier launch. Leading with a new glow-in-the-dark assortment, a Sanrio collection of exclusive Halloween designs, and the reintroduction of a popular replica, of the classic 2008 Pumpkin Kitty from our vault of favorite furry friends, we had planned on kicking off the season in mid-August. However, due to an unauthorized leak of a specific product imagery, we accelerated the launch and shared the situation in a press release, via social media, and in a direct mail to the over 25,000 plus fans that had already provided contact information to be informed about the Pumpkin Kitty relaunch. These efforts led to an estimated 285 million PR and media impressions in a viral event, contributing to the sellout of the first phases of Pumpkin Kitty, helping to drive record quarter-to-date sales. Our remaining pipeline for the third quarter includes additional exciting Halloween introductions and the launch of a broadened NFL product offering, the celebration of National Teddy Bear Day on September 9th, with in-store events and special promotion, an enhanced relationship with Varsity Spirit, the worldwide leading brand for competitive cheerleading, which includes pop-up shops at cheer camps, and reflecting on our exciting press release earlier today, the introduction of an exclusive 50th anniversary Hello Kitty Make Your Own Plush, as well as our November plans to open a first-of-its-kind Build-A-Bear and Hello Kitty and Friends workshop with our partner Sanrio in the premier Westfield Century City Shopping Center in Los Angeles. Overall, we delivered solid second quarter results, although we saw some challenges with web demand. As we continue to execute on the strategic initiatives, inclusive of the continued omnichannel integration, we expect to see positive momentum as the year progresses. In closing, while we are very proud of this organization as a pioneer in the creation of experiential retail, it is always nice to receive external validation, as we recently did with Newsweek's third annual ranking of America's Best Retailers. We not only had one of the higher rankings in the list, but were ranked as the number one toy retailer. With that, I would like to thank all of the Build-A-Bear associates, guests, and partners for continuing to deliver record results as we work toward our mission of adding a little more heart to life. Moin.