Earnings Call Transcript - BBW Q3 2024

Operator, Operator

Greetings, and welcome to Build-A-Bear Workshop Third Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Build-A-Bear Investor Relations. Thank you. You may begin.

Gary Schnierow, Investor Relations

Thank you. Good morning, everyone, and welcome to Build-A-Bear's third quarter 2024 earnings conference call. With us today are Build-A-Bear's CEO, Sharon Price John; and CFO, Voin Todorovic. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the Risk Factors 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 press release, which is distributed and available to the public through our Investor Relations website. Now, I'll turn the call over to Sharon.

Sharon Price John, CEO

Thank you, Gary. Good morning, and thanks for joining us for Build-A-Bear's third quarter fiscal 2024 earnings call. We are pleased to report strong results this quarter as we continue to execute on our strategic initiatives to evolve and diversify the company's business model, to drive profitable growth, and to leverage the power and affinity of the Build-A-Bear brand. These results represent the best-ever third quarter in Build-A-Bear's history, although the web continued to perform below expectations. Some highlights for the period include revenue growth of 11% to over $119 million, pre-tax income growth of 26% to $13 million, and as we continue repurchasing shares, an EPS increase of almost 38%. Adding the quarterly dividend to the stock buyback, we returned $7.5 million of capital to shareholders in the quarter. Even with our strong third quarter total results, given that the web has continued to perform below our expectations, we are narrowing our revenue guidance and updating our pre-tax income outlook for the year. Of note, we remain positioned for fiscal 2024 to deliver our fourth consecutive year of record revenue, and Voin will provide additional details in his comments. Over the past few years, within an environment of a variety of economic headwinds, we believe our ability to consistently generate profitable results is largely driven by the focus on our three key strategic initiatives to drive long-term profitability and growth. The evolution and expansion of our experience location footprint is our first initiative; the second is the acceleration of our comprehensive digital transformation; and third, the continued investment to support our initiatives to both expand and leverage the power of the Build-A-Bear brand, all while returning capital to shareholders. Said another way, we have been investing to increase repeat purchases while expanding our addressable market to new people in new places and with new products. The first strategic initiative of expanding our experience locations represents well when we opened our net 17 new units in the third quarter. We restarted store growth in 2022 after successfully expanding store contribution margins and improving store return on investment. We also diversified the risk often associated with new locations with more store types, opening in a variety of shopping environments and entering more geographies, as well as through our three retail location business models of corporately-operated, partner-operated, and franchise. As a reminder, our revenue per store varies widely given the business model and the unit format. By the end of fiscal 2024, we expect to have opened more than 110 net new locations over the past three years, bringing our total to almost 600 locations worldwide. Currently, most of our unit growth is with our partner-operated model, which requires little to no Build-A-Bear capital investment. Specifically, through the first nine months of the fiscal year, 31 of 40 net new locations are partner-operated. Since we opened our first domestic partner-operated stores some years ago, we have seen solid success in expansion, most recently with Great Wolf Lodge opening two units and a new partner, Vail Resorts, opening one unit in the quarter. After COVID delay, we are proud to have opened our first international partner-operated location in September of 2023. As of the third quarter-end, there were 10 Build-A-Bear experience locations in Italy alone with expectations for continued expansion. Additionally, during the third quarter, our existing Colombian partner opened their second and third locations, and we welcomed new partners in Denmark, Norway, Sweden, Lithuania, Latvia, and Mexico. When you include our international franchise workshops in Australia, New Zealand, Chile, Kuwait, Qatar, the United Arab Emirates, South Africa, and China, Build-A-Bear is now in more than 20 countries. Separately, as part of our continued domestic expansion, we are also growing our corporately-operated footprint, opening four new locations in the quarter, representing a mix of traditional and concourse stores while closing three. In total, since February, we have added 40 experience locations across all three retail business models, again, corporately-operated, partner-operated, and franchise. And we have increased our guidance to open at least 65 net new experience locations during fiscal 2024. Our second initiative is the acceleration of our multiyear comprehensive digital transformation across the entire company, including omnichannel capabilities. While we have implemented much of the technology to enhance our opportunity to drive both online and in-store sales, as we have discussed for the past few quarters, we believe we are still in the early stages of optimizing these omnichannel tools, including AI. Again, many of the steps we are making are based on the creation and execution of a robust omnichannel model, which when fully embraced, has been proven to help brands and retail companies unleash the combined power of in-store, e-commerce, e-mail, social media, loyalty, and traditional communications tactics through a more personalized unified vision. With the power of the Build-A-Bear brand and up to 50 million annual Build-A-Bear workshop visits, plus an estimated 50 million annual website visits, combined with an 85% data 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 effort. The third initiative is the investment to leverage the awareness, affinity, and power of the Build-A-Bear brand to both diversify and drive profitable growth while continuing to return value to our shareholders. In fact, we have returned over $31 million through dividends and stock repurchases to shareholders this year and more than $120 million since 2021, while simultaneously evolving the company by investing in product, partner relationships, content, infrastructure, and talent. Regarding product, we are expanding our audience with new offerings as we continue to broaden Build-A-Bear's consumer base by taking advantage of our growing multi-generational appeal through collectibles, trends, licensing, and gifting, as well as new plush segments. Trend products include Vault offerings, such as our fan favorite Pumpkin Kitty, and viral items such as our Mothman Plush or our new holiday cookie Capybara, which has already generated over 20 million online views. New concepts include expanding beyond our make your own products into differentiated plush segments, such as the new Build-A-Bear Mini Beans collection, which is sold in stores, online, and to our partner stores through our wholesale channel. Introduced in just February, Mini Beans are priced under $10 and released in collectible waves with mini styles based on popular full-size plush offerings. We are pleased to share that in its launch year, Mini Beans is well on its way to exceeding 1 million in unit sales. A recent example of partner relationships is our long and successful license collaboration with one of our best-selling lines, the Sanrio Hello Kitty collection. This includes a first-of-its-kind Build-A-Bear and Hello Kitty and Friends Workshop located in the premier Westfield Century City Shopping Center in Los Angeles. The store opened to great fanfare on November 15, surpassing our sales expectations and driving over 640 million media impressions. Now, regarding our investment in talent, in the past few months, we've made two strategic additions to the leadership team. The first is Dave Henderson, who joined the company in the newly created position of Chief Revenue Officer, and will report directly to me. His focus is on driving growth across our primary revenue streams at corporately-operated experience locations and buildabear.com, plus driving expansion opportunities beyond these traditional channels. Dave brings over two decades of toy, consumer products, operational, and retail experience, including most recently serving as the Chief Commercial Officer at Melissa & Doug, following some time at Newell Brands and a lengthy and successful career at Hasbro. Secondly, I would like to welcome Kim Utlaut, who has joined us in the newly created position of Senior Vice President and Chief Brand Officer. Kim will lead the continued evolution of the Build-A-Bear brand and communications strategy, reporting directly to Chris Hurt, our long-standing Chief Operations Officer, who also now oversees product development, marketing, public relations, and licensing, while continuing to drive our international expansion. Kim brings over 20 years of experience in senior leadership roles at Coca-Cola Company, largely focused on strategic partnerships. We are delighted to have both Kim and Dave on the Build-A-Bear team. As we look to the final quarter of the year, while we have continued work to do on the web, we are encouraged by our quarter-to-date store results, highlighted by our overall holiday selection, including our multiyear centerpiece, Merry Mission, which is inspired by last year's launch of the animated feature film, Glisten and the Merry Mission. As envisioned, we continue leveraging the movie and the storyline in our marketing, and we expect our magical sparkly snow deer Glisten to be one of our best-selling plush items for the fourth quarter again this year. In summary, we are pleased with our third quarter's 11% revenue growth and 38% EPS increase, plus the net new unit growth of 17 locations and our launch into six new countries. As we look forward to the holiday season and beyond, we believe we have the plans in place to deliver record revenue for fiscal 2024. In the longer term, our focus remains on the top priorities of evolving our experience location footprint, accelerating our digital transformation, and while returning cash to shareholders, continuing investment in our strategic growth initiatives that leverage the power of the brand. As we report today from the New York Stock Exchange, where we will participate in the annual tree lighting ceremony this evening, I can't help but think about our journey and be incredibly proud of and grateful for this remarkable organization. My thanks extend to our amazing guests and partners around the globe, who are also an important part of our corporate mission to add a little more heart to life. I would now like to turn the call over to Voin.

Voin Todorovic, CFO

Thank you, Sharon, and good morning, everyone. It's good to speak with you again today to share our third quarter 2024 results. Before I touch on the financials from the past quarter and provide an update on our 2024 guidance, I want to recap a few highlights. This was our best Halloween season and the best third quarter in the company's history, as we recognize the growing popularity of Halloween, both in general and in our stores. We strategically broadened our seasonal consumer offerings, increased our Halloween inventory, launched the seasonal marketing campaign earlier in the quarter, and brought back key successful Vault items to drive record sales. Also, as a result of consistent performance and strong cash flow generation, we continue to return capital to shareholders. We paid our third quarterly dividend and, during the quarter, spent nearly $5 million to repurchase shares. On a year-to-date basis, we have repurchased over 5% of our outstanding share count. Now, moving to third quarter results. For the quarter, total revenues were $119.4 million, up 11% year-over-year. Net retail sales increased 9.1% to $109.5 million. Our 9.1% sales growth was driven primarily by existing stores in both the US and the UK. Our store traffic again outpaced national traffic, increasing by 3%, most likely benefiting from our Halloween efforts and the earlier investments in our brand campaign, The Stuff You Love, while national traffic decreased by 3%. In fact, our stores saw increases across all four sales levers: traffic, conversion, average unit retail, and units per transaction. Web demand rebounded from the second quarter's decline to increase by 1.3% for the quarter. We mentioned on our previous call that third quarter e-commerce demand began with a double-digit percentage increase. However, our performance softened for the remainder of the quarter and into the fourth-quarter-to-date. Looking ahead, we expect web demand to remain down for the fourth quarter, impacted by a combination of challenging traffic performance in November and more difficult product launch comparisons. Commercial revenue, which primarily represents wholesale sales to partner operators and international franchise revenue, was up a combined 38.8% versus the prior year. We continue to expect solid growth for the commercial segment on a full-year basis. On a sequential basis, we currently expect fourth quarter commercial revenue to be below the third quarter. Recall that the commercial segment's quarterly revenue can fluctuate due to the timing of shipments for new and existing stores. Gross margin was 54.1%, an increase of 140 basis points compared to last year from both retail gross margin expansion, driven mainly by growth in merchandise margin, and commercial margin expansion. SG&A expenses were $51.6 million or 43.2% of total revenues, a 10-basis-point improvement year-over-year. For the full year, largely as the result of increases in medical insurance costs and continued minimum wage escalation, we now expect SG&A as a percent of total revenue to be slightly above 2023's level. Pre-tax income grew 26.4% to $13.1 million, a third quarter record. Diluted earnings per share was $0.73, an increase of 37.7%. This reflects our growth in pre-tax income, a lower tax rate, and a reduction in share count compared to the prior year. With respect to the balance sheet, at third quarter's end, our cash balance was $29 million, representing a $4.2 million increase year-over-year. This was after returning $37 million to shareholders over the past year. Inventory at the quarter-end was $70.8 million, an increase of $6.4 million compared to the same period last year. We accelerated the flow of our 2025 core product in anticipation of the uncertainty in cost due to potential tariffs. We continue to manage our inventory flow and continue to diversify our supply chain geographically. Turning to the outlook. Given our solid year-to-date results, particularly for our stores and commercial revenue, offset by lower-than-expected web demand performance, we are updating our annual guidance. While the 2024 GAAP and non-GAAP guidance details are included in the press release, given 2023's additional week, for modeling purposes, I would like to highlight some metrics on a comparable 52-week basis. For the year, we expect total revenues of $489 million to $495 million, representing low-single-digit growth at midpoint compared to last year on a non-GAAP 52-week basis. Pre-tax income of $65 million to $67 million, representing low-single-digit growth at the midpoint, again, compared to last year on a non-GAAP 52-week basis. As noted, the outlook anticipates continued lower-than-expected web demand, plus ongoing wage and inflationary pressures, including higher medical insurance costs as well as increased depreciation and freight expenses. I would also add that increasing our store guidance to at least 65 locations implies 25 new stores for the quarter. The majority of these are expected to be partner-operated stores with many of those being significantly smaller footprints. In addition, after a decade here, I believe the Build-A-Bear brand is as strong as ever with untapped potential across a number of fronts. And I'm particularly excited about our successful global retail expansion this year into many new countries. Separately, I would like to welcome the new members of our leadership team, who will be an important part of the execution of our strategy to evolve the company by leveraging the power of the Build-A-Bear brand. In closing, I would like to thank all of our store and warehouse associates as well as our corporate team members and partners and wish everyone a happy holiday season. This concludes our prepared remarks, and we will now turn the call back over to the operator for questions.

Operator, Operator

Thank you. Today's first question is coming from Eric Beder of Small Cap Consumer Research. Please go ahead.

Eric Beder, Analyst

Good morning.

Sharon Price John, CEO

Good morning.

Voin Todorovic, CFO

Good morning.

Eric Beder, Analyst

Great. Could you help us with the inventory number? If we take out the impact from the tariffs, and I fully understand why you did this and it makes a lot of sense, what would have been the inventory increase or decrease? And going forward, how much is China in terms of your value add here? And how much is the ability to shift that?

Voin Todorovic, CFO

That’s a great question, Eric. As we consider the supply chain and our sourcing operations, our business stands out because we sell a significant amount of product year-round. This provides us with flexibility, particularly from our core perspective, to bring in products earlier, since these will be the same items we sell throughout the next year. We have anticipated potential tariff changes and have adjusted accordingly. The majority of the increase we are observing is tied to products currently in transit. Our inventory levels will continue to fluctuate compared to previous years for two reasons. First, we are experiencing growth in our Commercial segment, leading to varied inventory receipt flows due to seasonal store openings and partner replenishments. Additionally, we will likely maintain higher inventory levels through the end of the year as we have tried to pull in as much inventory as possible to mitigate the initial impact.

Sharon Price John, CEO

I would like to add to that, Eric. This isn't new for us. We have been strategically diversifying our operations geographically for several years. Our strong cash position has allowed us to shift inventory flow and purchasing with our factories. For example, we adapted when freight costs significantly increased by leveraging our cash situation and maintaining our evergreen inventory, which includes many standard items and some core products, as Voin mentioned. Receiving these products presents minimal risk for us.

Eric Beder, Analyst

I want to discuss the online weakness a bit. Historically, we've noticed a quicker transition from online exclusives to physical stores. I believe the stores do a great job of showcasing the entire product line. In light of this year's performance, particularly considering how positive everything else looks, where should we focus our thoughts regarding this weakness? I'll stop there.

Sharon Price John, CEO

I'll start with that, and I'm sure Voin will add some more color. Yeah, well, as I mentioned in the remarks, Eric, this is a multiyear process. And you can kind of look at what happens out in the world with a lot of other omnichannel retailers. We're in a little bit of a different situation in that most of the omnichannel retailers, the consumer that they're servicing in their stores and the consumer that they're servicing online are often the exact same consumer. If you think about it on a Venn diagram basis, you're going to have a really big overlap. We service a little bit of a different consumer in both of these channels. One is the traditional family kid end user is the larger proportion of our sales in our stores, and it is an adult often sometimes a teen online buying a collectible, a trend product and often gifting. So, there is going to be some bifurcation of the types of products that we offer, but it is also important that we are using that website because the other reason people come to that when we talked about the 50 million people coming to our website, they 're often checking to see what store is near them, planning a party. So, there's still this fundamental integration between the consumers, our stores, the products and now that we have 'buy online, ship from store', where these are all very strategic steps to become a much more integrated organization where we can have a golden record of the consumers, send out personalized e-mail, send meaningful discounts that are exclusive and specific to the shopping patterns of that individual. Well, it's a hallmark of best-in-class in this area. And that takes a lot of steps to do that as well as highly skilled individuals and the integration of all of these systems that we've been putting in. That's a long answer, but that's not half as long as it takes to make it happen. But you're right, we are truncating some of those launches, which is only marginally associated with this situation. That's really listening to our consumer base. Some of these exclusives that we were offering online for our collectors, there was a push and a request from them that they wanted to make these in-store. We're also often shipping them to store because that's an efficient way for us to then service online. Again, it's a very integrated process, and we've not mastered it yet, but we're getting closer every day.

Voin Todorovic, CFO

Eric, I think you addressed that well, but I want to add one more point. As we consider our business, which operates across multiple channels, our goal is to increase overall revenue. We are indifferent to whether customers shop online or in stores, and we are very happy with the growth in total revenue. It resonates with our guests. As Sharon mentioned, there is a slightly different demographic shopping online, consisting of teenagers and adults, compared to those in our physical locations. However, the product is performing well in both environments. We are satisfied with how our offerings are doing in-store. Additionally, as Sharon noted in her remarks, our website attracts a significant amount of traffic, which also directs customers to our stores. This aspect is a crucial part of our ecosystem. Where consumers choose to make purchases is not a primary concern for us. Our focus remains on increasing total revenue for the company, and we have been successful in doing so consistently over the past several years.

Eric Beder, Analyst

Okay, true. One quick one. So, the Sanrio collaboration, it was impressive. How should we be thinking about that from a strategic sense? Is that something that makes sense to do on a more permanent basis or in certain locations? Are there other collections like I don't know, Pokémon that would make sense for that? How should we be thinking about that? And the store was really impressive. Thank you, and good luck for the holidays.

Sharon Price John, CEO

Thank you for your kind words. It has been an incredible journey for us. We have a long-standing partnership with Sanrio, and they have been fantastic collaborators. Hello Kitty and Friends are extremely popular, and the combination of our brands clearly appeals to both of our fan bases. This has been a significant opportunity for both brands, especially with our presence in Westfield, L.A., which has proven to be successful. Establishing a strong presence like this opens up further discussions and opportunities. Our decisions are based on partnership, which is essential for building strong relationships. We will continue to collaborate with Sanrio to explore the possibility of opening additional locations. This success also provides a foundation for potential future discussions, although we are unable to disclose specifics at this time.

Eric Beder, Analyst

Thank you.

Voin Todorovic, CFO

Thanks, Eric.

Operator, Operator

Thank you. The next question is coming from Greg Gibas of Northland Securities. Please go ahead.

Greg Gibas, Analyst

Thank you for addressing the questions, Sharon and Voin. Congratulations on the results. I wanted to ask about the web challenges, but I believe you have already provided some insight. Could we explore the trends you are observing with the four key metrics: traffic, conversion, units per transaction, and size? I would like to understand more about the trends regarding those. You mentioned that all trends are positive, but did any particular aspect stand out in terms of performance? Or were they all fairly equal contributors to the overall strength?

Voin Todorovic, CFO

Thank you for the question. As I mentioned, all of our four levers have performed well. Overall, we saw an increase of about 9.1%. Traffic was up 3%, while national traffic declined by 3%. We observed increases across the other three metrics as well, indicating healthy growth in all areas. This is particularly positive as we are seeing higher average unit retail, better conversion rates in our stores, and an increase in the number of units purchased per transaction, reflecting the effective marketing and customer engagement we are achieving. Our customers are responding positively to this, and we are delighted that our Halloween collection contributed significantly to these numbers this quarter. Last year, we ran out of product before the holiday season ended, so we made strategic investments in Halloween inventory, which has really fueled our growth in the third quarter this year.

Greg Gibas, Analyst

Great. That's helpful, Voin. And I wanted to get just a little bit more color on the increased expectations for store count growth. You talked about net new store count 65 versus the 50-plus before. And I just wanted to get a sense of what's driving that? Maybe where is that upside relative to your previous expectations or plans coming from? Is it simply you're finding more attractive locations? Is it a function of kind of accelerating the timeline? Or any color you can provide there? And just, I guess, regarding that mix, how much is domestic versus international roughly?

Sharon Price John, CEO

I'll provide some background on the three different models we utilize: corporately-operated, partner-operated, and franchise. Notably, as I mentioned, our international partner-operated locations have seen significant success, particularly in Italy. Our partner there has the responsibility for deciding how quickly they want to open new stores or shop-in-shops, which can be either standalone or located within other businesses. They have shown great enthusiasm for Build-A-Bear and are increasing their opening rate. Additionally, I highlighted several new partnerships we've established in various countries, many of which are international and driven by our partners.

Voin Todorovic, CFO

Yeah. And just to add a little bit more color, because as we think about all these locations, they are not all the same. We do have a wide spectrum of the revenue projections for these locations. Some of them are larger in size, more like traditional stores. Some of them are going to be shop-in-shops. So clearly, there are different economics for those. For example, we have some of the Girl Scout locations that are generally like the smallest footprint that we have. So, as you had a lot of those stores, we drive a lot of volume. And I know it is at times a little bit challenging to model. But again, our goal is really to be in more locations, we still believe there is a lot more runway for us, especially as Sharon talked about a lot of different countries that we are in. And again, we are in over 20 countries now, but there is plenty more of opportunities around the globe. And this is one of those things that we are excited that our brands are resonating across the world in these locations and that our partners are very excited about the results and performance they are seeing and you know that they are continuing on this journey with us.

Greg Gibas, Analyst

Yeah. Good to hear. And thanks for the color there. I guess lastly, just a quick clarification question. Voin, I think you were speaking to some type of guidance on G&A in terms of a percentage of sales in relation to 2023. Wonder if you could just maybe repeat or clarify that, I think I missed a portion of it.

Voin Todorovic, CFO

Our total SG&A as a percentage of total revenue for the full year will be slightly up compared to last year. Previously, we expected it to be flat or slightly down. This change is due to additional cost increases, particularly from medical insurance, as well as ongoing pressures from minimum wage and challenges related to compressor costs, with wage rates continuing to rise.

Greg Gibas, Analyst

Understood. Thank you, and good luck.

Voin Todorovic, CFO

Thank you.

Operator, Operator

The next question is coming from Keegan Cox with D.A. Davidson. Please go ahead.

Keegan Cox, Analyst

Good morning.

Sharon Price John, CEO

Good morning.

Voin Todorovic, CFO

Good morning.

Keegan Cox, Analyst

So, I was just wondering, you guys beat pretty nice this quarter and then the guidance is a little narrowed versus what we kind of expected. Is there anything you can give us more detail on like holiday trends, Black Friday and what you're seeing from the consumer right now in the fourth quarter?

Sharon Price John, CEO

Black Friday is significant for us, though not as critical as it is for many other retailers since we are not primarily a discount destination. However, with many of our stores located in malls, and considering the positive traffic reports this year, we do engage in the event. While it holds importance for us, it is not as essential for forecasting our future as it is for other companies during the holiday season. We typically experience a pronounced sales curve, especially in a year like this when Thanksgiving is quite late. As a result, the first week of December aligns with the last week of November, making it a more challenging and condensed period for predictions. Overall, we were pleased with our performance. We offered several online and in-store promotions, and we felt they worked well for us. It wasn't exceptional, but it was strong.

Voin Todorovic, CFO

Q3 was very strong, and we previously expected the latter half of the year to be robust. We began Q3 with double-digit growth in both stores and online, and this trend has continued in stores with a solid performance for Halloween. However, we have noticed some decline in our online sales, which has persisted. Looking ahead to Q4, we are still experiencing solid results, though Q3 benefited from Halloween and last year's comparisons. We are optimistic about our stores, but shipping times and customer ordering will affect our web business, especially during the busy weeks of November and the first week of December, which is critical for our quarterly performance. Our results fell short of expectations, leading to adjustments in our guidance.

Sharon Price John, CEO

Overall, our stores continued to perform well, although we experienced some weakness online. This has led us to slightly narrow our revenue guidance, but we are still outperforming compared to last year.

Keegan Cox, Analyst

Thank you. I would like to follow up on the wholesale timing shift. You mentioned that it's expected to decrease sequentially in the commercial business. Is this a result of pulling forward orders into the third quarter, or will there be a delay pushing it into the first quarter of next year?

Voin Todorovic, CFO

When we recognize our revenue at the time of shipments to our partners, the timing of openings for these locations and their replenishment for the holiday season can vary. This fluctuation may be more pronounced now that we have expanded into more international markets. We remain optimistic about this business, its growth, and the excitement surrounding it, but there will be some variability as we begin to see the effects of our initial shipments and the timing of replenishment orders.

Keegan Cox, Analyst

Awesome. Thank you.

Voin Todorovic, CFO

Thank you.

Operator, Operator

Thank you. The next question is coming from Steve Silver of Argus Research. Please go ahead.

Steve Silver, Analyst

Thank you, operator. I appreciate the opportunity to ask my questions and congratulations on a strong quarter. My first question is about the ongoing strength in traffic. It's quite impressive how Build-A-Bear is managing to exceed national retail traffic trends. In previous calls, you've indicated that this strength could provide the company with leverage during lease renegotiations. I'm interested to know if there are any specific stores that will be up for lease renewals in the next couple of years, and if this sustained outperformance grants the company any additional leverage in those negotiations.

Sharon Price John, CEO

That's a great question, and I appreciate the comment. I would like to highlight our traffic performance. Build-A-Bear is an experience that sets us apart, especially as consumer buying and shopping habits evolve. We see a growing desire for shared moments and memories, particularly during the holidays, which serves as an effective marketing strategy for us. We experienced a 3% increase in our traffic while national retail traffic reported a 3% decline. This presents a significant difference. When negotiating with landlords and retail partners, we emphasize our ability to drive our own traffic. Outpacing mall traffic means we're not only attracting families and desirable consumers to the mall but also facilitating their additional spending during their visit. Our partners acknowledge this. Over the years, we’ve navigated the market volatility with shorter-term leases, and we maintain ongoing communication regarding lease updates. However, this success does put some pressure on Build-A-Bear because they recognize our performance. Negotiations are challenging, but we aim to reach mutually beneficial agreements with our partners while maintaining lease flexibility. I'm proud of our team's achievements, especially in the post-COVID landscape where we renegotiated nearly every lease. Leveraging our brand's strength has proven effective, and our metrics support this strategy.

Voin Todorovic, CFO

And just to add, like we are in the upper echelon of the malls that we are operating in the US, but also, Steve, as you think about our business model, we have been able to operate in a variety of different formats. So, we have formats that we can operate from 200 square feet to 10,000 square foot locations profitably. And so that gives us also significant amount of leverage because we are not forced to be in specific locations and pay the premium rent. So, that's what our teams are working on. We are always looking at these opportunities. But as Sharon mentioned, it continues to be more and more challenging as our company is performing at these levels. And in some cases, some of these rent deals, what we like are our percentage of revenue deals. And those type of deals is what we really like because it also helps landlord as we do well, they do better, but also at a time like if things slow down, we do have some natural leverage and hedging there.

Steve Silver, Analyst

Thank you for the insights. I have one final question. Regarding international expansion, it's quite impressive to see the expected store count for the year reaching 20 markets. I'm interested to know if your partners have shared their plans about whether the international presence will expand into many markets and function more like flagship locations or focus on tourist areas. Essentially, I'm trying to understand how you plan to balance entering more markets without oversaturating them.

Voin Todorovic, CFO

I will begin by saying that we are very satisfied with the markets we are entering and the initial successes we are experiencing. As you consider this process, it requires considerable time to negotiate contracts, identify suitable locations, and establish partnerships. We take great care to protect our brand. In many markets, our partners may already be managing various businesses related to toys or similar categories. Therefore, we believe that securing the right partners in these regions will open up many more opportunities. Over time, it is important for us to be in prime locations within key markets. For example, our early stores in Milan, Italy, are situated in some of the top malls, and we are observing positive results. This approach is part of our strategy to expand into the best areas within these markets. However, it is important to note that since these are partner-operated locations, they are the ones making those decisions and negotiating leases with their counterparts in each country. Consequently, there is a bit more give and take involved, and we have slightly less control over the opening of new locations.

Sharon Price John, CEO

We are quite distant from saturating any European or global market. For instance, when I mentioned 10 stores in Italy, they are not all concentrated in one city; they are spread out from Rome to Milan. Ten stores is far from saturation, especially since, as Voin mentioned, they vary in size. Some are shop-in-shops within FAOs, while others are stand-alone stores, depending on the market. Regarding tourist locations, they are aware of our strong sales performance in these areas, particularly in Rome and Milan, which are influenced by tourism. We apply similar considerations to our own stand-alone stores. They understand the metrics that drive sales well, and we share this information with them because it benefits both parties.

Steve Silver, Analyst

Great. I appreciate the color, and congratulations again and best of luck through the rest of the holiday season.

Voin Todorovic, CFO

Thank you.

Operator, Operator

Thank you. At this time, I would like to turn the floor back over to Ms. John for closing comments.

Sharon Price John, CEO

Yeah. So, thank you so much, and we appreciate everyone joining us today to hear the results of our record-breaking third quarter. We also look forward to sharing our fourth quarter results with you. And in closing, we would like to wish you and your families a very happy holiday.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.