Earnings Call Transcript - BBW Q2 2024

Operator, Operator

Greetings, and welcome to the Build-a-Bear Workshop Second Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Investor Relations. Thank you. Sir, you may begin.

Gary Schnierow, Investor Relations

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, 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 release, which is distributed and available to the public through our Investor Relations website. And 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 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 expanding the business with new people, new places, and 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 primarily with collectibles, trim 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 historically US-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. Additionally, we are evolving product categories beyond the iconic make-your-own customizable 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 delivered more products in more places to more people at a consistently higher level of profitability. With strong cash flow and no borrowings, the company has been able to 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 pretax income of more than $11 million, representing growth of over 10%. These results, coupled with strong third quarter-to-date trends and robust plans for the back half of the year, 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 system enhancements and product launch timing, buildabear.com's overall web demand results were significantly down for the quarter. Fortunately, the challenges driven by the shift 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 improvements in early third quarter. On balance, the 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, expansion through experience locations. This well-researched global retail scaling effort represents not only the evolution of store types but also a financial model 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 stand-alone workshops and shop-in-shops inside their toy stores as well as Hamleys 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-Elysees in conjunction with our longtime partner, FAO Schwarz. As part of our continued US expansion and in conjunction with our successful tourist location strategy, we opened two Las Vegas shop-in-shops with our new partner, WHSmith, located inside their Welcome to Las Vegas gift shops at The Forum and LINQ 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, contributing to our comparative over-performance in this type of location on almost every key metric. When you include new franchise locations with existing Gulf state and Chilean partners, we added a total of 17 net new locations for the quarter across all three business models, corporately operated, partner-operated, and franchise 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. One of the key objectives is to become a true omni-channel entity, which 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 buildabear.com and Build-A-Bear Workshop, 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 the combined power of in-store e-commerce, email, social media, loyalty, and traditional communication tactics through a more personalized, unified vision, ultimately driving repeat purchases. 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 and other consultants to identify, prioritize, and implement opportunities. As an example, on our last call, we shared that we had a significant decline in web traffic associated with a decrease in organic search linked to competitive challenges. 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 investment we made in The Stuff You Love campaign earlier this year. While we are encouraged by these recent results, we 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, 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 have 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. Driven largely by our Halloween product line, we have posted solid increases in-store and double-digit increases online. Interestingly, Halloween seasonal products, in general, have 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 31 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 planned on kicking off the season in mid-August. However, due to an unauthorized leak of 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 fans that had already provided contact information. 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 and 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 9 with in-store events and special promotions, an enhanced relationship with Varsity Spirit, the worldwide leading brand for competitive cheerleading that includes pop-up shops at cheer camp, 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 faced 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 did with Newsweek's third annual ranking of America's best retailers. We not only had one of the higher rankings but we are ranked as the Number #1 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.

Voin Todorovic, CFO

Thank you, Sharon and good morning, everyone. It's good to speak with you again today to share our second quarter 2024 results. Before I touch on the financials from the past quarter, I want to recap a few highlights. This was our best ever second quarter as we continue to deliver on our strategic initiatives. Even though we faced headwinds working through transitory web challenges, our strong results reflect the ongoing diversification of the business. As a result of consistent performance and strong cash flow generation, we continue to return capital to shareholders. We paid our second quarterly dividend and during the quarter, spent $9.1 million to repurchase shares. Additionally, since the end of the second quarter, we have spent $1.7 million. On a year-to-date basis, we have repurchased over 5% of our outstanding share count. Now moving to second quarter results. For the quarter, total revenues were $111.8 million, up 2.4% year-over-year. Net retail sales were flat at $103.5 million. A 28.2% decline in web demand was offset by growth at existing stores plus the addition of new locations. As we discussed on our Q1 call, last year's 53rd week caused a shift in comparable weeks this year. First quarter's impact was mostly reversed during the second quarter, benefiting store sales. Additionally, retail sales for the second quarter last year increased nearly 8%, driven by the timing of product launches both in stores and online, creating a more difficult comparison for the quarter. Our store traffic outpaced national traffic, though slightly down for the quarter, was offset by increased store conversion. Traffic improved in July, and that trend has continued into the third quarter, most likely benefiting from the earlier investments in our brand campaign, The Stuff You Love, as well as new product launches. Web demand was impacted by a lighter product launch schedule this past quarter against successful product launches last year. Challenges related to organic search also impacted web demand, but we have seen solid search improvements starting in late Q2 and into Q3. Looking ahead, third quarter, which includes Halloween, has a stronger product launch schedule. And as Sharon mentioned in her comments, web demand is up double digits, and our stores have also posted strong performance on a quarter-to-date basis. Commercial revenue, which primarily represents wholesale sales to partner operators and international franchise revenue, was up 44.8% versus the prior year. We continue to expect strong growth for the segment on a full-year basis. Gross margin was 54.2%, an increase of 50 basis points compared to last year, mainly due to commercial margin expansion. The remainder of improvement was from retail gross margin expansion driven by growth in the retail merchandise margin, partially offset by higher depreciation expense related to last year's rollout of the new point-of-sale system. SG&A expenses were $49.2 million or 44% of total revenues compared to 44.2% last year. The 20 basis point improvement in SG&A rate was primarily driven by expense timing and disciplined cost management. On our previous call, we mentioned that for the first quarter, SG&A was negatively impacted by expense timing, and this partially reversed in Q2. For the full year, we continue to expect SG&A as a percent of total revenue to be at or below 2023's level. Pretax income grew 10.2% to $11.5 million, a second quarter record. Diluted earnings per share were $0.64, an increase of 12.3%. This reflects our growth in pretax income and a reduction in the share count, partially offset by a higher tax rate compared to the prior year. With respect to the balance sheet, at second quarter end, our cash balance was $25.2 million, representing a $7.4 million decline year-over-year. This was after returning $33 million to shareholders over the past year and also reflects some cash flow timing due to the calendar shift. Inventory at quarter end was $67 million, increasing $700,000 or 1% compared to the same period last year, and it is in line with our expectations. Turning to the outlook. Given our solid second quarter results and third quarter-to-date momentum, we are reiterating our annual guidance. The full details of guidance are included in the press release, but I will highlight a few key metrics compared to fiscal 2023, excluding the impact of the 53rd week. We continue to expect total revenues to grow in the mid-single digits. This growth is partially driven by the addition of at least 50 net new locations, with the majority coming through partner-operated expansion, both internationally and domestically. As we add more experienced locations and expect a more favorable fourth quarter comparison, we anticipate revenue acceleration in both the third and fourth quarter. Pretax income is expected to grow in the mid-single digit range on a full-year basis. The outlook also reflects ongoing wage and inflationary pressures, increased depreciation expense, and increased freight costs. In closing, I would like to thank all of our store and warehouse associates, as well as corporate team members and partners for their ongoing dedication to the execution of our strategy to evolve the company by leveraging the power of the Build-A-Bear brand.

Operator, Operator

We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Eric Beder with SCC Research. Please proceed with your question.

Eric Beder, Analyst

Good morning. Congratulations on a solid Q2 and a strong start to Q3. Thanks. So Mini Beans, great new product, a little bit lower price than a full-size bear. Are you seeing that being more of an add-on or incremental or just a single purchase? How is that helping to change the overall mix of units sold and pricing in terms of the stores?

Sharon Price John, CEO

Thanks, Eric. I appreciate that. The Mini Beans have been a labor of love for us. We love the fact that we are creating unique Mini Beans, and a lot of the ones that we create from a design perspective are takedowns of some of our most popular products. One of the reasons we do that is that a lot of people want to buy the Mini Bean as a product that they've already purchased the larger make-your-own item. So that dynamic often drives the add-on purchase for Mini Beans. On the whole, we are seeing an increase, although there is a combination of people coming in for just a Mini Bean or 4 or 5 Mini Beans sometimes. The lower price point helps us drive our conversion, which Voin mentioned, if somebody is coming in, and that's an easy pick-up purchase for them. However, strategically, we launched the Mini Beans not just to put them in our stores but as a proof-point of the power of the brand to stretch beyond the make-your-own concept with plush. We wanted to demonstrate that in our retail locations, which opens up a wholesale opportunity for us since there is no make-your-own experience necessary for these products. We are working with other retailers, not only here in the United States but across the globe, to sell Mini Beans as stand-alone plush items.

Eric Beder, Analyst

That's a great point. Quickly on the international and licensing opportunity, I would assume that as this is a success in one country, you will see people come to you for other locations and other territories. How should we think about where we are and the potential growth for this group? Where should we think about it going longer-term? Thank you.

Voin Todorovic, CFO

Thanks for the question, Eric. The international opportunity regarding partner-operated locations is truly one of the bright spots for the organization. We are very pleased with the success we have seen so far in the countries we are operating and expanding, and we are getting positive feedback from our partners. As you may recall, it was very challenging for anyone to travel and expand those relationships over the last couple of years after COVID. We have received many inbound requests about these opportunities, and we are working to evaluate and find the right partners that can scale in their respective markets. We believe this will be an opportunity for many years to come.

Sharon Price John, CEO

When you think about where this could go, we have mentioned before that US-based companies typically look at store opportunities in general as the scale in the U.S. often amounts to only about half, or 40% of what's possible on a global basis. Therefore, we feel it's not unreasonable to believe that we could have as many stores outside of the United States as we have inside the U.S. However, note that participation currently leans towards more partner-operated and franchise-operated models.

Eric Beder, Analyst

Excellent. Thank you. Enjoy the early Halloween, and the stores look great, and good luck the rest of the year.

Voin Todorovic, CFO

Thanks, Eric.

Operator, Operator

Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Michael Baker, Analyst

Thanks. The back half guidance suggests much better trends than the first half, I think even better than the second quarter, which seems reasonable because you're doing really well. But what sort of risks or can you flesh out the back half guidance, your holiday expectations? How do you think about consumer sentiment given the negative data points and concern about the election? How does all that play into your outlook that again, the second half seems like it's going to be much better than the first half?

Voin Todorovic, CFO

Thanks for the question, Mike. Our guidance really hasn't changed from the beginning of the year. We keep reiterating. As we have known, this being an election year means there will be lots of ups and downs, with choppiness in comparison to the previous year. We have always indicated that it is expected to be back half weighted. We have opened about 23 stores so far year-to-date, with 17 added in the second quarter and 16 in the first quarter. We expect the pace of openings to accelerate and to reach a net 50 by the end of the year. We believe this is an important part of future growth. Additionally, our commercial business has been strong, and we expect to see expansion in that segment. Speaking to product launches, we have had some strong trends in Q3. While some timing differences can create noise in the comparisons, the second quarter was our toughest comparable quarter due to last year's strong results, and we believe there are more opportunities later in the year. We are excited about our Halloween successes and the investments we've made in that product, which gives us confidence in our full-year guidance. However, there is still some uncertainty, which is why we have a high and low-end range for guidance. We feel good about the aspects within our control, but external factors are outside of that.

Michael Baker, Analyst

That makes sense. A lot of good points there. Another favorable situation, but can you clarify? So, web demand was down 28% in the second quarter, and you're saying it's up in the third quarter, did you say by double digits? I want to make sure those metrics are comparable. Did you swing from down 28% to up double digits, or am I hearing that wrong?

Voin Todorovic, CFO

We were down 28.2% for the full quarter. We are seeing strong double-digit growth on a quarter-to-date basis for Q3.

Michael Baker, Analyst

Okay, and for the follow-up, is there anything in the comparison that's influencing that? Is the improvement due to better search, or is it just your initiatives like bringing in Salesforce consultants, etc.?

Sharon Price John, CEO

It's a combination of factors, as we noted in the prepared remarks. We made some improvements to our SEO strategy and adjustments in search engine tactics, which led to a significant uptick in web demand, particularly around product launches like Halloween and the Pumpkin Kitty products. The timing of these product launches, which was positioned earlier in our sales calendar this year compared to last year, also really contributed to driving engagement and sales online, particularly for web-exclusive items.

Michael Baker, Analyst

Okay, that makes sense. Thank you very much.

Operator, Operator

Our next question comes from the line of Greg Gibas with Northland Securities. Please proceed with your question.

Greg Gibas, Analyst

Hi, good morning Sharon and Voin, thanks for taking the questions. Congrats on the strong results. I wanted to follow up on new store growth and your expectations there. A solid step-up in Q2, 17 versus 6 in Q1, and you are reiterating your expectations for the full year. I wanted to get a sense of the cadence of new store growth in Q3 versus Q4 and also discuss the geographic breakdown of the new store growth that you had in the quarter?

Voin Todorovic, CFO

Thanks for the question. We are pleased about our opportunities for store count growth and would prefer to open them as quickly as possible, especially for our own stores and partners to maximize the opportunity for the year. The goal is to take advantage of the fourth quarter and open them as early as possible. However, there are additional logistics challenges impacting and delaying some openings. We expect most of our growth will be partner operated, as well as some owned locations in key tourist markets.

Greg Gibas, Analyst

Great. That's helpful. And just to clarify, I know you don't like to point to same-store sales growth, but given the good number of openings this quarter and with the web being down, it makes it a little challenging. Can you give a sense of same-store sales kind of from a brick-and-mortar front?

Voin Todorovic, CFO

We don’t discuss same-store sales, but I can provide some context. Due to the 53rd-week shift, we had to navigate the comparative weeks for this year, and there has been improvement in existing store sales with the shifts in store traffic we had. Additionally, the new store openings contributed positively, offsetting the decline in web demand. It’s worth noting that around 25% to 30% of our web demand fulfillment is through store locations.

Greg Gibas, Analyst

Great. That’s helpful. Thank you.

Operator, Operator

Our next question comes from the line of Steve Silver with Argus Research. Please proceed with your question.

Steve Silver, Analyst

Thanks operator. Congratulations on the Q2 milestone. So a lot of the questions have already been answered, but I have one regarding the Halloween collection items being depleted. You've spoken on previous calls about supply chain investments. Can you talk broadly about how the supply chain is set up to replenish items quickly given that the company is heavily involved with seasonal and holiday items?

Sharon Price John, CEO

For seasonal items, replenishing stock is challenging due to shorter timeframes. We strive to be as predictive as possible based on our history. We've learned to manage inventory for seasonal items, and our Pumpkin Kitty launch, for example, was strategically timed, allowing us to plan for a flow coming in that hits the web first. Thus, we still have multiple opportunities to meet consumer demand while learning from past successes like the popularity spike in Halloween. The supply chain process can be challenging due to challenges with sourcing and shipping. However, our core business comprises a majority of evergreen items, allowing us to manage inventory effectively, ensuring there are options available for consumers, whether online or in-store.

Steve Silver, Analyst

Great. Thanks for the color. Congratulations again.

Operator, Operator

We have no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Sharon Price John, CEO

Thank you so much. We appreciate everybody joining us to hear the results of our record-breaking second quarter, and we look forward to sharing third quarter results with you.

Operator, Operator

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.