Q3 2019 Earnings Call
Greetings and welcome to the build a bear third quarter 2019 results conference call.
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It is now my pleasure to introduce your host Allison Malkin of I see our thank you you may begin.
Good morning. Thank you for joining up with me today are sharing price, John CEO and Voin Todorovic CFO for today's call Sharon will begin to look a discussion of our 2019 third quarter performance and review the progress made on our strategy after <unk> financials and chair guidance.
We will then open the call to take your questions. We ask that you limit your questions to one question and one follow up this way we can get to everyone's questions. During this one hour call feel free to me to you. If you have further question members of the media, who maybe on our call today. She contact us after this conference call with.
Question. Please note the call is being recorded and broadcast live via the Internet. The earnings release is available on the Investor Relations portion of our corporate website, a replay of both our call and webcast will be available later today on the IR site before I turn the call over to management I will remind everyone that four.
We're looking statements are inherently subject to risk [noise].
Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the risk factor section in the Companys annual report on Form 10-K .
We undertake no obligation to revise any forward looking statements and now I would like to turn the call ever do Sharon.
Thank you and good morning, everyone for the third quarter, we advance towards our long term goal with improved results compared to the prior year as we maintained our focus on executing our key strategic initiatives.
In the quarter, which is the smallest of our fiscal year, we had sales growth in both our direct to consumer and commercial revenue stream as well as expansion in gross margin.
We improved our operating loss compared to the prior year by $2.3 million.
The period saw no borrowings on our line of credit and we finished the quarter with no debt and $6 million in cash.
Overall, we remain steadfast in our mission to monetize the power of the build a bear brand.
Our brands consumer metrics are in line with those of much larger companies included.
Including aided awareness with moms in the U.S. of over 90% over 8 million opted in email addresses for direct marketing a communication and 4 million active loyalty club members that represent an estimated 20 million consumers. Additionally, on an annual basis, we draw nearly 45 million gets to the physical.
The store location and have an additional 110 million combined digital impressions through our website Youtube channel and other social media platforms.
Our goal is to leverage the consumer affinity that these metrics represent and diversified revenue streams beyond them all in traditional retail model and drive growth in areas that can add incremental revenue and accretive profitability.
[noise] looking in more detail at our revenue growth in the quarter. We saw improvement from this evolving business model, including a 2% increase in net retail sales with improvement across geographies in both North America in Europe , and inclusive of the eighth consecutive quarter of double digit ecommerce growth and an eight.
<unk> percent increase in our commercial revenue segment led by growth in wholesale primarily through relationships that we referred to as third party retail.
We expect to continue to see improvement results is the strategies that we have implemented to diversify the business and monetize the power of our intellectual property come to fruition.
We expect these efforts to allow us to continue to evolve the company beyond the traditional mall in retail model to create a more dynamic and resilient business model.
Now, let me turn to an update on the four of our key priorities that are intended to better leverage our brand assets and contribute to long term success.
These include more effectively taking advantage of growth in the digital economy, increasing acquisition engagement and lifetime value of loyal program members.
Diversifying retail location to broad consumer accessibility to our brand.
And monetizing the awareness and trust that consumers have for our brand through incremental profitable revenue stream, such as outbound licensing wholesale and entertainment.
As it relates to growing in the digital economy as I mentioned, we delivered double digit ecommerce growth.
For the eighth consecutive quarter, which represents every quarter since the update of our web platform.
The holiday season is important in this space with nearly 50% of our e-commerce occurring historically in our fiscal fourth quarter.
With this in mind, we had been laying the groundwork and building capabilities to take advantage of the ongoing macro trend of online shopping.
Because over 85% of our site traffic on average originates from a personal device. We recently upgraded our mobile capabilities and we continue to see improvements with reduced cart abandonment and higher conversion rates.
For the holiday season. In addition to our traditional gifting options, we have expanded the product range appealing to our teen and adult gifting segment, which represents over 25% of our consumer base within assortment of characters from classic Christmas movies, including a Christmas story and National campaigns Christmas vacation. These webex loose.
Products draw affinity consumers, who tend to prefer the convenience and mobile shopping.
And we continue to improve search result, with S. C O enhanced product descriptions and expanded search terms supporting targeted campaign optimization program with a goal of driving incremental traffic and higher conversion rates.
Closely tied to our digital roadmap is our initiative to enhance the lifetime value of our bonus club loyalty program members.
As I noted there are currently 4 million active members as well as a robust database with over 8 million consumers opted into received marketing and promotional messages across geography.
Specifically relating to the UK following the implementation of GDP deletions last year, we launched a new registration process.
This is led to a significantly larger email database of approximately 500002, which we have been actively marketing.
We believe the enhanced marketing communications contributed in part to the positive sales results in our European sector in the quarter.
On a global basis, we are focused on improving our segmentation model in order to optimize opening click through rates as we refine messaging and frequency to be more personally relevant to our bonus club members.
In addition, birthdays remain the top occasion for a visit to build a bear workshop and we are now in the second year of our successful count your candles campaign, and which bonus club members can bring a child to our store during the month of their birthday in pay their age for collectible Teddy bear.
We're pleased with the level of repeat visits that the program is driving as well as the ongoing levels of guest acquisition.
We expect to create customer journey model through our CRM program and leverage the rich data that has been collected.
This includes birthday information provided by members that now totals over 1.5 individuals associated with a half a million member accounts with the goal to add incremental lifetime visits and value in the future.
Turning to our next priority a broadening consumer accessibility at retail and diversifying our real estate portfolio, although build a bear has generally outpace national traffic trends, we expect consumer activity in traditional mall to continue to be challenging.
Accordingly in line with our real estate strategy through planning and persistence, we have maintained a high levels of optionality in our leases that I've reported in the past with nearly 70% of our store leases expiring in the next three years.
In addition, we continue to pivot our business to venues that better aligned with where today's families visit for shopping and entertainment is we develop and grow revenue streams that more fully utilize the build a bear brand.
As a retailer that does a high level a pre planned visits in an environment, where experience is a competitive advantage build a bear tends to be a desired tenet.
We believe this puts us in a good position to continue to renegotiate rents or take it other action is needed.
It is worth noting that in addition to the traditional retail model on which our company was started we had been developing a new business model, which I mentioned that we call third party retail.
Revenue from third party retail is captured in our commercial revenue segment.
This model has several advantages for build a bear.
These include little to no startup capital expenditures to open a store no direct operational overhead expenses, including both ran and labor and the opportunity to leverage retail.
Retail areas that tend to be in family centric tourist oriented locations.
The model is also beneficial for our partners, who can take advantage of space and labor that they typically have readily available as well as being able to offer the power the build a bear brand to their consumers.
As noted in this morning's relief we ended the quarter was 54 locations in third party retail relationships, which includes Cartiform cruise lines right Wolf Lodge resorts.
Landry thing.
And beaches family resorts among others.
Recently, we opened our first two locations within military bases using the third party retail model.
To summarize revenue from our third party retail model is reported in commercial revenue as a wholesale pricing base.
As such our financial statements do not reflect the retail revenue that the third party generates just the portion that they pay us for the products unrelated fixtures in supply.
Importantly, third party retail is a key part of our tourists diversification initiative that has been growing.
When evaluating our business we are focused on building our overall enterprise value, which includes a mix of Corporately managed and third party retail locations.
Other diversification programs has had been the addition of shops inside of select Walmart locations, which not only supports our real estate plan, but also expands the accessibility and convenience of our brand to a wider consumer base with approximately 60% of the shoppers newly registered to our bonus club we.
Now have 22 locations in operation within Walmart with additional locations planned in the next fiscal year.
On the tourist fraud, following the successful opening of and shop in shop within if they go Schwartz in New York City as well as the addition of a franchise location in ethane goes flagship store in Beijing, We added a third location of the Seo manage toy department in the iconic Selfridges store in London.
We also will be operating on a seasonal basis with the return of our historically successful locations in Gaylord resort resorts and other selected news through the holiday season.
On a separate note we had planned to open an additional flagship tourist location in the U.S. and a major new project, the American Dream and the New York market.
The developer has delayed the opening of the retail component until 2020, which caused a material top line headwind for us in the current fourth quarter.
Moving into the monetization of our brand assets, we made solid progress to leverage the awareness and trust that consumers have for our brand through incremental profitable revenue streams.
As I mentioned in in the quarter, our commercial revenue segment increased by nearly 20% and we continue to execute against our recent agreements tied to entertainment and content development.
These agreements cover multiple areas and entertainment from music with Warner Music groups Arts Music Division to films with Sony Pictures worldwide acquisitions, as well as the Hallmark channel.
We also are pleased to have solidified our agreement to move build a bear radio to Iheartmedia, the leading audio company in America.
We expect to begin to realize financial benefits from these new entertainment initiatives starting later in 2020.
We believe that our business model will benefit on a number of fronts, including the synergy of leveraging the branded entertainment content, which effectively acts as a more think tool to drive our own retail as well as outbound license product sales.
We expect the interaction with our iconic retail experience to intern drive additional interest across multiple entertainment platforms.
On an ongoing circle of engagement and value creation.
Reflective of a model that has been proven successful in other branded companies.
Looking forward. We currently expect total revenue in the fourth quarter to be in the range of slightly positive to a low single digit decrease resulting in total revenue for the fiscal year to being the flat to down low single digit range. However, we still expect to deliver pre tax income that is slightly Pos.
Good for the year, given our disciplined approach throughout the year to manage margin promotional activity and expenses.
The change in our revenue expectation is due to lower than expected quarter to date traditional mall traffic and sales associated with Disney's frozen to movie as wells. The previously mentioned loss of revenue due to the delay in the opening of new flagship store.
Although we had planned for some continued mall traffic headwinds we expected the successful release of the frozen to movie in late November to generate incremental shopping traffic tamale similar to the prior top license movies.
Especially given that the original frozen film was the best selling license in our history.
The property has gained momentum since the mean movie career and is generating nearly double our average dollars per transaction, however, the lower traffic and transaction levels.
The problem for the property, which is expected to be our number one story is now actually tracking at number two.
We are actively addressing the situation with strategic promotional offers especially given the reported higher than expected discounting of the property across multiple categories in retailers.
Currently our popular Merry mission Holiday collection is our number one story with a fresh assortment of updated characters outfits and accessories.
Separately. In addition to the expanded web exclusive gift, giving options I mentioned, we have offerings beyond our traditional make your own plush assortment.
This includes slippers and blankets for kids as well as grab and go stocking stuffers available both in store and online.
The holiday season is peak time for gift cards, and we are pleased to have our cards added to the sale in all of US Walmart stores. This holiday season. In addition to our traditional channels of stores online in third party retail locations.
Thus far gift card sales on a year to date bases are tracking above the prior year boding well for the post holiday redemption period.
As a reminder, with the change in our fiscal calendar year to the end of January we expect to benefit from the redemption. The gift cards sold as well in these in the initial launch of Valentine's day merchandise, which is generally our second biggest holiday every year.
On the digital front, we believe that we will continue to more effectively leveraged the trends to online shopping with our enhanced site features and improved marketing activities fueling traffic and transaction conversion to build on our ecommerce momentum with the goal to deliver our ninth consecutive quarter a double digit growth.
In E Commerce.
And we also expect another quarter of strong commercial revenue.
We have additional locations in the third party retail segment, which as noted we believe is a strong business model for us and intend to look for ways to accelerate the growth in this area in the future.
The holiday season tends to be a peak time for our branded license products as well in fact, one of the build a bear branded products developed through an outbound license agreement is the build a bear stuffing station.
Which was recently named to Walmart top rated by kids toy lift.
In summary, build a bear continues to evolve and an evolving environment.
Our goal is to understand and leverage the Chang changing consumer habit to position the company for the future with a diversified business model that expands our retail options and broadens our consumer base and accessibility built from brand strength.
We believe our brand in the strong relationships that we create with consumers can be activated in multiple categories ranging from our traditional make your own furry friend retail experience to heartfelt personalized gifts to license products to entertainment format, all while continuing to actively manage our expenses.
We continue to be energized by this strategy designed to advance the company for long term success and enhance shareholder value.
I'll now turn the call over to voting to review additional financial details.
Thanks, Sharon and good morning, everyone.
Third quarter show growth across key financial metrics and traction against our strategy highlighted by increased revenue.
Expansion in gross margin and an improvement in pre tax loss versus last year's third quarter.
Specifically for the period.
Total revenues of $70.4 million, an increase of 2.5% compared to the third quarter fiscal 2018.
Retail gross margin expanded 400 basis points to 29.5 per cent compared to the prior year.
This expansion was driven by stronger merchandise margin from less promotional activity.
In addition, we leveraged fixed occupancy expenses due to run productions through aggressive real estate portfolio management.
The balance of the improvement in retail gross margin was primarily related to non cash impairment charges incurred in fiscal 2018 third quarter.
As Jim noted was $35.4 million and 80 basis point improvement in he has done a rate as a percentage of total revenue.
This improvement was driven by disciplined expense management, including lower marketing spend partially offset by an increase in accrued incentive compensation.
Separately, we also had a favorable non cash currency impact as the British pound strength at the end of the period offsetting losses from earlier in the year.
Combined this drove a 2.3 million dollar improvement in pretax loss compared to the fiscal 2018 third quarter or 1 million dollar improvement from the prior year after adjusting for costs, primarily related to noncash asset impairment charges.
Turning to the balance sheet at quarter end cash and cash equivalents were $6.2 million with no borrowings against our revolving credit line.
This compares to $8.6 million ended the third quarter last year, which at $7.3 million in borrowings.
We ended the quarter with approximately $6 million to $6.2 million of consolidated inventories.
Representing an 8.9 million dollar increase compared to the prior year.
The inventory increase was driven by receipt of merchandise supporting key public stories and acceleration of trying to source goods due to potential implementation of peers.
We expect to finish the year has a similar level of inventory compared to fiscal 2018, and our comp comfortable with the composition and level of inventory that we have on hand.
Good.
Capital expenditures totaled $5.2 million for the third quarter fiscal 2019.
Compared to $1.7 million in the third quarter last year.
The increase in capital expenditures is driven by the opening of additional shop in shops within select Walmart stores.
Thanks.
In total excuse me.
In total we operated 371 Corporately manages locations at quarter.
Which is flat to last year as the opening of 16, Walmart locations offset 16 other store closures from throughout the year as the result, we had an overall the reduction of our corporate fully managed retail square footage for the period.
Separately, we had an increase of 20 locations in third party retail ending the period with 54 in total.
Before commenting on our updated full year guidance I would like to reiterate the comments we have made on peers.
Sure. The previously announced tariffs go into effect, we expect minimal impact this fiscal year.
This is due to the aforementioned pull forward to select inventory receipts and the work receptive to mitigate any therapy impact, including solid retail price increases and diversifying our sourcing structure.
As we go into the last couple of months of the fiscal year, we now expect.
Total revenue in the year to be in the flat to down low single digit trades.
As Sean noted this is primarily due to challenges and traditional mall traffic and sales associated with a key license movie property as well as the loss of revenue from the developers delaying openings planned flagship location.
Even with this revenue pressure, we continue to expect pretax income to be slightly positive, reflecting reduced promotional activity throughout the year and disciplined expense management, leading to expansion in gross profit margin and the reduction in as you may.
We expect this significant improvement in fourth quarter pretax income versus the challenging performance from a year ago that included an $8.4 million in non cash operating costs associated impairment bad debt and store closing expenses among the other thing.
Other items.
Due to the tax valuation allowance in foreign jurisdictions on our deferred tax assets and mixed of earnings by jurisdictions is currently difficult to provide and that could full year effective tax rate.
That said, we do not expect to pay any material cash taxes on the full year basis.
And finally, we expect to finish the fiscal year with a healthy balance sheet, including $20 million to $25 million in cash.
No borrowings on our credit facility and positive operating cash flow less capital expenditures.
We continue to believe in our long term plans to leverage the strength of the build a bear brand and to diversify our business model.
We expect our multifaceted approach to allow us to improve profitability.
We expect to see benefits as we evolve our retail footprint, including an intentional reduction in reliance on mall based retail locations as alternative models such as the growing third party retail options continue to expand.
We are actively diversifying our consumer base and expanding other revenue channels in order to enhance the content and monetization of our intellectual properties.
This concludes our prepared remarks, and we will now turn the call back over to the operator for questions operator.
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Thank you. Our first question comes from the line of Eric Beder, which she sees as CC Research. Please proceed with your question.
Good morning.
Good morning.
Okay feeling better.
In.
The quarter and looking forward.
How should we thinking about longer term, we hear the mix should be between online and stores and where the store count should be kind of excluding the.
The Walmart initiatives.
Good morning, Eric.
On the mix between common stores, we it's only been a couple of years now since we launched a robust web platform and as we noted we seen the eight consecutive years of double digit growth. So without a doubt that's outpacing our core store business model right now.
But it's still a smaller percentage as a small percentage of sales, we believe compared to other brick and mortar e-commerce .
Comparing comparative rates.
That.
Said that provides us with the the concept that we believe we have a good runway here and we also have it.
Actually activated all the levers that we have available yet to continue to drive and enhance and improve our e-commerce sales and.
Traffic as well as conversion rates and so were feeling.
Good about the continued growth of ecommerce and continuing to outpace our store base.
Right now where in the between depending on the quarter it will be between five and 10% of our total.
Our total sales.
There are many retailers, where it's 15% 20% of total retail we're certainly shooting for somewhere in that probably the lower into that range in the foreseeable future.
And we believe that also as a note.
Our ecommerce sales are profitable for us so I know theres, some retailers, who is not as profitable that it's a profitable endeavor for us.
And Eric in your question regarding the store count we continue to.
Cherished.
Optionality that the heavy tower leases as the have 70% of our leases coming up for renewal over the next three years, which gives us tremendous.
Leverage in.
Discussions with our landlord.
What we said that over the next couple of years fee may close up to 30 locations a lot of those locations may be outside of our North American market.
We continue to work with our landlords in UK as well too.
Possibly exit some of the.
Our profitable stores they are natural lease events. So at this this is really.
Oops us.
Pushed to the some of those things as we continue to work.
Finding that optimal store count in addition to.
What we are doing internally to.
Reduced reliance is on traditional mall based retail.
As we've talked in our prepared remarks debtors continuous effort to accelerate.
Expansion into third party retail channel showed that you know build a bear brand can be present in more locations.
And if we can find more economic model for us to really capture and monetize the value of the brand, but again at the end of the day, it's a discussion with each landlord to one started the time.
In the business of operating profitable stores, we tend to do a good job of managing those expenses reflected into margins that VR showing so.
We continue to do that work and we believe you noted we are positioned well in the upcoming negotiations.
And depending on the drilling the from landlords to work with US it's going to depend on how many of those stores be may close up over next two years right I think strategically it's important to understand that we need to maintain a balance between the brick and mortar Reid.
Tail and the ecommerce retail our experience is a big part of why we believe we have an opportunity to continue to diversify the company. It's why we build this brand strength with consumers is largely based on having that experience at retail so although we have been able to leverage.
And bill that ecommerce they.
Particularly related to expanding our consumer appeal to the teams and the adult consumers, which I mentioned in his over 20% of our business.
It is just important to understand that we're not trying to transition.
Away from brick and mortar retail and become an exclusive ecommerce site in ecommerce company like a lot of other companies are we don't believe that that's the best for our ongoing strategy I did just want to correct something I think I said eight consecutive years when I'm in eight consecutive quarters apologies for that of continuous double digit growth on e-commerce .
Yeah.
And just a quick follow up I know actually kind of parties online you have been much more aggressive.
Offering online only exclusives, mostly advertising into the store one has been the response to that and is that I was seem so they were seeing remora going forward.
Yeah, that's been a very very strong strategy for us and it's reflective of what I just mentioned Eric in that we are actively pursuing a diversification of our consumer base as well many of those online exclusives are specifically targeted tour in us toward and.
Adult affinity group a lot of them are licensed on some of them are kitschy a lot of them. Our gift gifting. We started some of this really more pushing the envelope kind of approach last valentines, you're going to see a little bit of at this valentines as well on being the ideal gifts for an adult.
To an adult.
So that's been successful for us and it also generally generally achieves a premium price.
Great. Good luck for the holiday season.
As a reminder, if he would like to ask your question Press Star one on your telephone keypad.
Our next question comes from a line of Stephanie Wissink with Jefferies. Please proceed with your question.
Hi, This is actually held ends on for southwest. Thanks. Thanks for taking your question Cisco Your guidance for pre tax income remains consistent despite reduced Q4 sales expectations is this a function of cost saves or other levers that were not anticipated before.
Thanks.
Good morning gasoline thanks for the question.
We continue to really stay focus on our controllables as we have done throughout the whole year.
We continue to really drive our retail gross margin expansion as Vic have shown good.
400 basis points expansion in the current quarter end throughout the year.
We continue to leverage our occupancy and push in those negotiations as we have this.
Big lease Optionality that you talked about.
We did.
Look at our as Gms structure, and we do continue to make.
Daily choices to reduce our structure.
To eliminate some of the redundancies sold we continue to push on that front and Thats definitely reflected in our results.
Throughout the year and we expect to continue over to those initiatives, giving guests.
Hi level of confidence that the can.
Develop the results that we are guiding tool.
Okay, great. Thanks to the color and I'm happy holidays. Thanks, guys. Thank you.
Thank you Mr. when we have no further questions at this time I would now like turn the floor back over to you for closing comments.
Thank you and thanks, everyone for joining us today, and we certainly hope you have a happy holiday.
Look for the updating you on our final results on our next call.
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.
Okay.