Q2 2020 Build-A-Bear Workshop Inc Earnings Call
Greetings welcome to build a bear workshop second quarter 2020 earnings call.
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Rick's question answer session will follow the formal presentation.
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At this time I'll now turn the conference over to Allison Malkin, what I see our.
Alison you may begin.
Good morning, Thank you for joining up with me today, our Sharon price <unk>, CEO and Voin Todorovic CFO for today's call Sharon will begin, but the discussion over second quarter 2020 performance and our positioning and actions in response to the Kobe 19 pandemic after Weibo review the financials.
Yeah. We will then open the call to take your question. We ask that you limit your questions to one question and one follow up this way we can get everyone's questions. During this one hour call.
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Please note the call is being recorded at 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 I'd webcast will be available later today on the IR site.
The Coca 19 pandemic continues to have a significant impact on our operate.
Cash flow and financial position, the uncertain and dynamic nature of Karen conditions, and its ongoing impact couldn't materially alter your outlook I will remind everyone that forward looking statements are inherently subject to risks and uncertainties actual results could differ materially from both care.
We 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 Liberty Sharon.
Thank you Allison good morning, everyone and thanks for joining us today.
As we continue to move forward in a very different in challenging world. After initially focusing on responding to and managing the immediate circumstance is driven by Carbonite thing, including the closure of all of our retail location, we have rapidly shifted our attention and leverage the current situation to celebrate our strategic.
Initiative to successfully operate in both the near and long term.
During this time that accelerated change we have increasingly relied on our experience.
Data resource isn't it not knowledgeable capabilities to drive our strategy forward.
But the goal, possibly diversify and monetize the power and affinity of Iran.
Our belief in the value that the build a bear brand brings to the world and the opportunity that it presents remain strong even in an ongoing era of uncertainty the demands agility and flexibility from companies everywhere.
As we continue to operate weather reduced corporate workforce that is primarily working from home. We have ground is the organization to remain focused on three key areas that we believe are critical to their through the current environment. While also positioning the company for the future inline with our stated strategic objective.
These initiatives are to accelerate the digital transformation of the company. So not only rapidly growing E commerce, but to more effectively use technology and digital capabilities throughout our entire organization increased as a marketing and leveraging digital content.
To utilize the strategic positioning in high Optionality of our real estate portfolio to revise the terms or at least as an overall operations to reflect big huge shift in brick and mortar shopping pattern and the evolution of the consumer shopping behaviors and to maintain a solid financial condition with the liquidity needed to support our.
Business, including a third of cash management and meaningful cost reduction.
To that end, we made progress in each of these areas in our fiscal second quarter. Let me highlight you on like detail.
In the digital area consolidated ecommerce revenue increased by nearly 300% over the prior years quarter.
We saw strong consumer demand for key license products, such as a furry friend based on the child.
From the Lukas films Siri Star Wars demand Lorianne on Disney plus.
Notably, even excluding sales of the child product ecommerce showed a triple digit deep inquiry.
Other key affinity products and gifting options were also popular online reflective of the merchandise mix, we have seen increased demand from our team and older consumer segments. During this time.
We expanded our omni channel capabilities leveraging store locations to supplement ecommerce fulfillment through buy online ship from store program.
And we completed the initial phase of our expanded engagement with Salesforce, which is designed to enhance our CRM capabilities and drive sales by creating meaningful consumer journey, managing multiple touch points with a 360 degree view with the goal of ultimately increasing our guests lifetime value.
Some are real estate in store perspective, even though our retail locations were closed approximately 60% of the quarter, we were able to modify our bear building experience to meet Covance safety recommendation.
With the wellbeing of our associates and guess foremost in our approach and initiate a staggered reopening plan at local restrictions were lifted.
At this time, we now have reopened approximately 90% of our stores. Many however, we shortened hours of operation.
Notably much of the California markets still remains closed due to governmental restrictions in place in that area.
While traffic levels have been below the prior year, we are seeing higher conversion it's been per transaction.
As I've mentioned previously recognizing the trend of declining mall traffic several years ago. We made the strategic decision. It took action to visa high level of flexibility and optionality into the management of our store leases.
We've been able to leverage that position and renegotiate contractual terms that include rent reduction deferral and abatement for approximately 95% of our location.
Importantly, we have maintained much of our asset optionality with over 70% of locations continuing to have Elisa there in the next three years.
This allows us to remain responsive to future movement in consumer traffic patterns in brick and mortar stores.
As it relates to our financial health and liquidity I believe our disciplined approach to expense management and willingness to take decisive action is evident with over $14 million and reductions in S. DNA for the period compared to the prior year.
Solid cash balance and no borrowings under our credit agreement.
Recognizing the need to operate as a leaner simpler organization. We recently completed a long planned corporate reorganization that align key functions and leadership roles with our stated strategy inclusive of our intended future digital positioning versus our past traditional specialty store structure.
Accordingly, the decrease in expenses reflects the reduction in workforce from both furlough activity and position elimination as well as reduced marketing costs combined with tight overall expense control.
In addition, we saw continued expansion in merchandise margin less promotional activity and intensified supply chain oversight.
A third of cash management allowed us to in the quarter with a higher cash balance and lower inventory compared to the same period in the prior year.
And importantly, as we previously reported we have finalized a five year asset based credit facility for up to $25 million, increasing our financial flexibility.
As we look to the back half of the year, let me highlight some opportunities that we expect to realize particularly in the area of accelerating our digital transformation.
Consumers have demonstrated that they're willing to order almost anything online as well as engage and entertainment in family activity virtually.
Our teams are embracing these trends and working to capitalize on them and leverage our investments to be more digitally focused organization.
For example, we recently announced that we had canceled are highly popular annual in store pay your age promotion due to cope with 19 and replaced it with our first no line online they're building sell event.
This event resulted an online order volume in the top five days of our E Commerce history.
We were able to make use of new capabilities, such as our virtual waiting room to manage the high demand and over 70% of the orders for fulfilled from a store location versus our central warehouse.
This paves the way to plan for other traditionally high traffic store events, such as National Teddy Bear day, which we're moving to a primary lead digital format featuring at live streaming virtual store that later this month.
Another example is our new Carty in a box offering that is available online for families that want to celebrate special occasion birthdays to thanking the hero in alive with a curated product collection. The stimulates the party activity that we had previously had in store.
As I noted we have completed the initial planning phase of the Salesforce engagement and are actively implementing key initiatives.
The technology and capabilities that we have added from Salesforce combined with the data that we have collected the various consumer touch points, including our bonus club program are being used to expand guess profiles and segmentation improve the consumer experience and drive current and future demand.
This includes developing and deploying sophisticated multi channel buyer journey.
New guest journeys are being designed in activated that engage consumers at different touch points and their relationship with build a bear with the goal to drive additional incremental future purchases.
In addition, the tools and data are being used to develop lead generation and efficiently reach lookalike consumers with increased accuracy.
Closer really related our marketing program has significant lease shifted media mix and embraced a digital first approach.
We have restructured our key campaign and post campaign tracking around durney based outcome with algorithms to optimize key metrics and reach target audiences.
We are actively working to increased brand consideration and conversion, while focusing on hot driving a higher return on AD spend with us for overall investment.
This digitally focused approach will be evident as we launch key affinity products such as the new Harry Potter collection that is planned for release Tomorrow.
This is one of the most successful over arching licensed properties on record and one of the most requested from our own guests as we anticipate a high level of excitement when it comes to market.
With the expectation that it will have strong appeal to the team plus eight segment, reflecting interest from the fans that grew up with this property offering will be exclusively online for a limited time before expanding distribution to our stores.
With the anticipation of strong online demand during the holiday season, as well, we have been re imagining and Reconfiguring our warehouse operations in order to increase order fulfillment capacity inefficiency.
This has resulted in several key changes, including accelerating our omni channel competencies of buy online ship from store and buy online pickup in store.
Effectively this allows us to use over 200 of are currently operating stores as many distribution centers.
An efficient shift, particularly given the ongoing challenges in traditional retail traffic.
This allows us to leverage the geographic proximity of stores as well as available labor to help fulfill strong E commerce demand, both seasonally and associated with popular product releases such as Harry Potter.
In addition, we are featuring select merchandise offering that have a limited number of Predefine bundle. There are more quickly assembled and reconfiguring the lay out of certain areas of our warehouse to improve speed and efficiency to support part are expanding ecommerce business.
We also have continued to emphasize and focus on liquidity cash management and expense reductions as the year progressive.
And finally, a key tenets of our strategy has been to develop entertaining content to build further brand equity and consumer engagement.
As as previously noted we believe that our business model will benefit on multiple fronts, including the synergy of leveraging the branded entertainment comment content, which effectively axes marketing tool to drive our own retail as well as outbound license product sale.
We expect the interaction with our iconic retail experience to intern drive additional interest across multiple entertainment platform in an ongoing circle of engagement in value creation.
Reflective of a model that is proven to be successful for other branded company.
We recently saw the release of our first music offering through our agreement with Warner Music groups Arts Division with an album entitled Workshop Jam. This soundtrack delivers a build a bear spin on classic songs that are expected to appeal. The kids of all generations. The music is available on I tunes, Spotify, Amazon or your favorite streaming service. This.
In terms of been added to the mix on build a bear radio on that I Heart media platform, notably we recently saw the largest monthly increase in listenership for build a bear radio since the beginning of the Iheart relationship as we added new programming designed to appeal to families looking for engaging entertainment.
Separately. We're also excited to shared that our first movie through our relationship with the Hallmark channel is slated to release this holiday season as a part of the ever popular Hallmark channel count down the Christmas.
Build a bear entertainment is a production partner on the film which features a heart warming story line in this call deliver by Christmas.
In closing I think it is important to reiterate that many of the moves we're making in response to cobot also play into our long term strategies. In fact, we've been able to accelerate key initiatives. During this time, taking on activities that were one slated for 2021 and beyond but are now underway in an aggressive manner with the goal.
To drive sales, both online and in our reopened stores.
As you may recall before the pandemic when we announced our 2019 year end result, we also noted that our fiscal first quarter 2020 year to date sales were positive versus the prior year.
Turning to the present as we noted in this mornings press release, we have seen sequential improvement in sales trends compared to the prior year with our operating stores recapturing over 80% of cells in August and improvement from the 70% levels that we saw in July.
Pleased to add that the improvement has continued and we recently seen positive year over year consolidated date daily sales for the first time since the mid March Covance driven closures.
Finally, I want to thank our associates for their continued dedication to our mission and long term goal. During this time, we have been reminded of the importance of the core values and purpose that we have as a company.
These include collaborating and learning as a team and totally new technologically advanced waste and embracing the value of each diverse individually that is touched by our brand, particularly with the backdrop and heightened dialogue around social justice.
We have been reminded of both the need for in responsibility that we have to achieve our mission of adding a little more heart to lie.
As a generational brand that truly in our opinion makes a difference in the world.
Believes that we are in the process of strengthening our company by developing additional core competencies, while enhancing others.
That will be critical to evolve and ultimately achieve our strategy.
We are committed to remaining flexible agile and innovative in order to succeed and return to position a sustained profitable growth with the goal of creating long term value for our stakeholders.
Now, let me turn the call over to volume.
Thanks, Sharon and good morning, everyone.
I want to add that I'm also proud of how our team has executed through this unprecedented crisis.
In the second quarter, we once again manage the controllables, while driving digital sales and moving to our strategy forward.
We have taken steps to more closely aligned our cost structure with the anticipated lower revenues.
While preserving cash and securing a new bank credit facilities to improve our overall liquidity.
We have actively impacted every functional area of our company to achieve a meaningful as DNA reduction combined with ongoing negotiations with landlords and partnering with suppliers and vendors to reduce operating costs and the device payment terms.
In addition, we finished the quarter with lower inventory and reduce capital expenditures all of which improved our cash position at the end of the quarter.
During the second quarter as share and noted our sales were negatively impacted by force temporary store closures due to covered.
The resulting in 60% fewer operating days compared to the prior year.
As it relates to our current store operations, we have approximately 90% of our Corporately man of stores that we open and are encouraged by the progress made on two fronts.
First we are seeing improving sales trend since the start of the Reopenings.
In July we recaptured approximately 70% of last year sales volume in operating locations with this percentage improving to over 80% in August with some of our most recent daily sales performance positive over the last year.
Second because we have secured a significant number of short term leases and kick out days over the past few years.
In the wake of Corvid, Recompete able to successfully renegotiated approximately 95% of our leases in our continuing to work with our remaining partners and expect a favorable outcome.
This has been a comprehensive effort and is resulting in the rent reductions deferrals and the basements.
While continuing to maintain highly assumption analogy with approximately 70% of our leases still coming up for renewal in the next three years.
While nearly all these locations has historically been profitable. We believe it is critical to continue to have the flexibility to exits locations as part of overall strategic evolution of our real estate portfolio.
Regarding render basements in the second quarter, we Expensed 13 weeks of Ryan with the benefit of negotiated rent abatements to be recognized over the remaining lease term income statement.
The cash benefit is reflected in our cash balance at quarter end.
In regard to rent payment deferrals and short term lease exit extensions with more favorable rent terms.
These will be primarily reflected in subsequent quarterly results as many of the negotiations. We're also fully executed after that period and balance sheet date.
Our cash balance was positively impacted by yearend deferrals that.
Thats the most we'd be recognized in fiscal 2021.
Most of this cash deferral is expected to be offset by savings generated through the renegotiated the rent reductions for 2021.
We are making rent payments based upon renewal terms as the revised deals are executed.
Importantly, these negotiations has increased the percentage of our leases with variable rent structure, one third of out of North American fleet.
This structure is intended to increase flexibility in an environment with higher sales volatility and provides a natural hedge against potential sales declines.
Even with a significant decrease in revenue and profitability, our cash balance improved over $10 million at quarter end from the second quarter last year.
Driven by expense in the working capital savings initiatives and previously mentioned impact the brands negotiations.
Also as a part of our disciplined approach to working capital and strong management or vendor relationships inventory was down $6.6 million a decline of 11% year over year.
Separately, we had no borrowings on our credit facility in place at the end of second quarter.
Finally as noted in this mornings press release and yesterday's aftermarket 8-K filing we improved our financial flexibility entering into a new five year asset based credit facility with availability of up to $25 million right.
I'm pleased to enter into this agreement with PNC Bank, a strong reputable partner, particularly in these unprecedented times.
Moving now to a further review of the second quarter results.
Total revenues were $40.4 million compared to $79.2 million in the second quarter fiscal 2019.
This includes a 48% decline in net retail sales, which reflects the 60% of the reduction in store operating days in the quarter due to temporary store closures driven by corporate 19.
As noted during the quarter in the reopened brick and mortar stores, we recapture 70% of last year sales volume, partially offset by an increase in E commerce revenue of almost 300%.
Commercial and franchise revenue was slightly over $1 million down 75% from the prior year, mainly driven by temporary store closures of our third party and international franchise locations due to cover 90.
Retail gross margins will significantly lower compared to prior year as it reflects full occupancy costs for 13 weeks, while as noted the only had sales for about 60% of the period.
Notably during the quarter merchandise margin was 410 basis points higher than the prior year fueled by lower E commerce promotional activity.
A retail gross margin excluded $4.1 million in non cash store asset impairment charges recorded in the quarter.
As you enables down $14.2 million or 40% from the second quarter of 2019, driven by lower store and corporate payroll due to our covers 19 mitigation efforts.
Due to store closures in the quarter marketing spend was reduced and the redirected to drive E Commerce sales.
Pre tax loss was $14 million compared to a pretax loss of 700000 in the fiscal 2019 per second quarter.
This years second quarter pretax loss includes $2.1 million that related to estimated noncash asset impairment charges.
Regarding our outlook as previously highlighted given the rapidly evolving may turn over the pandemic and the resulting uncertainty we do not believe is proven to provide guidance at this time.
As you would expect we will continue the disciplined management of expenses across all areas of the business.
In closing.
We believe we have the financial flexibility and strategy to navigate during this challenging time, while continuing to make progress on our initiatives that evolve our business model to maximize the power of our brand and drive value for our stakeholders.
This concludes our prepared remarks, and we will now turn the call back over to the operator for questions operator.
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General counsel, we pull for questions.
Thank you. So first question comes from the line of Eric better with FCC Research. Please proceed with your questions.
Good morning.
Good morning, Eric.
Congrats on non navigate this crazy times on could you give us an update on how its going with Walmart how the UK stores are doing.
Hi, Eric Karen.
Well the Walmart, we closed those stores as well when we talk about the the stores that have been.
Forced closures that we that was inclusive of Walmart for us.
Partially because of even though some of the walmarts remained open.
We did not.
Continue to operate those until much later in the process. We have started to reopen some of those stores.
And.
They are performing really no different than some of the more regular stores that we have are more traditional stores that we have although we do have to be clear some.
Interesting dynamics going on in different locations and I'll, just kind of riff on that from one moment, if I can because it will make sense when I speak about the UK. Some is the big urban areas are struggling for example in our like some of our New York areas and so some like London as well but is that.
Same kind of what we might have been previously defined as a tourist location.
We have tourist locations in more rural areas lets say like the Smoky mountains that are outperforming even last year. So it's a really interesting dynamic.
With that.
Overall, the resulting in the data that we shared with you on the prepared remarks as an improving.
Trend and in some cases starting to see some.
Some days that are now performing prior better than.
Prior year, the UK is not performing as well at the North America right now.
But it's starting to ramp up this well and we're seeing that same acute kind of difference between the London than the rest of the world.
So it's it's pretty dynamic.
Got you want to adding one yes. So also in UK Erik Bedard disorders in UK were mostly open.
Mid late June across the country and loss after the reopening we started to see sequential improvement as the stores are open a little bit longer but again, we are seeing same similarities with us as Sharon mentioned regarding the urban locations in central London versus.
The rest of the fleet in UK and.
Mhm.
Last question and you look at some of the corporate relationships and other pieces how are those ramping up and how do you expect them to go going forward. Thank you.
Are you referring to our third party relationship yes.
Yes so.
Some of the third party relationships such as Carnival cruise lines are great work lies our lending Chester on of course were were significantly impacted by coated and closed down entirely.
Carnival for example, you that you may know.
Continues to be closed down and all that none of those businesses just like ours, even inside of Wal Mart, even though Walmart is what's considered essential where we're not considered essential so we were unable to.
Open those stores and they've been unable to open back up we earned our opened during that time period. We're now seeing some of those locations start to open great were flat just opening.
And.
We were starting to ship products best to them, they're very most of our partners are very encouraged about their future.
And we're here to support them and they're in the future state.
It but it's it's still the word is dynamic on things are changing information new information comes out on a regular basis and we have to maintain our flexibility to manage through that but we're very helpful and.
So believe and ours to overall strategy on the other side as of this pandemic.
It is strong and right that build a bear should be where people go for funding entertainment.
That's just changed a little bit right now and but eventually when the new normal arise that will still be a driver for consumers and want to make memories of family.
Great. Thanks.
As a reminder, inventories star one to ask your question at this time.
Thank you.
At this time I'll turn the floor back to share information for closing remarks.
So thank you for joining us today and.
When we look forward to providing further update following our third quarter.
Thank you everyone. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.