Q3 2020 Build-A-Bear Workshop Inc Earnings Call

Greetings and welcome to the build a bear workshop third quarter 2020, <unk> earnings call.

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It is now my pleasure to introduce your host out to market I see our accounts maybe GAAP.

Good morning, Thank you for joining US with me today are Sharon price, John CEO, and Voin Todorovic CFO for it.

Today's call Sharon will begin with a discussion of our third quarter 2020 performance and update you on our priorities definitely at to the final quarter of a year of.

Sure well I will review the financials in more detail. We will then open the call to pay for your question. 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 for.

<unk> free to re queue. If you have for their questions numbers of the media, who maybe on our call today should contact US. After this conference call with your 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 common.

Webcast will be available later today on the IR site. The cold at 19 pandemic continues to have a significant impact on our operations cash non financial position the uncertain at dynamic nature of carrying conditions kind of ongoing impact could materially alter our outlook Mike.

I will remind everyone that forward looking statements are inherently subject to risks and uncertainties actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the risk factors 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 there because Sharon.

Good morning, everyone and thank you for joining us today to review, our third quarter fiscal 2020 retail.

As projected at our earlier pre announcement, we saw an increase in total revenue inclusive of continued triple digit growth in E. Commerce expansion in gross profit margin and a decrease the next day like the interest compared to the prior year's period. These.

These results were consistent with or better than expectations. There for shared prior to the end of the quarter.

These improvements contributed to pre tax income of $1.7 million an improvement in the pre tax loss of $7.7 million in the fiscal 2019 third quarter.

We ended this quarter with over $25 million in cash and cash equivalents with no borrowings on our credit facility and we are pleased to have positive momentum momentum at the start of our fourth quarter, while remaining appropriately cautious given the ongoing impact at the intimate.

After the initial actions to address the immediate challenges brought by the pandemic, we rapidly shifted our focus in order to leverage the circumstances to celebrate our strategic initiatives for the long term benefit in three key areas.

As a reminder, these areas are one of accelerating the digital transformation to drive revenue of meet demand.

To evolving our retail store experience with the goal of safely operating while leveraging our high level of strategically secure at least optionality to Ricky strength.

And three the caring financial stability with the liquidity needed to support our business when I take a long term positioning including finalizing a new side of your asset based credit facility.

During this period of rapid change, we have relied on experience and discipline of our management team and organization to stay focused and agile now so.

Circumstances continue to evolve the strength of our brand and our multi generational consumer connection that provided a critical foundation as we continue to execute our strategy to drive profitable growth by monetizing our brand equity.

And while we have made great strides in our digital transformation, we continue to see growth opportunity for in this day as well at with our entertainment programming.

Looking for there at the details of the quarter, we believe our financial results point to the benefit of the work that we have done to accelerate these key initiatives.

We believe our efforts are already driving change and delivering growth and barring any further negative income from coated are giving us momentum.

As we enter the fourth quarter.

Highlights of the period include.

An increase of over 6% and net revenues compared to the prior year, which grew to $74.7 million.

As noted that included another triple digit increase in E Commerce, the man well.

While we continue to have to let Colin driven temporary store closure same reduced operating hours in the quarter, we were able to leverage available store labor and inventory to support the heightened digital demand with buy online ship from store and buy online pick up in store curbside.

The topline growth was achieved even with the decline in commercial and international franchise revenue, which reflects closures unrestricted operation due to the pending make for our third party retailers.

And international franchisee.

We believe these segments of our business will show recovery in the future, although the timing and actual results will be expected to vary by accounts and geography.

Next we had an improvement in gross profit margin of 720 basis points compared to the prior year.

This is the result of several initiatives, but there are two that are particularly important to call out.

Burst of Freebies as previously reported over the past several years, we have strategically positioned at retail store portfolio, Yeah, hi lease optionality and flexibility.

When we were required to close our entire Corporately managed store fleet due to the pandemic, we seize the opportunity to renegotiate rent to include rent reduction deferral and of Bateman, our 99% of North American location and almost 90% of that was in the UK day.

The change in terms, including a higher level of variable of rent deal will continue to show benefit beyond this quarter and notably our rent payment of all now substantially correct.

Also importantly, we maintained at a high level of Optionality going forward.

And second following the temporary measures of Furloughing associates, and reducing salaries for those remaining.

We completed a corporate reorganization that was planned prior to the pandemic with reduced head count and realign leadership responsibilities to better support the execution of our current at longer term strategic initiative.

With the growth in revenue for the improvement in gross margin and a reduction in expenses, we delivered at profitable quarter with $1.7 million in pre tax income compared to a loss in the prior year with a significantly improved cash position and no borrowings on our credit facility.

The progress that we showed this quarter is the result of initiatives that are in step with our strategic business model.

The model is based on optimizing our key skill set of experience for retail operation of digital and brick and mortar as well as our core competency in the design development in sourcing of course products, while leveraging our most of valued at that our brand to drive new profitable revenue stream.

Over the past few years, we've been systematically building an infrastructure and organization to nurture at continuous cycle of engagement to span lifetime values with the goal of delivering long term profitable growth.

And we believe for third quarter serves as a testament to our ability to achieve this adjusted.

If we look forward, even with the uncertainty that embodies the external environment and the majority of our corporate staff still working remotely as noted we remain focused on three areas critical to positioning our company for the future of.

Celebrating our digital transformation evolving at retail experience and maintaining a solid financial position.

Regarding the acceleration of our digital transformation, we remain intent on rapidly growing E commerce with more effective use of technology and improved and enhanced fulfillment capabilities, while leveraging our expanded digital platform to end warm and dry marketing and content efforts.

We delivered our twelveth consecutive quarter of double digit or greater E commerce gross ecommerce demand.

We continue to see robust demand for key license products, including the new Harry Potter collection was launched as an online exclusive the for expanding to all store distribution.

We also had good results with this year at Halloween collection, and we continue to see upticks in sales gifting product is consumer seek out creative ways to stay connected while many remain more home base for it in the past.

Separately, we continue to refine and improve our digital marketing effort leveraging added CRM capabilities that came with our engagement with sales force to create meaningful consumer journey that at multiple touch points with the goal of driving sales and ultimately increasing lifetime value.

These performance based digital marketing campaigns, including social media and paid search tend to be acquisition focused and targeted on individual based on their areas of interest shopping intent and other signal that help us form at profile that is more discrete then the larger demographic segments, we reached in the past.

And once someone is made a purchase we then model that data from our loyalty program to identify differences in shopping behaviors and transactional history to encourage repeat buying.

Finally, we see the creation of digital delivery of content as an important part of the expression of our brand and at the tool to drive further consumer connection the tends to generate incremental sales over time.

For example, we've created engaging live streaming event with key promotions such as for National Teddy Bear day and to rebuild of new product introductions, which we plan to spend going forward.

And in order to position our brand of things top of mind with consumer we have advanced key entertainment platform from build a bear radio and I heart at most recently has grown to nearly half a million monthly unique listeners to the release of our first of five action film in conjunction with hallmark over the holidays that generated over 2 million viewers.

When in the first week of its premier to the launch of a new CD, which has had over half a million lessons of streaming thus far.

Our second initiative is to maintain a process for real estate portfolio as we continue to evolve our real estate stores in response to Matt for business and traffic trends.

In the quarter, we successfully reopened the vast majority of our store base, although temporary closures continue to fluctuate on a localized level.

We implemented safety protocols, we re imagined our iconic in store experience, while still offering a memorable and personal experience for both our GAAP and our associates.

We were pleased with the high level of staff at return from for low and the retention levels that were maintained even after we put it in a reorganization that eliminated a number of position.

And in addition to the actions taken to lower rent for both the short end longer term, we have been intently focused on reducing operating expenses at store level.

For the quarter in North America on average stores recapture at more than 100% of prior yourself following the reopening.

Inclusive of buy online ship from store orders, while in the UK E Commerce drove revenue at a higher pace than the brick and mortar stores.

Both conversion and transaction value saw a meaningful increase.

A lot of similar to other retail we saw declines in consumer traffic in both geography.

Looking forward, we remain cautious in regard to our expectation and we continue to prioritize digital initiative given that uncertainty surrounding physical store operations in various communities in jurisdiction.

As an example of this continued volatility following the end of the quarter in early November the vast majority of our stores in the UK were once again required to temporarily closed due to governmental cold at restriction.

We're pleased to report that most locations, we're able to reopen yesterday.

And finally, we remain keenly focused on maintaining our financial stability with the liquidity needed to support our business, including cash preservation in managing working capital.

In closing while it is clear that we are continuing to operate in a challenging environment. We believe that the rapid response and actions that we initially took to stabilize our business in the wake of coal that has been effective.

And while we are regularly monitoring condition, we have shifted our primary focus to driving our future state.

As previously noted we have been able to accelerate key initiatives that were once slated for 2021 and beyond but are now underway and the breadth of manner with the goal to drive sales.

Online and then reopened stores and through additional diversified revenue stream and.

Importantly, we are seeing the benefits as we implement these innovative solutions and comprehensive program that are intended to drive transformative change end result through our entire business and organization.

Fourth quarter to date, we have experienced positive consumer demand on a consolidated basis. Despite the aforementioned closures of the UK.

We also had solid results for the Black Friday promotional period fueled by strong E commerce demand.

While we are pleased with the early reads and have a number of initiatives in place for the holiday season. As noted we remain cautious considering the continued uncertainty of the business environment and consumer shopping trends as well as the potential for negative impact on net endemic to the balance of the fiscal year.

Finally, I would like to once again, thank our associates for their resilience and commitment to our company's mission is they know that the comfort of a hug for furry friend from build a bear workshop can provide.

We believe our third quarter results demonstrate the passion and affinity that consumers have for our brand and we intend to continue to drive the ongoing evolution of our company with the execution of our strategic plan with the goal of increasing long term stakeholder value.

Now I'd like to turn the call Levered of online.

Thanks, Sharon and good morning, everyone.

I also want to note how proud we are of our entire team working together to deliver a positive third quarter performance across key financial metrics amid the ongoing pandemic.

I've recently, Sharon to our expectations for the quarter. We are pleased to report of the finished the period with results at for above the projected ranges we provided.

As the third quarter has historically been the smallest of the year. We are pleased to report a profitable quarter, ending with a solid balance sheet and strong cash position.

Let me move to discussing our third quarter results in more detail.

Total revenues were $74.7 million, a 6.1% increase compared for the prior year.

The growth includes an 8.7% increase net the retail sales price.

Merely for even by 867% increase in E commerce demand.

Trueflex online generated orders, including those fulfilled through our stores.

In addition on average our stores were closed at about 7% of the quarter with brick and mortar locations operating 25% fewer hours.

Despite these challenges our north American stores recaptured for 100% of the prior year sales.

The growth in net retail sales was partially offset by $1.5 million decrease in commercial and international franchise revenue, mainly driven by cost at the restrictions that impacted the opening of our third party of retail partners that tends to be hospitality based businesses.

As well as international franchise locations.

Gross profit margin expanded 720 basis points versus the prior year with the majority of the expansion driven by the combination of higher sales and leverage of occupancy costs.

This primarily reflects the benefit of the aggressive renegotiation of leases, which resulted in the rent reduction deferrals in the basement in 99% of North American location, and almost 90% of those in Europe.

In addition, merchandize margin also expanded as we prudently managed our promotional activity in the period, which contributed to increasing our dollar spend of transaction for the highest level ever in the fiscal third quarter.

On the expense side.

As DNA was down $2.3 million or 6.6% from the third quarter of 2019, driven mainly by decrease of payroll expenses due to cover at 19 mitigation efforts.

This was a result of combination of lower store payroll a temporary reduction in corporate salaries and some permanent corporate payroll savings driven by the planned for restructuring the Chen mentioned.

Notably late in the quarter, the corporate salaries for store as business conditions improve.

We also reduced our marketing spend in the period, while shifting for more efficient digital marketing programs overall as Gionee of was 44.3 percentage of total revenue, representing a 600 basis point improvement compared to fiscal 2019 third quarter.

And finally pretax income was $1.7 million compared to a pre tax loss of $7.7 million in the fiscal 2019 through the quarter.

Turning to the balance sheet at the end of the quarter GAAP.

Cash and cash equivalents, what of $25.8 million, an increase of $19.6 million compared for the end of the fiscal 2019 sort of quarter.

Driven by improvement in profitability.

We had no borrowings on our asset based credit facility at quarter end.

Importantly, we are currently on substantially all of our rent payments as the renegotiated terms have been finalized end documented.

As part of our disciplined approach to working capital and strong management of vendor relationships inventory was down $14.7 million a decline of 22.2% year over year.

As a reminder, in the prior year, we pull forward of inventory as of mitigation to potential period of goods from China.

We are currently comfortable with the receipt flow level and the composition of our inventory.

Capital expenditures for the quarter of EUR $700000 compared to $5.1 million in the fiscal 2019 third quarter, reflecting our price working capital management and the reduction in planned capital expenditures amid over at 19 environment.

In closing we are pleased with our financial performance in the third quarter and the current strength of our balance sheet.

Regarding our outlook for the balance of the year, given the ongoing impact of the pandemic and resulting uncertainty we do not believe it is prudent to provide guidance at this time.

Bobby have noted that the of positive consumer demand, thus far in our fourth quarter. We plan to continue at the disciplined expense management across all areas of bits of business as we remain cautious given the volatility of the external environment.

This concludes our prepared remarks, and we will now turn the call back over to the operator for questions operator.

Thank you we will now be conducting a question and answer session.

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Our first question comes for the line of Eric Theater with FCC Research. Please proceed with your question.

Good morning, Congrats on a solid quarter.

Good morning, Thanks, Eric.

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You guys have done a lot of internal change of the pieces, how should we be thinking.

Looking forward in terms of the potential.

Moving somewhat normalized in terms of hours and slow at potential machine a savings and in terms of what should be the inventories I know now that you are doing fine good buy online pickup in store and ship from store of the need for inventory is a little bit changed how should be thinking about that as we go forward.

Okay. So let me start first and then maybe we can talk about inventory is first and then we'll tie back into the EPS DNA.

Definitely from the inventory perspective, we continue to stay focused on what we can control.

We are pleased with the proud of that we have the composition of our inventory how we are managing to our promotional activity. That's reflected in strong margin results that the of share.

Continues to stay focused and work with our vendors to deliver proud of timely as relative you are looking at opportunities store.

Drive increased in our inventory turn as we are trying to do.

Deliver benefits I guess, a chief of benefits from investments in all the infrastructure and technology that we've been making over last several years our investments in a new warehouse management system is going to enable us to do some of those things in addition, Eric.

Earlier this year, we started on initiatives like buy online ship from store pickup in store. We are also working on initiatives to deliver from stores, which really is going to help us to be even more efficient without inventory and the really managed that working capital even better.

So at again, what I mentioned in my prepared remarks, some of the inventory of fluctuation versus last year is driven by the potential mitigation of tariffs that fee of what we're expecting to happen last year that never materialized.

So last years, probably another good compare.

Comparable data point, but at the same time VR police, how they're managing inventory and we believe you know there is some opportunity to further improve our tenant at some of the things that I just mentioned.

Then on the other side as we talk about as Gionee again, we are living in some uncertain times.

There are closures of stores happening.

We just reopened our stores in UK, a couple of days ago.

Yesterday it was yesterday.

So I'm definitely it will be for making some adjustments you know be unfortunately has to for a lot of.

Majority of the people that are in those particular locations. These things are going to be happening. We are going to do what we can to mitigate what's everything that's within our control we've.

We've proven I believe that we can manage SGN a at but at the same type of be needs of continues to make for right investments in business and continued to invest in places that will support our strategy is at the continued to deliver long term shareholder value.

I think the key here, Eric is and weighted point point I think that we've shown the ability to do this is to find that balance between maintaining tremendous flexibility managing our cash situation in the midst of uncertainty, while still making strategic and that's.

For future.

Yes, it's definitely come through that way one of the question here you have.

Oh, you did it with a child and you did it for a little Harry Potter buy online first and then shifted into stores how.

Do you see that slowing outage, that's something we're going to see more of.

And how does the store personnel all of the people kind of out of the different stakeholders response of that.

Right and so the initial effort that we made on a big launched at with online for slaves associated with the child, the Disney men Lorien Baby Yoda as it now.

And that was simply because all of our stores for close to the launch period. So we had to speaking of flexibility and end the ability and the ability to shift focus then a end and read react to the market place and the pandemic, we quickly shifted our entire effort to be.

An online effort and reposition launch I'm too and it was quite successful as we've shared in previous quarters.

And continues to be so with the new mandatory into having just launched and created a continued demand for that particular product in some of the add ons that we've now included in the offering that we learned a lot during that we learned that we can reach in a different types of consumer a broader consumer base consumer base that might be not build.

Your first but the affinity products first.

So that combined with our new capabilities in digital marketing enabled through the sales force relationship that we signed in January of this year really drove a lot of these sales and also has expanded our consumer base.

That we're now bringing into the build a bear fold modeling and driving as I mentioned at some of my remarks on the opportunity for additional add on sales and pulling them into our loyalty program overtime. So if theres a number of things going on we actually learned through that process that it.

Ideal Gibbs.

Given the particular profile of that product to to actually launch online first and then bring it into the store different types of consumer that wants a different type of experience and so that is why even though our stores for at reopened when we launched Harry Potter we chose to replicate.

Hey that approach because it drove value and stretched out the the tail of the particular high affinity product.

Great. Good luck for the holiday season.

Thanks for.

Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

There are no further questions at this time I would like to turn the call back over to Sharon price for any closing remarks.

Thank you, yes. Thank you all for joining us today.

And we appreciate you tuning in the end, we wish you all at a safe and happy holiday season.

The the same be happy and in Chile.

On behalf of the build a bear team. Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.