Q3 2024 Build-A-Bear Workshop Inc Earnings Call
Speaker Change: Greetings and welcome to Build-A-Bear Workshop third quarter 2024 earnings conference call. At this time all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation.
Speaker Change: If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Bill DeBaere, Investor Relations. Thank you.
Speaker Change: Thank you. Good morning, everyone, and welcome to Build-A-Bear's third quarter 2024 Earnings Talk Itself.
Speaker Change: With us today are Build-A-Bear 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.
Speaker Change: Please refer to our forms 10-K and 10-Q, including the risk factor section. We undertake no obligation to update any forward-looking statements.
Speaker Change: During this call, we will present both GAAP and non-GAAP financial measures, and the reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the Public or Investor Relations website. And now, I'll turn the call over to Sharon.
Sharon Price-John: Thank you, Gary. Good morning and thanks for joining us for Build-A-Bear's third quarter fiscal 2024 earnings call.
Sharon Price-John: We are pleased to report strong results this quarter as we continue to execute on our strategic initiatives to evolve and diversify the company's business model, to drive profitable growth, and to leverage the power and affinity of the Build-A-Bear brand.
Sharon Price-John: These results represent the best ever third quarter in Build-A-Bear's history, although the web continued to perform below expectations.
Some highlights for the period include
Sharon Price-John: Revenue growth of 11% to over $119 million. Pre-tax income growth of 26% to $13 million. And, as we continue repurchasing shares, an EPS increase of almost 38%.
Sharon Price-John: Adding the quarterly dividend to the stock buyback, we returned $7.5 million of capital to shareholders in the quarter.
Sharon Price-John: Even with our strong third quarter total results, given that the web has continued to perform below our expectations, we are narrowing our revenue guidance and updating our pre-tax income outlook for the year.
Speaker Change: Of note, we remain positioned for fiscal 2024 to deliver our fourth consecutive year of record revenue, and Voin will provide additional details in his comments.
Speaker Change: Over the past few years, within an environment of a variety of economic headwinds, we believe our ability to consistently generate profitable results is largely driven by the focus on our three key strategic initiatives to drive long-term profitability and growth.
Speaker Change: The evolution and expansion of our experience location footprint is our first initiative.
Speaker Change: The second is the acceleration of our comprehensive digital transformation, and third, the continued investment to support our initiatives to both expand and leverage the power of the Build A Better Brand, all while returning capital to shareholders.
Speaker Change: Said another way, we have been investing to increase repeat purchase while expanding our addressable market to new people, in new places, and with new products.
Speaker Change: The first strategic initiative on expanding our experience location represents well when we opened our next 17 new units in the third quarter.
Speaker Change: We restarted store growth in 2022 after successfully expanding store contribution margins and improving store return on investment.
Speaker Change: We also diversified the RIFs often associated with new locations with more store types, opening in a variety of shopping environments, and entering more geographies.
Speaker Change: as well as through our three retail location business models of corporately operated, partner operated, and franchise. As a reminder, our revenue per store varies widely given the business model and the unit format.
Speaker Change: By the end of fiscal 2024, we expect to have opened more than 110 METS new locations over the past three years, bringing our total to almost 600 locations worldwide.
Speaker Change: Currently, most of our unit growth is with our partner-operated model, which requires little to no build-to-bear capital investment. Specifically, through the first nine months of the fiscal year, 31 of 40 net new locations are partner-operated.
Speaker Change: Since we opened our first domestic partner-operated store some years ago, we have seen solid success and expansion, most recently with Great Wolf Lodge opening two units and the new partner, Vail Resorts, opening one unit in the quarter.
Speaker Change: After COVID delay, we are proud to have opened our first international partner operating location in September of 2023.
Speaker Change: As of the third quarter end, there were 10 Build-A-Bear experience locations in Italy alone with expectations for continued expansion.
Speaker Change: Additionally, during the third quarter, our existing Colombian partner opened their second and third locations, and we welcomed new partners in Denmark, Norway, Sweden, Lithuania, Latvia, and Mexico.
Speaker Change: When you include our International Franchise Workshops in Australia, New Zealand, Chile, Kuwait, the United Arab Emirates, South Africa, and China, Build-A-Bear is now in more than 20 countries.
Speaker Change: Separately, as a part of our continued domestic expansion, we are also growing our corporately operated footprint, opening four new locations in the quarter, representing a mix of traditional and concourse stores, while closing three.
Speaker Change: In total since February, we have added 40 experience locations across all three retail business models, again, corporately operated, partner operated, and franchised.
Speaker Change: And we have increased our guidance to open at least 65 net new experience locations during fiscal 2024.
Speaker Change: Our second initiative is the acceleration of our multi-year comprehensive digital transformation across the entire company, including omni-channel capabilities.
Speaker Change: While we have implemented much of the technology to enhance our opportunity to drive both online and in-store sales, as we have discussed for the past few quarters, we believe we are still in the early stages of optimizing these omnichannel tools, including AI.
Speaker Change: Again, many of the steps we are making are based on the creation and execution of a robust omni-channel model.
Speaker Change: which, when fully embraced, has been proven to help brands and retail companies unleash the combined power of in-store, e-commerce, e-mail, social media, loyalty, and traditional communications tactics through a more personalized, unified vision.
Speaker Change: with the power of the Build-A-Bear brand and up to 50 million annual Build-A-Bear workshop visits plus an estimated 50 million annual website visits combined with an 85% data capture rate in stores and over 20 million first-party data records.
Speaker Change: You can understand why we believe this is such an important part of our strategic effort.
Speaker Change: In fact, we have returned over $31 million through dividends and stock repurchases to shareholders this year and more than $120 million since 2021, while simultaneously evolving the company by investing in products, partner relationships, content, infrastructure, and talent.
Speaker Change: Regarding products, we are expanding our audience with new offerings as we continue to broaden Build-A-Bear's consumer base by taking advantage of our growing multi-generational appeal through collectibles, trends, licensing, and gifting, as well as new plush segments.
Speaker Change: Trend products include vault offerings, such as our fan-favorite Pumpkin Kitties, and viral items, such as our Mothman plush or our new holiday cookie Capybara, which has already generated over 20 million online views.
Speaker Change: New concepts include expanding beyond our make-your-own products into differentiated plush segments, such as the new Build-A-Bear Mini Beans collection, which is sold in stores, online, and to our partner stores through our wholesale channel.
Speaker Change: Introduced in just February, Bill's Mini Beans are priced under $10 and released in collectible ways, with many styles based on popular full-size plush offerings.
Speaker Change: We are pleased to share that in its launch year, Mini Beans is well on its way to exceeding $1 million in unit sales.
Speaker Change: A recent example of partner relationship is our long and successful license collaboration with one of our best-selling lines, the Sanrio Hello Kitty Collection.
Speaker Change: This includes a first-of-its-kind Build-A-Bear and Hello Kitty and Friends workshop located in the premier Westfield Century City Shopping Center in Los Angeles.
Speaker Change: The store opened to great fanfare on November 15, surpassing our sales expectations and driving over 640 million media impressions.
Speaker Change: Now, regarding our investment in talent, in the past few months we've made two strategic additions to the leadership team.
Speaker Change: The first is Dave Henderson, who joined the company in the newly created position of Chief Revenue Officer, and will report directly to me.
Speaker Change: His focus is on driving growth across our primary revenue streams of corporately operated experience locations and Build-A-Bear.com plus driving expansion opportunities beyond these traditional channels.
Speaker Change: Dave brings over two decades of toy and consumer products operational and retail experience, including most recently serving as a Chief Commercial Officer at Melissa & Doug.
Speaker Change: following some time at Newell Brands and a lengthy and successful career at Hedbroke.
Speaker Change: Secondly, I would like to welcome Kim Utlout, who has joined us in the newly created position of Senior Vice President and Chief Brand Officer.
Speaker Change: Kim will lead the continued evolution of the Build-A-Bear brand and communications strategy, reporting directly to Chris Hurt, our long-standing Chief Operations Officer, who also now oversees product development, marketing, public relations, and licensing, while continuing to drive our international expansion.
Speaker Change: Tim brings over 20 years of experience in senior leadership roles at Coca-Cola Company, largely focused on strategic partnerships.
Speaker Change: We are delighted to have both Kim and Dave on the Build-A-Bear team.
Speaker Change: As we look to the final quarter of the year, while we have continued to work
Speaker Change: While we have continued work to do on the web, we are encouraged by our order-to-date store results, highlighted by our overall holiday selection, including our multi-year centerpiece, Merry Missions.
Speaker Change: which is inspired by last year's launch of the animated feature film Blitzen and the Merry Mission.
Speaker Change: As envisioned, we continue leveraging the movie and the storyline in our marketing, and we expect our magical sparkly Snowbeard glisten to be one of our best-selling plus items for the fourth quarter again this year.
Speaker Change: In summary, we are pleased with our third quarter's 11% revenue growth and 38% EPS increase, plus the net new unit growth of 17 locations and our launch into six new countries.
Speaker Change: As we look forward to the holiday season and beyond, we believe we have the plans in place to deliver record revenue for fiscal 2024.
Speaker Change: In the longer term, our focus remains on the top priorities of evolving our experience location footprint, accelerating our digital transformation, and while returning cash to shareholders, continuing investment in our strategic growth initiatives that leverage the power of the brand.
Speaker Change: As we report today from the New York Stock Exchange, where we will participate in the annual tree lighting ceremony this evening, I can't help but think about our journey and be incredibly proud of and grateful for this remarkable organization.
Speaker Change: My thanks extend to our amazing guests and partners around the globe who are also an important part of our corporate mission to add a little more heart to life.
Voin Todorovic: I would now like to turn the call over to Voin.
Voin Todorovic: Thank you, Sharon, and good morning, everyone. It's good to speak with you again today to share our third product, 2024 results.
Voin Todorovic: Before I touch on the financials from the past quarter and provide an update on our 2024 guidance, I want to recap a few highlights.
Voin Todorovic: This was our best Halloween season and the best third quarter in the company's history as we recognize the growing popularity of Halloween, both in general and in our stores.
Voin Todorovic: We strategically broadened our seasonal consumer offerings, increased our Halloween inventory, launched the seasonal marketing campaign earlier in the quarter, and brought back key successful vault items to drive record sales.
Voin Todorovic: Also, as a result of consistent performance and strong cash flow generation, we continue to return capital to shareholders.
Voin Todorovic: We pay our third quarterly dividend, and during the quarter spent nearly $5 million to repurchase shares.
Voin Todorovic: On a year-to-date basis, we have repurchased over 5% of our outstanding share count.
Voin Todorovic: Now, moving to third quarter results. For the quarter, total revenues were $119.4 million, up 11% year over year.
Net retail sales increased 9.1% to $109.5 million.
Voin Todorovic: Our 9.1% sales growth was driven primarily by existing stores in both the US and the UK.
Our store traffic, again outpaced national traffic, increasing by 3%.
Voin Todorovic: most likely benefiting from our Halloween efforts and the earlier investments in our brand campaign, the Stuff You Love, while national traffic decreased by 3%.
Voin Todorovic: In fact, our stores saw increases across all four sales levels, traffic, conversion, average unit retail, and units per transaction.
Voin Todorovic: We mentioned on our previous call that third quarter e-commerce demand began with a double-digit percentage increase.
Voin Todorovic: However, our performance softened for the remainder of the quarter and into the fourth quarter today.
Voin Todorovic: Looking ahead, we expect web domain to remain down for the fourth quarter, impacted by a combination of challenging traffic performance in November and more difficult product launch comparisons.
Voin Todorovic: We continue to expect solid growth for the commercial segment on a full year basis.
Voin Todorovic: On a sequential basis, we currently expect fourth quarter commercial revenue to be below the third quarter. Recall that the commercial segment's quarterly revenue can fluctuate due to the timing of shipments for new and existing stores.
Voin Todorovic: Gross margin was 54.1%, an increase of 140 basis points compared to last year.
Voin Todorovic: from both Retail Gross Margin Expansion, driven mainly by growth in merchandise margin, and Commercial Margin Expansion.
SG&A expenses were $51.6 million for 43.2% of total revenues.
a 10 basis point improvement year-over-year.
Voin Todorovic: For the full year, largely as the result of increases in medical insurance costs and continued minimum wage escalation, we now expect SG&A as a percent of total revenue to be slightly above 2023's level.
Voin Todorovic: Free tax income grew 26.4% to $13.1 million, a third quarter record.
Voin Todorovic: Looted earnings per share was $0.73, an increase of 37.7%. This reflects our growth in pre-tax income, a lower tax rate, and a reduction in share count compared to the prior year.
Voin Todorovic: With respect to the balance sheet, at third quarter's end, our cash balance was $29 million, representing a $4.2 million increase year-over-year.
Voin Todorovic: This was after returning $37 million to shareholders over the past year.
Voin Todorovic: Inventory at the quarter end was $70.8 million, an increase of $6.4 million compared to the same period last year.
Voin Todorovic: We accelerated the flow of our 2025 core product in anticipation of the uncertainty in cost due to potential tariffs.
Voin Todorovic: We continue to manage our inventory flow and continue to diversify our supply chain geographically.
So, we'll link to the output.
Voin Todorovic: Given our solid year-to-date results, particularly for our stores and commercial revenue, offset by lower than expected web demand performance, we are updating our annual guidance.
Voin Todorovic: While the 20-24 gap and non-gap guidance details are included in the press release, given 2023's additional week for modeling purposes, I would like to highlight some metrics on a comparable 52-week basis.
Voin Todorovic: For the year, we expect total revenues of $489 million to $495 million, representing low single-digit growth at midpoint, compared to last year on a non-GAAP 52-week basis.
Voin Todorovic: Free tax income of $65 million to $67 million, representing low single-digit growth at the midpoint, again, compared to last year on a non-GAAP 52-week basis.
Voin Todorovic: As noted, the output anticipates continued lower-than-expected web demand, plus ongoing wage and inflationary pressures, including higher medical insurance costs, as well as increased depreciation and freight expenses.
Voin Todorovic: I would also add that increasing our store guidance to at least 65 locations implies 25 new stores for the quarter.
Voin Todorovic: The majority of these are expected to be partner-operated stores, with many of those being significantly smaller footprints.
Voin Todorovic: In addition, after a decade here, I believe the Build-A-Bear brand is as strong as ever with untapped potential across a number of fronts. And I'm particularly excited about our successful global retail expansion this year into many new countries.
Voin Todorovic: Separately, I would like to welcome the new members of our leadership team who will be an important part of the execution of our strategy to evolve the company by leveraging the power of the Build-A-Bear brand.
Voin Todorovic: In closing, I would like to thank all of our store and warehouse associates, as well as our corporate team members and partners, and wish everybody a happy holiday season.
Speaker Change: This concludes our prepared remarks and we will now turn the call back over to the operator for questions. Operator?
Speaker Change: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star 1 to register a question at this time. Today's first question is coming from Eric Better of Small Cap Consumer Research. Please go ahead.
Good morning.
Good morning.
Great.
Speaker Change: Could you help us a few things here? Could you help us with the inventory number? If we take out ...
Speaker Change: the impact from the tariffs, and I fully understand why you did this. It makes a lot of sense. What would have been the inventory increase or decrease? And you know, going forward, how...
Speaker Change: How much is China in terms of your value add here and how much is the ability to shift that?
Speaker Change: So, great question Eric. You know, one of the things as we think about the supply chain and the sourcing organization, where our business is
Speaker Change: unique in the way that we have a lot of product that we are selling throughout the whole year so that gives us flexibility especially from our core perspective to bring in product earlier and so because it's the same product that we are going to be selling throughout next year.
Speaker Change: So our inventory levels will continue to change versus what we have seen in the past, as you know, it's twofold. We continue to grow our commercial segment.
Speaker Change: And, you know, so the flow of inventory receipts is going to be a little bit different up and down based on the seasonality of opening stores and the replenishment for our partners. In addition to that.
Speaker Change: We are going to have probably more elevated inventory levels for the end of the year as we have tried to pull as much inventory forward to avoid at least initial impact.
Speaker Change: Yeah, I would add to that, Eric. This is not new for us.
We have strategically been diversifying geographically.
for a number of years.
We have also...
Speaker Change: utilize this flexibility because of our cash disposition usually. It's usually very positive.
Speaker Change: to shift inventory flow and purchasing with our factories. We did that, as you might recall.
Speaker Change: When the freight costs were escalating significantly, that when we predict things like that, we take advantage of our cash situation and the fact that our inventory is often evergreen, like a standard bear, or a lot of the outfits, or some of these poor products that Voin referred to, because taking receipt of those has very little downside for us.
Okay, we'll unpack a little bit on the online
Speaker Change: I know that you have historically, excuse me, I know that the shift has been to move more. We've seen this kind of less of a lag between online exclusives to the stores. And part of that, I think, is because the stores do, I think, a great job of showing the whole product line. Is that part of this here? When you look at this,
And I'll leave it at that.
Speaker Change: I'll start with that and I'm sure Voin will add some more color.
Speaker Change: Yeah, well, as I mentioned in the remarks, Eric, this is a multi-year process, and you can kind of look at what happens out in the world with a lot of other omni-channel retailers.
Speaker Change: We're in a little bit of a different situation in that most of the Amichana retailers, the consumer that they're servicing in their stores and the consumer that they're servicing online are often the exact same consumer. If you think about it on a Venn diagram basis, you're going to have a really big overlap.
Speaker Change: We serve as a little bit of a different consumer in both of these channels.
Speaker Change: One is the traditional family, kid, end-user is the larger portion of our sales in our stores and it is an adult, often sometimes a teen, online, buying a collectible, a trend product, and often gifting.
Speaker Change: So there is going to be some bifurcation of the types of products that we offer, but it is also important that we are using that website
Speaker Change: because the other reason people come to that, when we talked about the 50 million people coming to our website, they're often checking to see what store is near them, planning a party. So there's still this fundamental integration.
Speaker Change: between the consumers, our stores, the products, and now that we have buy online, ship from store. We're, these are all very strategic steps.
Speaker Change: to become a much more integrated organization where we can have a golden record of the consumers, send out personalized email, send meaningful discounts.
Speaker Change: that are exclusive and specific to the shopping patterns of that individual that is a hallmark of best-in-class in this area. And that takes a lot of steps to do that as well as.
Speaker Change: highly skilled individuals, and the integration of all of these systems that we've been putting in. That's a long answer, but that's not half as long as it takes to make this happen. But you're right, you know, we are
Speaker Change: truncating some of those launches which is only marginally associated with this situation, that's really listening to our customer base.
Speaker Change: Some of these exclusives that we were offering online for our collectors, there was a push and a request from them that they wanted to make these in-store. We're also often shipping them to store because
Speaker Change: that's an efficient way for us to then service online. Again, it's a very integrated process and we've not mastered it yet but we're getting closer every day.
[inaudible]
Speaker Change: I think that answered really well, but like one additional piece just to add to that.
Speaker Change: You know, as we think about our business, and you know we are an omni-channel...
Speaker Change: who's shopping online, teens and adults versus who's in our stores, but at the end of the day, the product's working. We are very pleased with how stuff is working and performing in our store locations. And the website, as Sharon shared in her prepared remarks,
Speaker Change: drive significant amount of traffic and also that traffic funnels to our source. So it is a big piece of our ecosystem and you know where consumers that will choose to transact is less important to us, less important to us what again we are striving to drive.
Speaker Change: Total revenue for the company, and I think we have been doing that consistently over the last seven years.
Okay, sure. Let me make one quick one.
The Sanrio collaboration, it was impressive.
Speaker Change: How should we be thinking about that from a strategic sense? Is that something that makes sense to do?
Speaker Change: on a more permanent basis or in certain locations? Are there other collections like, I don't know, Pokemon that would make sense for that? How should we be thinking about that? And Mr. was really.
Thank you and good luck for the holidays.
Okay, thank you. Thank you for mentioning that.
Speaker Change: That's been an incredible experience for us. Look, we've been in business with Sanrio for a long, long time.
So this was a...
Speaker Change: an incredibly opportunistic moment for both brands, particularly to go into Westfield in L.A. And as we noted in the remarks, it's been very successful.
Speaker Change: Yes, by putting a successful fake in the ground like that.
Speaker Change: Certainly, it opens up conversations and opportunities. None of these decisions are unilateral, they're partnership-based, and that's how we build great relationships.
Speaker Change: So we will be working with Henry Yeo to determine if that does make sense to open another location. And that success also bodes well for potential other discussions, which of course we wouldn't be able to share, but it does open your mind to different types of possibilities.
Thank you.
Thanks, Eric.
Speaker Change: Thank you. The next question is coming from Greg Gibbous of Northland Securities. Please go ahead.
Greg Gibbous: Great, thanks for taking the questions. Sharon, Voin, congrats on the results.
Greg Gibbous: I guess I was going to ask about kind of the web challenges, but I think you provided color there. If we could dive a little bit deeper on those trends you're seeing with those four key metrics, I think traffic conversion, units for transaction and size, you wanted to get a little bit more color on the trends with those. You said all positive, but anything that kind of stood out more in terms of performance or were they all pretty roughly equal drivers of the strength?
Speaker Change: As I mentioned yes, all of our four levers have been up. We did call out that in total we were up like 9.1 percent. We shared the traffic was up three percent against the national traffic that was down three percent. The other three metrics we saw increases across all of them.
Speaker Change: So, again, healthy growth in all these aspects, so, and this is great, you know, when we are seeing, you know, higher average unit retail, when we are seeing higher conversion in our stores, and also when the guests come into our stores, they are buying more units per transaction, which talks about
Speaker Change: overall marketing that we are doing in our stores and the customer engagement that's that's happening. You know our customers are resonating with that really well and we are pleased how our Halloween collection really helped drive some of these numbers.
Speaker Change: in a quarter. As again, as I mentioned last year, you know, what we have done, we ran out of, you know,
Speaker Change: product basically before the end of the holiday season. So we made some strategic investments from the Halloween inventory buys and that really helped fuel the growth in Q3 this year.
Great, that's helpful, Voin.
Speaker Change: And I wanted to get just a little bit more color on the increased expectations for store count growth. You know, you talk about net new store count of 65 versus the 50-plus before.
Speaker Change: And I just wanted to get a sense of, you know, what's driving that, maybe where is that upside relative to your previous expectations or plans coming from? Is it simply, you know, you're finding more attractive locations? Is it a function of kind of accelerating the timeline or, you know, any color you can provide there? And just, I guess, regarding that mix, you know, how much is domestic versus international, roughly?
Speaker Change: We talk about the three different models of corporately operated, partner operated, and franchise.
And interestingly, as I highlighted in my comments,
as we started to open the international partner-operated locations.
Speaker Change: In many cases, like in Italy, where we specifically noted, they've been very successful. And so our partner in Italy, and it's more of, you know, it's a combination, but it's largely up to them.
on how fast they want to accelerate in open stores.
Speaker Change: are open shopping shops often, sometimes they're stand-alone, sometimes they're inside other locations.
Speaker Change: They've been incredibly bullish on Build-A-Bear, so they're opening at a faster rate. And we're also now, I noted a number of countries where we have created partners, new partnerships. So a lot of those are international, and a lot of those are partner-operated, driven by the partner themselves.
Speaker Change: And just to add a little bit more color, because as we think about all these locations, they are not all the same. We do have a wide spectrum of the revenue projections for these locations. Some of them are larger in size, you know, more like a traditional,
stores.
Speaker Change: Some of them are going to be shop and shop, so clearly there are different economics for those.
Speaker Change: For example, we have some of the Girl Scouts locations that are generally the smallest footprint that we have. So as you add a lot of those stores...
Speaker Change: We derive a lot of volume, and I know it is at times a little bit challenging to...
Speaker Change: to model, but again, our goal is really to be in more locations. We still believe there is a lot more runway for us.
Speaker Change: especially, as Sharon talked about, a lot of different countries that we are in. And again, we are in over 20 countries now, but there is plenty more opportunities around the globe.
Speaker Change: And this is one of those things that we are excited that our brands are resonating across the world in these locations and that our partners are very excited about the results and performance that they are seeing and you know that they are continuing on this journey with us.
Speaker Change: Yep, good to hear and thanks for the color there. I guess lastly just a quick clarification.
Speaker Change: clarification question. Voin, I think you were speaking to some type of guidance on GNA in terms of a percentage of sales in relation to 2023. I wonder if you could just maybe repeat or clarify that. I think I missed a portion of it.
Voin Todorovic: Yeah, so what we have said that our total on a full year basis, our SG&A as a percent of total revenue will be slightly up versus last year. What we shared previously, we expect it to be
Voin Todorovic: or slightly down. So just as we have seen some additional cost increases, especially from the medical insurance perspective. And we continue to see continued minimum wage pressures and compression challenges, as you know, like the...
Understood, thank you and good luck.
Thank you.
Speaker Change: Thank you. The next question is coming from Keegan Cox of D.A. Davidson. Please go ahead.
Good morning.
Good morning.
Speaker Change: So I was just wondering, you guys beat pretty nice this quarter and then the guidance is a little narrowed versus what we kind of expected. Is there anything you can give us more detail on like holiday trends, Black Friday and what you're seeing from the consumer right now in the fourth quarter?
Speaker Change: Sure. Black Friday is an important part for us. It's not actually as important as it is for a lot of retailers because we're not a big discount.
Speaker Change: destination but given we have a significant portion of our store still in malls which
Speaker Change: By the way, the traffic reports were pretty positive this year and positive for us as well. You know, we do participate in it. It's important for us but not as big a predictor of our future as it is, you know, for the quarter or the holiday season as it is for a lot of companies. We tend to see a much steeper, pretty steep curve, particularly in a year like this.
Speaker Change: And what I mean by that is a year when Thanksgiving falls almost as late, if not as late as it possibly can. So that first week of December, which is usually the last week of November,
Speaker Change: falls in the previous quarter, and so it's a harder, more contracted time period for us to make predictions. So, just a little color on that, net-net, we were...
Speaker Change: We were pleased with it, and we offered a number of online and in-store specials, and we felt like it was good for us. I can't say it was gangbusters, but it was strong.
Speaker Change: Yes, and you know, to just tie it back to the guidance, definitely Q3, you know, was very strong. You know, we said, as we guided previously, we expect the back half of the year to be very strong. We started Q3.
Speaker Change: And that trend continues in stores with a strong Halloween performance.
Speaker Change: things have softened on our web and some of that stuff has continued so as we think even about Q4 we are still seeing
Speaker Change: solid results. Again, we saw a little bit more of a lift in Q3 because of the Halloween things and some of the things that I just talked about, comparison versus last year.
Speaker Change: And we feel pretty good about where our stores are, but, you know, as you think about some of the shipping times and, like, when the customers can order and get things...
Speaker Change: You know, some of these weeks in November and first week in December is where you have like a big portion of your web business completed for a quarter, so as we were, you know, below our expectations, that dropped some of that.
for tweaking of the guidance. Yes.
Speaker Change: I guess that stores, I'm not mad on that, but you know, a good store, continued good store performance, softness in the web.
Speaker Change: Again, you know, leading us to that guidance, a little bit of a guidance narrowing on the revenue but still beating prior year.
Speaker Change: Awesome, thank you. And then just a follow-up on the wholesale timing shift. You mentioned that it's going to be down sequentially in the, I think, in the commercial business, right? And so I was just wondering if this was more of a pull forward into the third quarter or is a delay out into the first quarter of next year?
Speaker Change: Well, when you think about, you know, a lot of these...
Speaker Change: We recognize our revenue at the time of shipments to our partners, so depending on the timing of openings of these locations
Speaker Change: And when they are replenishing for the holiday season, just for the calendar, some of those
Speaker Change: may fluctuate a little bit, especially now that we have some more international business.
Speaker Change: So we still feel good about that business, about the growth, about the excitement, but there is going to be a little bit of choppiness as we start anniversary some of those initial shipments and timing of replenishment orders.
Awesome, thank you.
Thank you.
Speaker Change: Once again, that's Star 1 to register a question at this time.
Speaker Change: The next question is coming from Steve Silver of Argus Research. Please go ahead.
Steve Silver: Thanks operator and thanks for taking my questions and congratulations on the strong quarter.
Steve Silver: My question first is around the continued strength in traffic. I think it's very impressive how Build-A-Bear continues to outpace the national retail traffic trends out there. And I think on past calls you've mentioned the leverage that the company could have when it comes time for lease renegotiations given that strength. I'm curious as to whether over the next couple of years whether there's a certain number of stores that might become eligible for lease renewals and if this continued outperformance does provide the company any leverage in those regards.
Speaker Change: Yeah, that's a great question and I appreciate the comment and I might go as far as compliment on traffic. You know, we think that one, you know, Build-A-Bear is an experience.
Speaker Change: So, and that's been a very strong point of difference for us through some of the shifting consumer buying and shopping habits.
Speaker Change: We do see, we believe, a return to wanting to have moments and memories together, and that usually is a very positive thing for us during the holidays, and, you know, we use that as a strong marketing tool.
Speaker Change: But yes, we did see plus three on our traffic where the national retail traffic reported was at a negative three, so that's a strong delta. And indeed, when we're negotiating with our landlords and our retail partners,
We do notes that we're
Speaker Change: Often, you know, driving in our own traffic. If we're outpacing the mall traffic, you know, that's...
Speaker Change: certain shorter-term leases as the market has been volatile? So yes.
Speaker Change: We have different lease optionality and natural lease rates coming up, and we have constant communication, constant communication, constant updates on those, but I will note
as we also do well.
Speaker Change: that pressure on healthcare because they know that we're doing well. So it is a back-and-forth.
Speaker Change: Just because we are a strong brand and a noted brand, and that we're driving our own traffic, that's not a court-launched by any means. These are still tough negotiations, and we always try to land in the right place with our partners.
Speaker Change: and have enough lease latitude and negotiation latitude. I'm really proud of the team on what we've been able to do over the years, particularly in the post-COVID environment, where we've renegotiated practically
Speaker Change: every single week. And I think that utilizing the power of the brand as leverage and I believe we've done a very good job at that and when you look at our metrics it would support that position.
Speaker Change: And just to add, we are in the upper echelon of the malls that we are operating in the U.S.
Speaker Change: But also, Steve, as you think about our business model, we have been able to operate in a variety of different formats. So we have formats that we can operate from 200 square feet to 10,000 square feet.
book locations profitably. And so that gives us also...
Speaker Change: significant amount of leverage because we are not forced to be in specific locations and pay the premium rent. So that's what our teams are working on. We are always looking at these opportunities.
Speaker Change: But, you know, as Sharon mentioned, it continues to be more and more challenging as our company, you know, it's performing at these levels. And in some cases, some of these rent deals, you know, what we like is our percentage of revenue deals. And, you know, those type of deals is what we really like because it also helps landlord as we do well, they do better, but also at a time like if things slow down, we do have some natural leverage and hedging in there.
Speaker Change: Great, I appreciate the color. And one last one if I may, on the international expansion, it's very impressive as well with the increasing the expected store count for the year, now in 20 markets. I'm curious as to whether there's
Speaker Change: whether your partners have communicated their intentions as to whether the international landscape will eventually be in a lot of markets and operating more like flagship locations or around tourist locations, basically just trying to balance.
More markets entered versus saturating those markets.
Speaker Change: So, I'll stop. We are definitely pleased with the markets, you know, that we are opening and some of the successes that we are initially seeing.
Speaker Change: As you think about this process, it does take a long time to really go through the contract negotiation.
Speaker Change: find the right locations, find the right partners. We are protective of our brand. And really, in a lot of different markets, our partners may be managing multiple.
Speaker Change: businesses tie back to toys or similar categories. And so we believe finding the right partners in these countries, you know, it will create a lot more opportunities.
Speaker Change: And, absolutely, over time, you know, some of those things and some of these key markets you want to be in the best real estate, you know, some of our early stores in Milan, Italy, where we have families and, you know, in some of the best malls. So we are seeing some...
Speaker Change: best places in those respective markets. But again, this is the other side of the equation being partner-operated. They are making those choices. They are negotiating these leases with the respective counterparts in those countries. So it's more give-and-take on those and, you know, we have a little bit less control where they can be opening locations.
quite far from saturating any European market or global market.
Speaker Change: And so when I noticed, you know, ten stores in Italy, they're not all in one city.
Speaker Change: There's a scatter across the cut from Rome to Milan, so, you know, ten stores is nowhere near a saturation, particularly when they're, as Voin noted.
Speaker Change: They're different sizes. Some of them are shop-in-shops inside of SAO. Some of them are stand-alone. It depends on...
Speaker Change: And then you also asked about tourist locations, and yes, in fact, they are cognizant of our over-index of the sales and tourist locations, and these locations in Rome, Amelon, and some of these others, they do base them on tourism.
Speaker Change: Great, I appreciate the color and congratulations again and best of luck through the rest of the holiday season.
Thank you.
Speaker Change: Thank you. At this time, I would like to turn the floor back over to Ms. John for closing comments. So thank you so much, and we appreciate everybody joining us today to hear the results of our record-breaking third quarter. We also look forward to sharing our fourth quarter results with you. And in closing, we would like to wish you and your families a very happy holiday.
Speaker Change: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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