Build-A-Bear Workshop, Inc. (NYSE:BBW) Q3 2023 Earnings Call Transcript

Build-A-Bear Workshop, Inc. (NYSE:BBW) Q3 2023 Earnings Call Transcript November 30, 2023

Build-A-Bear Workshop, Inc. beats earnings expectations. Reported EPS is $0.53, expectations were $0.51.

Operator: Greetings, and welcome to the Build-A-Bear Workshop Third Quarter 2023 Earnings Call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Investor Relations. Thank you. Please go ahead.

Gary Schnierow: Good morning. Thank you for joining us. With me today are Sharon Price John, CEO; and Voin Todorovic, CFO. For today’s call, Sharon will begin with a discussion of our third quarter performance and update the progress we’ve made on our key priorities. After, Voin will review the financials in more detail and provide our guidance. We will then open the call to take your questions. Members of the media who may be on our call today should contact us after this conference call with your questions. 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 Web site. A replay of both our call and webcast will be available later today on the IR site.

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 of the company’s annual report on Form 10-K. We undertake no obligation to revise any forward-looking statements unless required by law. Also during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items, which management believes can be useful in evaluating the company’s performance. The presentation of non-GAAP financial measures should not be considered in isolation or a substitute for results prepared in accordance with GAAP.

If non-GAAP measures are presented, you will find information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the company’s earnings release. And now I would like to turn the call over to Sharon.

Sharon Price John: Thank you, Gary. Good morning. And thank you for joining us for Build-A-Bear’s third quarter 2023 earnings call. We are pleased to again report strong results as we continue to execute against our strategic initiatives to evolve our business model by leveraging the power of the Build-A-Bear brand. As noted in this morning’s press release, while we have revised our guidance to reflect some unexpected softness in the business starting in the latter part of October and continuing into November, we intend to stay focused on delivering our fourth quarter plans during the remainder of the most critical holiday shopping period as we continue to expect to deliver our third consecutive record breaking year. Our results represent the best ever third quarter and first nine months revenue and pretax income in Build-A-Bear’s history.

Specifically, for the third quarter, revenues increased nearly 3% to over $107 million and pretax income increased almost 5% to $10 million. For the first fiscal nine months of 2023, revenues increased 4% to almost $337 million and pretax income increased 12% to $40 million. We attribute our meaningful expansion and profitable growth over the past few years to the successful execution of our strategy and business model evolution. Note that the $337 million in revenue we generated over the first nine months of fiscal 2023 approximate the $339 million in revenue recorded for the entire fiscal 2019, the last pre-pandemic year. Additionally, this revenue is at a significantly improved level of profitability, generating $40 million in pretax income over the 2023 fiscal nine month period as compared to less than $2 million in the 2019 fiscal year.

As a reminder, the three key strategic initiatives we have focused on that have contributed to our results, such as those noted above are; one, the evolution and expansion of our experienced location footprint; two, the acceleration of our comprehensive digital transformation; and three, the investment to support initiatives that leverage our significant brand equity to drive incremental growth. Some of the recent progress we’ve made across each of these initiatives include, first, Build-A-Bear experience locations are a critical part of what makes our valuable point of difference in the marketplace. We cultivate memorable and shareable one-to-one experiences with guests through our exclusive bear building process. We do this while capturing first party and loyalty club data, enabling us to directly communicate to guests to drive further engagement and repeat purchases.

Substantially, all of our stores are profitable and deliver on average greater than 25% annual store level contribution margins. These top-tier unit economics, along with independent research showing an opportunity for additional Build-A-Bear Workshop has led us to our recent domestic and international strategic market expansion. This store expansion utilizes a variety of business models, including corporately operated, partner operated and franchised stores. Last year, we saw net new unit growth of 13 corporate and partner operated stores. Through the first nine months of fiscal 2023, we opened 21 new stores and expect to end the year with 30 new corporate and partner operated locations. Additionally, our existing international franchise partners have also started reinvesting in the brand’s location expansion with the expectation of seven new franchise operated locations by the end of this fiscal year on top of the 63 that were opened at the end of our first quarter.

Demonstrating both the business model evolution and global opportunity in the third quarter, we opened our first location in Italy. It is a store in a store utilizing our partner operated model. Recall, our partner operated stores require little to no direct investment, producing high returns on capital. The new location is in conjunction with the Milan opening of the famed toy store chain, Hamley, a longtime successful partnership for Build-A-Bear in their London location. We believe the strong initial success of this store further supports the potential broad geographic appeal of the brand, while expecting more stores in Italy even as we are in discussions for additional Continental European expansion. Our second strategic initiative is a comprehensive digital transformation that touches nearly every aspect of our company and is designed to elevate our business efficiency, increase consumer engagement and build incremental opportunities like gifting and personalization programs while extending the lifetime value of guests, both in stores and online to ultimately increase overall sales and profitability.

More recent examples include upgrades in our corporate wide business system, further integration of our Web site, CRM and loyalty program, as well as the current rollout of our new [POS] system and other integrated in-store technology. Our third key strategic initiative is our increased investment to support growth. As we continue to generate favorable returns on capital, we are focused on driving our growth by leveraging the power of the Build-A-Bear brand. In addition to the capital associated with our footprint expansion and digital evolution, we have also been investing in content, product and concept innovation. Given our broad multigenerational audience, some of these initiatives take advantage of the increasingly publicized kidulting trends.

Examples in the third quarter include launching a productive and creative Halloween collection appealing to kids and adults who often look for unique items in our age gated Bear Cave e-commerce site. Additionally, at the New York Toy Fair, we celebrated Build-A-Bear’s first time nomination for a plush Toy of the Year with one of our series of popular team centric TikTok trend animal, the Axolotl. Also as a part of our ongoing entertainment and content strategy, at the New York Toy Fair, we premiered our new documentary, Unstuffed, a Build-A-Bear story. This star studied film is available on demand through major digital platforms and chronicles the amazing 25-plus year journey of the company’s evolution from a mall based retailer for kids to a global iconic brand.

During the quarter, we also pre-marketed the early November release of our first ever animated theatrical film, Glisten and the Merry Mission. The movie based on the characters and storyline of our multiyear top selling holiday plush collection that has generated over $150 million in revenue since its launch, features Glisten the Magical Snow Deer that face Christmas, voiced by multi-Grammy nominated Leona Lewis and other top talent like Teddy Chase as Santa. While the film was originally expected to be distributed directly to streaming platforms as a holiday marketing catalyst, we were delighted to strike a partnership with Cinemark for a limited theatrical release and overlapping geography, featuring a unique multifaceted consumer engagement program, including in-theater stuffing events and co-marketing with a free children’s movie ticket with the purchase of a furry friend at select Build-A-Bear Workshop.

The movie launched in approximately 250 theaters. And while we strategically scaled down screens through Thanksgiving due to the competitive film landscape, we are returning to distribution across the country for this weekend just as we kick off our core December Christmas marketing efforts. This film is also scheduled to be rolling out across a number of digital platforms in the US, Canada, the UK and Australia starting tomorrow. Of note, the collective marketing and PR initiatives associated with this effort have already generated over 4 billion media impressions, likely increasing our top of mind awareness as we move into the critical holiday season. So while we are excited about our content as pure entertainment vehicle, much of the strategic value is as a marketing tool designed to bring our entire consumer facing communications to life.

We believe our content will enhance and expand consumer engagement while supporting and even inspiring our product offering ultimately driving sales. In the case of Merry Mission, assets ranging from the art style to the tagline of the film, it’s about believing, are optimized across multiple consumer touch points ranging from our Merry Mission music video and app to a holiday activation in our Roadblock Build-A-Bear Typhoon game with over 12.5 million players, to transforming of our Build-A-Bear workshops into temporary Santa’s workshop inclusive of our beloved Bear Builders donning elf costume. In fact, as a final example of our ongoing investment in new and innovative concepts we launched, supported by a dedicated commercial, our first animatronic interactive Make-Your-Own Build-A-Bear called the Bear Lead Bear, inspired by the featured teddy bear in the Glisten and the Merry Mission movie.

This unique bear lead bear comes to life with blinking eyes, wiggling hairs and sounds during the stuffing process, responding to the child’s voice and touch as they explain I Bearlieve. Over the next two months, which typically represents the vast majority of our fourth quarter, we are intensely focused on delivering yet another record breaking year for the company. We believe the combination of our integrated holiday marketing program informed by Glisten and the Merry Mission combined with a broad gifting message and a cadre of proven licenses from San Rio to Stitch provides meaningful tools to drive sales throughout December. Separately, as a reminder, unlike many traditional retailers, redemptions of gift cards, given its stocking stuffers drives ongoing traffic even the week after Christmas.

In closing, while our sales were negatively impacted simultaneously with the widely reported consumer spending softness during the last two weeks of our fiscal third quarter, which continued into early November, our web business was further challenged due to a disruption caused by a new platform implementation during the period. However, we are encouraged to see that our overall trend has started to show some improvement as we head into December. And as we look beyond the current macroeconomic situation, we continue to expect to execute against our top priority into the future, including the evolution of our experienced location footprint, the acceleration of our digital transformation and while still returning cash to shareholders, continued investment in our strategic growth initiatives to leverage the power of the Build-A-Bear brand.

Our mission to add a little more heart to life is never more evident than during the holidays. And I would like to take this moment to thank our associates, partners and guests as we enter this magical season. Now I would 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 and share our results for fiscal third quarter and nine months of 2023. Our performance was highlighted by growth across all segments, expansion in gross profit margin and an increase in pretax income versus last year. We attribute our ability to report ongoing positive results in a challenging retail environment to the increasing resonance and strength of the Build-A-Bear brand and the successful execution of our strategic initiatives as Sharon previously mentioned. Even with an increase in SG&A from higher wages due to inflation plus investments in marketing and talent for growth, we have continued to expand our margins, deliver a record profit and return capital to shareholders.

Specifically, over the past eight quarters, we have paid two special dividends and repurchased more than 1 million shares returning $86 million to shareholders. To put this in perspective, this return of capital to shareholders represents more than 20% of our current market capitalization. Turning to a more detailed review of third quarter. Total revenues were $107.6 million, up 2.9% year-over-year. Net retail sales increased 1.2% year-over-year with positive contributions from both stores and e-commerce. Store sales benefited from transaction growth, offset by a decline in dollars per transaction. E-commerce demand increased 7.1% for the period. Total North American sales increased while UK sales decreased. We opened a net nine corporate stores year-over-year, including five stores in the quarter.

Commercial revenue, which primarily represents wholesale sales to our partner operators and international franchise revenue rose a combined 36.2% versus the prior year. Our partners opened 20 stores over the trailing 12 months ending with 85 locations and our franchisees opened a net four locations over the past 12 months ending with seven. Gross profit margin was 52.7%, an improvement of 70 basis points compared to last year. Benefiting from merchandise margin expansion reflective of expected lower freight costs and leverage of distribution costs. Gross profit also benefited from growth in margin expansion in our commercial and franchise segment. SG&A expenses were $46.6 million or 43.3% of total revenues compared to $44.4 million or 42.5% of total revenue in the 2022 third quarter.

The 80 basis point increase in SG&A was driven by higher wages at the store level from inflationary pressures, as well as the addition of talent plus investments in marketing to support future growth. As a reference, our SG&A rate is 700 basis points lower than in third quarter of 2019. Higher gross profit dollars plus interest income more than offset the increase in SG&A and led to pretax income growth of 4.7%. EPS aided by a lower share count and offset by an increase in tax rate was $0.53 per diluted share, a 3.9% increase. Turning to our results for the first nine months of our fiscal 2023. Total revenues were $336.9 million, up 4.3% year-over-year. As Sharon noted, our first nine months revenue was just shy of our entire fiscal 2019 revenue.

Our store traffic also outpaced reported national traffic for the first nine months of the year. Our store traffic growth, while it has recently moderated, remains positive and continues to outpace reported national traffic for November. E-commerce demand is down approximately 2% for the first nine months. Although the third quarter was positive, this was below our expectations. Over the last nine months, we have seen volatility in that demand largely due to new platform implementation as we remain focused on the evolution of our digital business. Additionally, the timing of new product launches as compared to last year contributed to the e-commerce demand fluctuations for the first nine months. Commercial and international franchise revenue rose a combined 40.7% versus the prior year.

Gross profit margin was 53.5%, a 210 basis point improvement compared to last year, driven by merchandise margin expansion, reflective of expected lower freight expense and leverage of distribution costs, as well as from growth and margin expansion in our commercial and franchise segment. SG&A expenses were $140.5 million or 41.7% of total revenues compared to $130.3 million or 40.4% of total revenues in the 2022 third quarter. The 130 basis point increase in SG&A was driven by higher wages at the store level from inflationary pressures as well as the addition of talent plus investments in marketing to support future growth. Pretax income grew 12.5% to $40.2 million for the nine months. Higher gross profit dollars plus interest income more than offset the increase in SG&A and led to pretax margin expanding 80 basis points to 11.9% of total revenue.

EPS was $2.10 per diluted share, an 18% increase reflecting a lower share count offset by an increase in the tax rate. With respect to the balance sheet, at the quarter end, we had cash and cash equivalents of $24.8 million, an increase of $12.8 million compared to the same period last year. This was after returning $37 million to shareholders through dividend payments and share repurchases over the last 12 months. Inventory at quarter end was $64.5 million, declining $23.9 million or 27% from the end of the third quarter last year and in line with our expectations. Keep in mind, last year’s third quarter and inventory was intentionally elevated to avoid potential supply chain disruption. We remain comfortable with our inventory level and composition as we begin the fourth quarter and continue to expect to finish the year below last year’s $70.5 million [level].

Turning to the outlook. Given the most recent challenges in the retail environment, we are revising our fiscal 2023 guidance. The full details of our guidance are included in the press release, but I will highlight two key metrics. Total revenues to now increase in the range of 3% to 5% growth compared to the previous guidance of 5% to 7% and pretax income to now grow 5% to 10% as compared to the previous guidance of 10% to 15%. Please keep in mind that December and January have historically accounted for a significant portion of our fourth quarter revenue and our outlook assumes no further material changes in the macroeconomic and geopolitical environment, or relevant foreign currency exchange rates. In closing, I would like to thank all our store and warehouse associates as well as corporate teams for contributing to a record result, which even with the revised guidance, has positioned us for our third consecutive record breaking year in 2023.

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

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Q&A Session

Operator: [Operator Instructions] Today’s first question is coming from Michael Baker of D.A. Davidson.

Michael Baker: So I just want to clarify the fourth quarter outlook. So you said that December and January assumes no change in the macro environment, and understanding those are big months. I guess, what I’m trying to understand is, does the implied fourth quarter guidance assume any pickup from the weakness you saw in October and November? I think, you had said that you’re already starting to see it come back a little bit as we head into December. So does that full fourth quarter need any kind of pickup over the next couple of months relative to what you saw in October and November?

Voin Todorovic: So thanks, Mike, for the question. Definitely, as we talked about our results — and our finish to Q3 was softer than what we expected. And as we mentioned in our November results are only in the month have continued at that pace. But like later in November and as we said right now as we are entering into December, our trends have reversed. So like we are contemplating that as we are projecting for our Q4 and fiscal year results EBIT in our guidance. When we think about some of those and clearly there are multiple things to consider. Definitely, there are some challenges that we called out from our web perspective that’s not performing in line with our expectations. We also talked about our US business has been stronger than our UK business.

So there is a little bit more to that guidance than just necessarily extrapolating the current trends. But we believe based on what we are seeing in recent days and last couple of weeks, that we are properly accounting for that stuff in our projection for the rest of the year.

Michael Baker: Two follow-ups on that combined, I guess, because we’re only supposed to ask one follow-up. But when you say the last few weeks have gotten better, I presume that means that the Black Friday weekend was okay for you guys. And then related — the other thing you talked about is the web issue. Can you talk a little bit more about that? What happened, how much did that impact you? How should we think about that going forward, do you have your arms around whatever the issue was?

Voin Todorovic: So Black Friday for us was good, not great. Definitely, we have seen sequential improvement when you are comparing our business versus prior year versus earlier in November. So there were some positive things. And again, some differences between different geographies. Definitely, our US business was better than other geographies and we are seeing more of a positive improvement in that business compared to some of the other regions. When we think about the web business, we have been working on our digital evolution and digital transformation, and that’s the ongoing process. And with some of the implementations, we had some challenges that impacted our business. We believe like that we are working on some of those initiatives to fix some of those things in place then that’s going to be over time resolved.

But we also talked about some of the product launches and timing. And so definitely, some of those things and how people are shopping we are still seeing more traffic that’s coming to our stores, even though our web traffic is down, but like we are one of those retailers that like people are coming and we are driving more visits in our stores and that’s definitely reflected in our year-to-date results. But definitely, there is some room for improvement on the web because being down 2% on a year-to-date basis is definitely behind our expectations.

Sharon Price John: And Mike, I’ll just give you a little more color. In that when you — obviously, when you’re implementing upgrades to technology, some of it is not always associated with, what you’re doing wrong or what you need to fix. There’s just a moment where when you’re setting up a new platform or changing some third process that there’s going to be some volatility in the results as you’re kind of mastering the new technology, that also goes for the rollout of a new POS system. There’s going to be times when you’re down so you can put the new POS system as you’re rolling across the entire enterprise. So that’s why when we look at things like this, if you’re tracking the business that sometimes we’ll talk about that kind of disruption.

And it usually is around that September, October time period because that’s a low portion of our seasonality and we’re trying to cause the least demand disruption. And we have to stay focused on the continuous upgrade from a digital transformation perspective. There’s so many new opportunities that are coming out for us to continue to optimize that business. And I would expect that there will be continued evolution for us to master and optimize that part of our business. Voin did mention that we did see some of that, too. Our web business tends to overindex on some of these core licensed products and things that are focused more on adult. And we saw some volatility in that, some of it was timing, some of it was performance on some of these key licenses that have delivered for us pretty consistently.

But on the flip side, we’re seeing strong results in our core holiday product and that has been the big contributor to a little bit of that turnaround in the last couple of weeks here. So there’s a lot of puts and takes and we’re trying to balance that as best as we can, and we’re looking out on the guidance.

Operator: The next question is coming from Greg Gibas of Northland Securities.

Greg Gibas: Wondering if you could comment on any operating metric trends that you’re seeing, specifically average revenue per customer versus maybe overall traffic customer count trends?

Sharon Price John: Generally, as Voin noted, our traffic continues to outpace national traffic. We had people plan their visits to Build-A-Bear, upwards of 80% of those visits are planned in advance, that speaks to the loyalty of the brand. And it also speaks to the wide variety of locations that we can have, whether we’re taking advantage of tourist locations where there’s a natural traffic in tendency, but even in some of the malls, which, by the way, there have been some positive reports on mall traffic recently. But in some of the malls, we’re still a planned visit. So that’s what drives that consistency with traffic. But as you’re implying and we mentioned kind of the flip side of that was we did see a little bit of a downturn in our dollars per transaction.

That is possibly somewhat related to some of the softness in consumer spending, I would suppose, but it’s also related to continued increases in — which is a part of our strategy, our Birthday Treat bear, which is the offer for consumers to purchase a birthday treat bear in the month of their birthday for the age they are turning. And the reason that’s a really good — we don’t mind that metric is that it’s our number one acquisition tool. So when we talk about the integration of our POS system with our loyalty program, with our CRM program, if the capture data of that, that allows us to pull that lifetime value through over the course of time. So those are a couple of the things that are impacting that. But yes, we’ve seen a little bit of softness in the dollars per transaction and that is the offset of our strong traffic.