Greetings, and welcome to the Build-A-Bear Workshop Third Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you. You may begin.

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 results and the performance against the key priorities we identified at the start of the year. Voin will review the financials and then we will take your questions. We ask that you limit your questions to one question and one follow-up. This way, we can get to everyone's questions during this one-hour call. Feel free to re-queue if you have further questions. Members of the media who maybe 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 website and a replay of both our call and webcast will be available later today on the IR site. Before I turn the call over to management, I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties. Our 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 Annual Report on Form 10-K, and we undertake no obligation to revise any forward-looking statements. And now, I would like to turn the call over to Sharon Price John.

Thanks, Allison. Good morning, everyone. Thanks for joining us today. Results for the third quarter of fiscal 2015 include our fifth consecutive quarter of consolidated comparable store sales growth with an increase of 2.1% and 160 basis point expansion in retail gross margin, pretax income of $1.4 million, a decrease of $690,000 compared to last year, net income of $0.06 per diluted share compared to last year's net income $0.10 per diluted share. Importantly, for the first three quarters we've achieved pretax income of $8 million and 134% increase compared to the prior year. This represents the highest level of pretax profit for the first nine months since 2007 but was typically our largest and most profitable quarter still ahead of us. The consolidated comparable store sales growth in the third quarter was achieved with increases in both North America and the United Kingdom. Contributing factors included an increase in units per transaction and traffic, buoyed by a rise in dollar per transaction nearing our all time high. Our year-to-date positive profit position and multiple quarter comp store sales momentum enable us to make a number of investments designed to accelerate our ability to successfully transition the company from our goal of sustained profitability to sustained profitable growth in line with our stated multiyear strategy. Although many of these initiatives are associated with longer-term capital investment, some also require expense investment which is accounted for in the quarter. Key investment included the multimedia marketing launch of our new intellectual property, Honey Girls, the roll out of new stores and remodel plus the temporary opening of pop-up location to preserve a portion of top line sales during the remodel and closure period. The opportunistic expansion of our international footprint, the continuation of necessary upgrades to our IT system and the investment…

Thanks, Sharon. And good morning to everyone. In the third quarter, our consolidated comparable store sales rose 2.1% driven by a 7.3% increase in dollars per transaction partially offset by a decrease in the number of transactions. By geography, comparable store sales rose 0.2% in North America and 8.9% in Europe. Net retail sales were $84.3 million compared to $85.6 million in the prior year. Our increase in comparable store sales and sales from the addition of new stores were more than offset by the negative impact of currency, Q1 week calendar shift related to the 53rd week last year. The strategic closure of our multimillion dollar store on Fifth Avenue, New York City and low sales from temporary store closure due to remodel activities. Excluding currency, net retail sales increase 0.8% for the quarter. Consolidated e-commerce sales rose 4.1% excluding the impact of foreign exchange. Retail gross margin increased by 160 basis points to 45.3%. 100 basis points of which were due to merchandise margin expansion with the remainder attributed to lower distribution and occupancy expenses. SG&A was $37.6 million or 44% of total revenues compared to $36.2 million or 41.8% of total revenues last year. SG&A in the third quarter this year included $1 million in management transition cost and currency loss compared to $1.6 million last year. Adjusting for these items in both period, SG&A as a percent of total revenues was 42.9% compared to 39.9% last year. The majority of the $1.4 million increase in SG&A reflects investment in support of our long-term strategy that positions our company to accelerate sales and earnings growth. As Sharon noted we invested in key areas to support our long-term strategic growth plans specifically in the quarter we invested in incremental marketing to launch our new intellectual property the Honey…

[Operator Instructions] Our first question is from Stephanie Wissink from Piper Jaffray. Please proceed with your question.

Thank you. Good morning, everyone. Two questions if we can. Sharon if you could just help us appreciate a bit more of the timing and sequencing of some of the products flow releases in this year's fourth quarter into first quarter versus last year, just with respect to some of those I think property tie-ins or media-related tie-ins? And then Voin, if you could also just give us a bit more color on the SG&A run-rate in the quarter and how we should think about that progressing over the course of the next few quarters and where your opportunities are to drive incremental leverage? Thank you.

Okay. Last year Frozen was a big launch for us as you might recall. That launched late in October and earlier in the UK and little bit later in the United States. It hit with immediate traction. A loss was juggernaut for us. The difference this year as I noted was when you have like sort of a four quadrant hit like we did first with Honey Girls again -excuse me with Frozen against that younger girl then we also had the continuation Teenage Mutant Ninja Turtle which was doing quite well for us, at that time we launched Merry Mission into first week of November which will be the same timing that we are doing at this year. And then we also had Toothless which was against universal consumer. So we were hitting on all four cylinders against all our four consumer groups. We have created a cadence this year to hit on all four those cylinders again. You might recall we had a 9.8% almost 10% in the fourth quarter of last year so we knew that we needed to build a very robust plan versus this year to combat the 2014 comp. So the cadence of this year as we launched Honey Girls actually in the third quarter because we wanted to make sure that it had some time to build. And the media and marketing against that was the dynamics sure that we will be going into the fourth quarter with a lot of visibility, a lot of awareness and a lot of opportunity. The next launch for us against that girl consumer which is little bit of younger girl consumer was the Frozen launch which we just recently launched; it had already some traction and moved to the number one position for the younger girl…

Absolutely. Thank you.

All right, thanks.

Okay, Stephanie, and regarding the SG&A question, Q3 was an investment quarter for us as we talked about in the past. Like we are really focused on the value creation, and a lot of our SG&A activity is really focused on driving the value to the organization in the upcoming quarters and years. So really you know when we talk about some of these investments that I mentioned in our prepared remarks and we talk about investment in marketing, when we talked about the store remodel activity, some of these things are going to depend -- there is going to be some timing in future quarters. We are going to be providing little bit more color to you guys at the beginning of the year when we discuss our real estate strategy. There are going to be some additional cost as we talk about stores pre opening and closing expenses due to downtime then we remodel the stores into the new Discovery format. At the same time, we have the continuous effort to leverage our SG&A, and as we have been discussing in the past, our goal is still to continue to drive operating margin expansion in the future. And some of these investments that we are making in SG&A are really reflecting the benefit in the overall margin that you are seeing even today. Does that help?

It does. That's really helpful. So we'll look forward to that conversation on real estate. If I could just one more on the Discovery format? I think Sharon you mentioned early indications, you've been pretty pleased. If you could just give us a sense of some of the metrics that are showing some nice steady improvement, whether it's mixed related or just traffic overall?

Yes we are seeing strong double-digit growth. One of the things that we are really pleased about is I also mentioned in the script that we have a number of different formats of where we are putting these Discovery Stores. So whether that's a brand-new location, a location that we've remodeled in place or a location that we've moved inside of a mall, we are still seeing similar double-digit growth metrics. When we dig deeper because we are putting traffic counters in all of these and as you know we are expanding traffic counters slowly into all of our other stores so we can have a much better metrics to manage our business, it's a significant increase in traffic and then buoyed by a better than average dollars per transaction. So it is really interesting dynamic. I am pleased to see it increase in traffic because clearly that's going against what's happening generally in the mall business today and is one of the bigger battles for retailers overall. We believe that in store lease line theater is drawing in consumers in a way that has perhaps not in the past. We are certainly catching people's eye, people are just coming in and to explore in a way that they might not even noticed before, we have a lot of incidental data about while I didn't even know you are here and these are in the remodel and place stores. So it is pretty interesting how eye catching the new color palette the new branding seems to be. And then you marry that with increased dollars per transaction, it seems like a really nice story for us. The stuffer that we have created also has increased productivity with three novels and a number of other things that we've done to improve that. So for a store like our mall of America location where our biggest challenge in many ways during our peak period with throughput, we've already increased that significantly our ability to manage the throughput on the weekend and on important holiday season. So just that alone is doing our mall of America business.

Our next question is from Alex Fuhrman of Craig Hallum Capital Group. Please proceed with your question

Hey, thanks guys. I wanted to ask a couple questions about gross margin. It sounds like your occupancy cost leverage a little bit here in the third quarter on a 2% comp. Wondering to what extent that was driven by the Fifth Avenue closure in New York City, and then kind of looking out at the next few quarters, can you leverage occupancy cost on a flat comp? Wondering where we should be thinking about that for Q4. And then just more broadly as it relates to the fourth quarter gross margin, just trying to understand thee fixed components that might be in there and the extra week comparison. I mean I would be thinking that your rent is the largest item there. Were there not 14 weeks of occupancy costs in last week's fourth quarter? I am just trying to understand where is the disconnect here and why Q4 retail margins are going to be down?

Sure, Alex. So you know gross margin as we talked about there are two pieces of that question. In Q3, really we were able to expand our merchandise margin, which has been a continuous story throughout the whole year, and we expect to continue to drive the expansion of merchandise margin in the future quarters as well as I mentioned earlier. As we talk about our occupancy expenses in Q3, we had some favorability in other occupancy costs and distribution expenses that are going to our gross margin. When we talk about Q4, we were trying to explain in our prepared remarks the impact of the 53rd week. So last year in fourth quarter, it comprised of 14 weeks versus 13 weeks this year. So when you talk about the leverage from the dollar perspective, our occupancy, our rent was comparable year-over-year. But last year I had one extra week of sales, so I was able to get additional leverage of our occupancy costs. This year that one week is gone, so like it's tougher for us to leverage the same occupancy base. But at the same time, we continue to expect to see the merchandise margin expansion in Q4.

Our next question is from Gerrick Johnson of BMO Capital Markets. Please proceed with your question.

Hi, good morning. I was hoping you could talk about inventory; it looked like that was up sharply on a year-over-year basis. And then also if you could discuss historic economics on the outlet stores, how do they differ from traditional stores and also how might they impact on traditional stores be nearby? Thank you.

Okay, Gerrick. Thanks for the question. Our inventory was up $10 million compared to the same period last year. As we mentioned, we have a stronger position on some of our key product stories, but there is also timing of purchases to support our fourth quarter product launches and additional store openings in for the holiday season. As we mentioned, on a two year basis, our inventory is actually down 2%. So really there is a lot of timing and shift in calendar. This quarter end of this year, it's one week closer to Christmas than the week same comparable week last year. So really we still feel very confident about the quantity and quality of the inventory that we have, and we believe it positions us well to deliver our Q4 plans.

Hi, Gerrick. It is Sharon on the other question. We now have six outlets that we opened five in the U.S. and one in the UK. As you might recall one of the strategies that we had with outlets was to overlap this concept of outlet malls which are one of the better metrics of overall mall business with this construct of tourist locations and tourist destinations that we tend to over index on, and we really did that in the United States in locations like Hilton Head for example and Rehoboth Beach, Delaware. And what we are seeing and what we have planned on saying was there going to have opposite seasonality, I remember about our other stores because we are in very beach location. So our objective with those outlet openings and that particular location is to run them out through a calendar year so that we can see the ups and downs and the puts and takes on that. There were two objectives that was one to be able to take advantage of this tourist location combined with this concept of the type of mall that seems to be over indexing, so putting those two things together and seeing a new opportunity for us, is non cannibalistic from a real estate perspective. The second is a way for us to manage our inventory better and flush our inventory better. So we are learning on two fronts, but thus far pretty excited about the opportunity to be able to master this new sort of store format for us. And we are seeing differences between the places where we had more closely related to beach type of location and the places that are more in like our UK store. It is over performing versus those types of stores but that was the way we thought it would work because we are going to see opposite seasonality. And that's where we are so we are kind of learning and not only from a consumer, the way the consumer interacts with that outlet space but also learning and not only from the way we manage our inventory and flush it too and manage this pricing process and promotional cadence in those outlet. So it's going to be a great tool for us.

Okay. Great and one last one. Hey, Voin, what kind of tax rate would you anticipate next year?

So we expect to be a taxpayer next year, so we will be providing a little bit more guidance at the beginning of the year.

[Operator Instructions] Our next question is from Greg McKinley from Dougherty. Please proceed with your question.

Yes. Thank you. Could you talk a little bit about more about your promotional calendar for the quarter? You talked about some special Black Friday promotions, and then maybe just recap for us, if you could, what you're doing with McDonald's and the potential impact there?

Yes, sure. Stephanie asked a question earlier about it how we are lining up product launches to product launches, and on top of that we have two really important promotions that will buoy or we expect to buoy the total business to Build-A-Bear. One of those is a much more robust Black Friday week promotional cadence. In the past what we've done is really a one day product offering at a discount on the actual Black Friday that's usually specifically procured product maybe like buy one get one half and we be in and we be out for that one day. Given the increase in the total interest in Black Friday and the Black Friday week and how retailers and malls are reacting to that we build the whole cadence this year inclusive of the use of and partnership with some of our key licenses for the first time ever. So it's not a more of a generic product. It is actually a highly desired assortment of that some of our license properties that will be offered during this Black Friday timeframe. And there is a whole week of what we call deal that are consumers and our loyalty consumers will get involved in and engaged in so we think that there is a lot of opportunity there and we once again will be also participating in Cyber Monday with special offerings for consumers and this is such a high traffic high gift purchasing time period and we believe that we should participate in that given that we are a real such gift option for consumers. The second is McDonald's. We did not have McDonald's last year. The last time that we did, have McDonald's was in 2013 and we are very excited about it this year. We think the…

Thank you. And then how did those promotions impact how we should think about margins or operating expenses, or are those being more funded by your license partners at McDonald's?

Well, no, they're not funded by our license partners or McDonald's, but they are built into our expectations.

And Greg, as I mentioned in my remarks, we expect merchandise margins still to be up in Q4 compared to the Q4 last year.

Then also recall that McDonald's, the exposure that McDonald's provides to us through the Happy Meal and sales, the in-store displays in the tens of thousands of McDonald's -- I am not sure how many there are, I know thousands of McDonald's in the United States as well as the TV advertising that they bring is tremendous exposure for us during an absolutely critical time period.

Okay, all right, thank you. Getting back to merchandise margins, Voin, in the past, you've occasionally quantified the breakdown how much of retail gross margin improvement came from merchandise margin. Could you provide that to us?

Yes, in Q3 100 basis points or 160 basis point improvement came from merchandise margin.

Okay, thank you. And then regarding within same store sales and I know you sometimes also given us a sense of value per transaction versus number of transactions. Are you able to give us some color there?

Yes. So we share that our dollar per transaction has been up 7.3% that was offset by the number of transactions we haven't specified like but as we talked about unit per transactions are driving that as well as our average unit retail continues to be very strong but it is offset with the number of transactions.

[Operator Instructions] We do have a follow up question from Greg McKinley. Please proceed.

Okay, sorry about that. So maybe just one more thing if I could ask a little bit about on the investments in your various media programs and getting talent at corporate to steer some of your initiatives. I'm wondering if you can just revisit how you and we should think about your operating margin expectations for 2016 in relation to 2015, and then can you narrow in at all on October same-store sales trends? I know you said they are down, but if you could be more specific than that I'd appreciate it. Thank you.

So to answer your question about SG&A in the context of operating margin expansion, as we previously mentioned we continue to expect on a full year basis this year and in the future that our operating margin is going to continue to expand. There are going to be some fluctuations in our quarterly results as we continue to make investments in the business but still we expect to deliver continued improvement in our operating profits. Each one of these situation that we called out incremental marketing, it is really tied to the timing of the new launches in the promotions that we have and really the timing of the calendar year-over-year is going to be driving some of that. As we are going to be trying to provide little bit more color beginning of next year as we talk about the higher story model activity next year because as we've some downtown in the stores that are being remodel that does have an impact. As a reminder, Greg, Mall of America store when it was down we had a temp location, so we are really trying to protect the top line but at the same time we are incurring some duplicative expenses. And as we talked about China we are making some investments on the China front we are making investments as we talk about whole selling outbound licensing, really so these SG&A investments we believe are going to be accretive to earnings in a future and we are going to be seen both the benefit in overall top line revenue as well as the margin expansion. And your second question was related to the comps in Q3, so we really provided some color as where are right now. I don't know that we will provide any more color than that.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the floor back to management for closing remarks.

Thanks again for joining us this morning. We want to wish you all are happy and healthy holiday season and really look forward to speaking with you at ICR Conference in January and our Fourth Quarter call in February.