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Build-A-Bear Workshop, Inc. (BBW)

Q2 2016 Earnings Call· Thu, Aug 4, 2016

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Transcript

Operator

Operator

Greetings and welcome to the Build-A-Bear Workshop Second Quarter 2016 results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison Malkin

Analyst

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 second quarter results and highlight our performance against the key priorities we outlined we began fiscal 2016. Voin will review the financials and guidance 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 everyone’s question during this one hour call. Feel free to re-queue if you have further 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 website, any 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.

Sharon Price John

Analyst

Thanks, Allison. Good morning and thanks for joining us today. As 2016 is shaping up to be a tale of two house. In the first half we anticipated and experienced to the bumpy road of loss productivity due to closing and reopening a number of stores to update them to our now proven and more effective discovery store format while simultaneously willing out critical IT upgrade across the company to improve our efficiency. As we shared given the historically comparatively smaller financial impact of the first two quarters of the year which consciously shows the first half to make this much needed investment in the company with real estate and infrastructure requirement had been largely ignored for almost a decade. Although we still have some key investments to make in the third we’re pleased to report that we’ve completed most of the planned work for 2016 and we’re focused on delivering the important back half of the year namely Q4 d5riven by a special stronger more diversified and more productive sweet suite with an improved IT infrastructure across the company. With this we expect our investments in this important evolution of the company to begin to reach returns in the second half of the year particularly in the all important fourth quarter and beyond. Reflective of our planned investments pre-tax loss was in-line with our second quarter guidance. Notably these results included $0.5 million negative impact from currency losses due to the re-measurement of our balance sheet driven by the sudden decline in the pound versus the dollar at quarter end. Some details of the second quarter include an expected consolidated comparable sale decrease as we anticipated the impact of last year's strong launch specifically consolidated comparable sales decreased 8.6% following 8.8% increase in last year's second quarter reflecting our…

Vojin Todorovic

Analyst

Thanks Sharon and good morning everyone. Second quarter results were in line with our guidance. Total revenues reflected a consolidated comparable sale decline against the difficult comparison of the prior year second quarter as well as temporary store closures due to significant remodel activity to our discovery stores format. We completed 13 remodels in the second quarter and continue to see significantly higher sales from our discovery format stores versus our heritage stores. Another positive is our continued increase in merchandise margin which demonstrates the ongoing strength of our product development planning and pricing strategies. In addition to expanding our discovery format stores we also advanced our initiatives to grow revenue from diversification of stores beyond mall and develop new income stream to outbound license agreement. We expect these programs along with easing comparisons to position us to accelerate sales and operating income in the second half and most significantly in the fourth quarter. Separately as many of you are aware, approximately 20% of our annual sales are generated in the United Kingdom. As such the sudden and sharp decline in the British pound versus the dollar at quarter end driven by the outcome of the UK referendum in late June had an effect on our second quarter earnings and we expect further impact to our previously stated full year guidance that I will discuss shortly. Continuing with the details of our second quarter results consolidate comparable sales decreased 8.6% following an 8.8% increase in the second quarter last year which was in-line with our expectations for two year positive stack. Comps in North America and Europe declined 8.3% and 10% respectively. Our comparable sales reflect 4.8% increase in dollar per transactions offset by a decrease in overall transactions. Importantly transactions in our remodel North American and UK discovery stores…

Operator

Operator

[Operator Instructions] The first question comes from the line of Gerrick Johnson of BMO Capital Markets. Please state your question.

Gerrick Johnson

Analyst

Good morning. The discovery stores, how are they comping against themselves so the ones that are reformatted last year how are those performing this year relative to themselves and then also how many stores I guess it was 13 stores that were down in the quarter are those stores included in the same store sales calculations or are they excluded and my last question you started one comment saying despite macro trends so can you just talk about the macro trends that are affecting right now? Thank you.

Sharon Price John

Analyst

Sure. We don't have any discovery stores that are comping themselves yet.

Vojin Todorovic

Analyst

First start up was in Q3 of last year, and the 13 remodel stores, they are not part of our comp numbers.

Sharon Price John

Analyst

Yes and that question is simply referring to what's going on in mall traffic overall over the last three years?

Gerrick Johnson

Analyst

Okay, sounds great thanks.

Sharon Price John

Analyst

No problem. Thanks Gary.

Operator

Operator

Next question is from Stephanie Wissink of Piper Jaffray. Please go ahead.

Stephanie Wissink

Analyst

Thanks. Good morning everyone. And thanks Sharon and Vojin for the additional color. I just curious shown on your comments regarding quarter-to-date sound like the first couple of weeks for a little of bit more difficult time as comparison, but then you seen a positive trend over the last couple of week. Can you just talk a little bit about some of the performance may be by brand or category where you’re seeing that step up and then also on top appreciate the timing shift which will want to make sure we fully understand and what you are suggesting in terms of the comp impact Q3 and Q4 by a couple of weeks?

Sharon Price John

Analyst

Yes, so as I mentioned the Minions movie actually hit theaters July 10th of last year. So, our comparisons were still pretty tough to the first two to three weeks of July. Minions then started to decline significantly as a percent of our overall sale. So, we now through the balance of the quarter had much easier compares. A lot of our different programs are working I mentioned many of them, some of our proprietary properties as well as Barbie Doll working quite well for us right now, Star Wars is working quite well for us, The New Disney Princess there is working quite well. We like to see it hitting on all of those key consumer segments that’s when we generally have the best opportunities and so that's a younger girl, a boy, and a younger boy and girl mix with the Barbie Doll. So we're pretty pleased with our lineup as we go through the rest of the quarter. On the Trow impact we had planned on setting that Trow line towards the end of September when we first laid out our comp plans and shared our expectations on positive negative comps in January in the ICR meetings. We still expect to see slightly positive comps, we now have to believe that they will affect the range of positivity from pushing the Trow into the fourth quarter. It's still the right decision, it's through the relationship and partnership with Dreamworks so that has been great. They have a very powerful marketing plan lined up for this is really exciting movie. The trailers are amazing and our product looks terrific. And we want be able to fully take advantage of that partnership. So overall we believe it will not affect the total sales of trolls probably improve the total sales of trolls. It's just the quarter shift.

Stephanie Wissink

Analyst

Thank you and Vojin there is a couple for you. the first is with respect to the UK I know you are changing your pretax growth outlook based on currency but is there any change in the cadence of the business there based on what you see in terms of volatility in the currency?

Vojin Todorovic

Analyst

So far what we have seen the real we haven't seen material impact to our business as a result of break, we are seeing just the impact as it relates to currency and it creating some volatility just like what everybody else but we are trying to mitigate some of that exposure. We are looking at different options how we can further mitigate some of those challenges either through pricing initiatives or looking at the ways to have some of our positions that we have outside of US.

Sharon Price John

Analyst

We have already made a few pricing changes in the UK. Just easing up some pound prices at some natural breaks.

Stephanie Wissink

Analyst

And is that both on owned and licensed properties Sharon or just your capabilities on -

Sharon Price John

Analyst

Yes we kind of win across sort of our natural price expanding and ease them up per pound here and there.

Stephanie Wissink

Analyst

Final question just on the balance sheet working capital looking at inventory level, can you just talk about the composition of that inventory and the balance sheet what you are seeing in terms of deployment of that either into your new store remodels or where we should think about those inventory being focused?

Vojin Todorovic

Analyst

Yes. So as I mentioned like we are making some strategic investments as we are expanding beyond retail like thinking about the carnival cruise and like having some inventory for our wholesales business growing. We are expanding our product lines as well as we are going to building our store count. We expect to continue to make some of these investments in Q3 as well to get ready for Q4 but by the end of the year we are expecting to be on par with last year on for store inventory level at the end of the Q4.

Stephanie Wissink

Analyst

Thank you, best of luck you guys.

Vojin Todorovic

Analyst

Thanks Step.

Operator

Operator

Your next question comes from the line of Jeremy Hamblin of Dougherty & Company. Please go ahead.

Unidentified Analyst

Analyst

Hi, this is David on for Jeremy Hamblin. Thanks for taking my question. Regarding the Pokémon it was obviously the big coincidental hit but seem like locations sold out pretty quickly how soon can the product be replenished and then what actions do you plan to take to respond the craze?

Sharon Price John

Analyst

Yes so Pokémon we were very fortunate to the already in relationship with Nintendo with our Pikachu and Pikachu bundle and we have benefited from the Pokémon Go craze. The sell out was in uneven so we are you may have been in the store that was a Pokémon stop which sold out very quickly but we had started to pick up the sales of Pokémon across the board and we are seeing some stock out. We have been on the case for Pokémon since we saw it here and we are re-planning as quickly as possible additionally as I mentioned in the remarks we are adding a new character and that we had already been in the pipeline and we will be able to get that before the end of the year.

Unidentified Analyst

Analyst

Okay. Thanks. And then just jumping over to the discovery remodels Q1 you noted that there was about 12% sales lift from the old heritage stores and now this quarter you mentioned they are coming at about 10% I guess now that more discovery models are coming into the system I guess what should we expect in terms of sales increase in the long term.

Vojin Todorovic

Analyst

Based on these early indications what we have on stores is that we have opened we are seeing similar growth as we see in Q1 and Q2 we would expect on all these stores that we continue to remodel into a discovery format to see the similar growth rates. Once they start on - don't have enough history and we are going to start getting some of that late Q3.

Unidentified Analyst

Analyst

Okay and then it looks like 2016 number or remodels were coming at the high end of your guidance just looking at it in the 2017 should we still expect around 50 remodels or is there a chance given their success this could be accelerated?

Sharon Price John

Analyst

We really haven't shared anything about our capital plans into 2017 clearly when we work with the board and make those decisions the success of the discovery stores as well as our ability to continue to push down the cost of each of the subsequent stores that we are building will be a big part of consideration set. But we are very excited and feel good about the to-date performance of discovery and feel like that we have a tremendous solution on not only how to evolve the business model and in mall experience but also this model with the slow and excitement and the stuffer it's translating into non-mall areas, tourist areas, and non-traditional areas. So actually there is really not a place that we put it from a concept perspective and it isn't working. So we are looking forward to being able to continue to both remodel and build new locations with the discovery format in the future.

Unidentified Analyst

Analyst

Okay. Thanks and just one last one. There is 31 discovery stores right now expected 50 to 55 on the year how much of that will come in Q3?

Vojin Todorovic

Analyst

So probably most of the remodels are going to be done in Q3 some of the new stores as Sharon talked about temp to perm some of that is going to be late Q3 early Q4.

Unidentified Analyst

Analyst

Okay great. Thanks.

Sharon Price John

Analyst

Yes right. Most of our temp to perm stores when we are trying to access a new location with a percent of sale lease and we really try to get at least two of our big seasons under our bell. So we will - we want those opened before the holiday before Christmas. We like to run them before Easter. We often sign up the lease for a year to get a full assessment so we have really great information going into the negotiation.

Unidentified Analyst

Analyst

Okay, great, thank you.

Operator

Operator

Next question comes from the line of Greg Pendy of Sidoti & Company. Please go ahead.

Greg Pendy

Analyst

Thanks for taking my call. I guess just looking at the discovery stores you say on average they were up I guess 0.6% but if I am not mistaken now you have done some mall locations like Mall of America maybe some flagship locations like Myrtle Beach within the discovery format are you finding maybe more success in the malls or more success in the tourist locations?

Sharon Price John

Analyst

Well, like I was just mentioning with the previous question this particular format seems to work in different types of location. As I thought about we try to provide you with some information on where they are slightly over performing they actually have a greater impact on stores that were already good for us which are amazing. So the malls at America store has been a very powerful remodel and the other one that you mentioned which is Myrtle Beach also very powerful remodel. But they have positive impact in more of a traditional type mall place like Christiana in Delaware for example.

Greg Pendy

Analyst

Okay. Thanks. And then maybe I can just get one follow-up just on the tax longer term I understand there is a lot of noise in getting the tax up to 34% but what you think your normalized tax rate over the long term once this kind of stabilizes?

Vojin Todorovic

Analyst

Well, I would expect it to be like closer to what we have previously in low 30s, but again, with some of these changes in the income that we are getting from different tax jurisdictions and specially the impact from the unexpected impact of the British currency devaluation impacted significantly so I think those things they get more normalized and we would expect to be in those low 30s.

Greg Pendy

Analyst

Okay, thank you.

Operator

Operator

[Operator Instructions] Next question comes from the line of Mark Rosenkranz of Craig-Hallum Capital Group. Please go ahead.

Mark Rosenkranz

Analyst

Hey, great, thanks for taking my questions. Just real quick, open the call talking about the productivity losses for the re-openings can you just walk us through what the typical ramp time to where you see after reopening where you get the normal levels?

Vojin Todorovic

Analyst

Yes, so we talked about this in the past typically when we do these remodels it takes us 8 to 10 weeks before the store opens. So we have some down time. In all the cases if we are able we are trying to preserve the top line sales by opening a temp location and in the lot of the cases we are able to do that stuff but sometimes we are not able to secure the location or the economics for attempt location may not make financial sense and we will pass but typically 8 to 10 weeks.

Mark Rosenkranz

Analyst

Okay great. That's all for it. Then last question from me just wondering if you can discuss the China opening one more Disney town you mentioned some credentials new franchise opportunities just kind of any opportunities you are seeing in terms of big markets we are looking at in the next couple of years internationally?

Sharon Price John

Analyst

Yes. China is very exciting for us. We actually are in some initial conversations with quite a few potential partners on the franchising front the store is very exciting and the park is amazing. So we have - we feel very good about the decision that we have made particularly given that where we are working with the long term partner of our Disney. On the additional expansion front from an international perspective we have a great partner in Germany KFG they are best in class retailer and children clothing manufacture we are working with them to expand into other European countries from - that's a big potential for us to take a known partner and start to move into new countries as we mentioned on the call sometime ago, we have already expanded their right into Australia and Switzerland we should be opening in Switzerland soon. We have also started to take another one of our important franchise, for example, our Australian franchise and we just expanded the rights in New Zealand and so that's kind of our first goal is to take known entities partners that are working well with us and help them build into new countries and then we are looking at the next year of opportunistic expansion in countries that there are large countries that we don't have a presence in that are stable but I would rather not mention that specifically right now as we are not in any sort of contract.

Mark Rosenkranz

Analyst

Okay. Great. Thanks for taking my questions.

Operator

Operator

Ladies and gentlemen we have reached the end of the question-and-answer session. And I would like to turn the call back to Sharon Price for closing remarks.

Sharon Price John

Analyst

Thanks for joining us guys and we really appreciate your time this morning and we look forward to speaking with you when we report third quarter results.

Operator

Operator

This concludes today's conference. Thank you for participating. You may now disconnect your line.