Greetings. And welcome to the Build-A-Bear Workshop Third Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Ms. Allison Malkin of ICR. Please go ahead.

Thank you. Good morning and 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 2017 third quarter performance and review our strategies for the year. 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 to everyone’s questions during this one hour call. Feel free to re-queue if you have further question. Members of the media who may be on our call today should contact us after this conference call with your questions. Please note this call is being recorded and broadcast live via the Internet. The earnings release is available on the Investor Relations portion of our corporate website. A replay of both our 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. 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 company’s annual report on Form 10-K. We undertake no obligation to revise any forward-looking statements. And now, I would like to turn the call over to Sharon.

Thanks, Allison. Good morning, everyone. Before discussing the current results, I’d like to take a moment and acknowledge that tomorrow is the 20th birthday of Build-A-Bear Workshop. What was once labeled the fed is now a multigenerational global brand with a legacy of 170 million furry friend sold and 6 billion in cumulative revenues. Many thanks to our thousands of associates, partners and guests around the world for helping us to achieve this milestone. As a part of our celebration, we are marking our return to Manhattan with the opening of a new flagship door later today. And yesterday we participated in the ringing of the opening bell at the New York Stock Exchange to mark this important pivot point in our company’s history. We now begin our next 20 years with significantly improved infrastructure, processes and skill set. We have a strong balance sheet and cash flow to be able to both scale the business and monetize our powerful brand in new ways in order to drive sustained profitable growth in the future. And while you are familiar with the ongoing evolution of our real estate portfolio, we recently delivered on some key milestones in other areas of the business. We have now launched a completely upgraded version and platform of buildabear.com designed to enable us to more efficiently leverage shifting consumer shopping trends in a much more robust manner. It has taken multiple years of planning and cadence infrastructure upgrades to accomplish this important goal. This upgraded web platform also serves as the backbone for the reintroduction of our data rich loyalty program, the Build-A-Bear Bonus Club. We plan to use this backbone to systematically increase the lifetime value of our members and we have signed a new franchise agreement with a partner in China representing our first…

Thanks, Sharon, and good morning, everyone. During the third quarter we achieved pretax income in line with guidance as retail sales not included in the comp base which represents approximately 20% of our store base and strong margin expansion helped to mitigate the impact of negative comparable sales. Because of the activity related to the evolution of our retail portfolio, we caution that comparable sales may not give you the full picture of the health of the retail chain. In fact we have closed to a 20% contribution margin, which is more than doubled the contribution margin we had when we began to optimize our real estate portfolio in 2013. We continue to transform this company to capitalize on the power of the Build-A-Bear brand by opening more productive store formats, developing new higher margin revenue streams and offering desirable product selections, while lowering promotional activity versus a year ago. This morning’s press release includes details of our third quarter performance that I will now selectively highlight in my discussion. Total revenues were $82.4 million, a decrease of 1.6% compared to the third quarter of fiscal 2016. Net retail sales were $80.6 million, a decrease of 1.4%, excluding the impact of foreign exchange. Consolidated comparable sales declined 7.4% with North America down 7.8% and Europe down 5.2%. As an additional indicator of our retail strength we generated increases across key metrics that are typically more within our control, including conversion, units per transaction and average unit retail. As expected, however, these increases were more than offset by a decrease in transactions primarily due to a decline in store traffic. We remain pleased with the performance of Discovery format stores. The locations in their first year operation continue to achieve a double-digit increase over heritage location and stores in their second…

Thank you. [Operator Instructions] Our first question comes from the line of Ashley Helgans with Jefferies. Please proceed with your question.

Good morning. This is Ashley Helgans on for Step Wissink. Can you quantify what gross profit dollars and EBIT dollars would have been from the revenue missed by the storm in the e-commerce blackout?

Yes. Thanks, Ashley, for the question.

Ashley, if you could mute your line?

Yes. So, on the pro forma basis, as we quantified like, our total revenue was down 1.6%, so if we just assume 1.6% revenue miss and apply our existing retail gross margin, which I think, is very conservative, because most of our fixed expenses are already reflected in our numbers and you extrapolate you will get a benefit north of $0.5 million on a pro forma basis.

Great. Thank you so much.

Thank you. Our next question comes from the line of Jeremy Hamblin with Dougherty & Company. Please proceed with your question.

Good morning. Thanks for taking our question. I wanted to just get into the real estate portfolio. You’re obviously seen some very, very strong results with your concourse shops and it sounds like kind of the longer term plan to reformat the -- into the Discovery locations that you’re putting that a little bit on hold as you evaluate the best use of capital here. But in terms of thinking about the holistic portfolio, how long do you expect it to take to get to a point where you feel -- you have got about 80% of the real estate in the format that we want. Is this something that’s kind of a two-year target, is it something that’s considerably longer than that, just recognizing, where your capital structure stands today?

Yeah. Thanks, Jamie. Yeah. Just to kind of walk through some of your comments, the concourse shops are still strong and we do feel like that there is an opportunity to continue to use the capital to expand those in a wide variety of places. I think as we’ve noted in the past. We -- our strategy at Build-A-Bear even from beginning, the 20 years ago was to be where families go to make memories and have fun and be entertained, and that used to be more of a traditional mall, but now it’s evolved and we’ve created these wide variety formats to be able to meet those needs, families are still very interested in experiencing Build-A-Bear. We just need to meet them where they’re going. The long-term plan is, I wouldn’t exemplify putting Discovery on hold. What I would exemplify that as is managing the realities of real estate in terms of leases and a 10-year projections or the lack of ability to predict a 10-year projection in some of the -- which are still A mall but on the lower tier of some of the A mall. So we believe that is our 120, 130 leases are coming up over the next few years for renegotiation or renewal that it gives us a lot of leverage to power for a moment and renegotiated a favorable rate, understanding that that traditional heritage store is completely depreciated at that point and put a shorter-term lease in place, so that we can continue to generate cash, while we’re building out some of these other alternative operations. We are also building Discovery stores in brand new places that are totally non-mall based. One is an example is the New York store. There are others that will be able to announce at the end of next quarter. There are exciting new types of locations for us that are in mostly tourist focus areas. So it’s a really stepped stone process of evolution. Giving you a date on horizon is a bit difficult. We could say two years to three years would be ideal, but we are trying to be nimble in the response to making sure that when we finally do decide this place is stable, this place is stable, this is a good rent deal, that we are able to feel confident in those choices. It is of course the shift of a lease deal that has step increases on a 10-year basis is just really needs to change.

Okay. And then just kind of two follow-up questions related to that and that is, given the returns on capital that you’re seeing with the concourse shops, is there -- should we assume that you’re going to see an increase in the total mix of concourse shop type of locations and may be fewer of the traditional mall. I mean it sounds like that’s the direction that you’re going?

Our number one goal is to be profitable, make money and expand the company in terms of building our real estate portfolio, while doing that in a brand right consumer centric way. So there’s still opportunity for us to remain as we noted in some of these other stores and located in the traditional mall, but you are correct in the assumption that as a percent of our total offering, we will shift towards concourse shop mostly because of all of those objectives that I highlighted in the remarks, reduce capital, increase flexibility, better lease deals, that giving us a lot of leverage to meet the needs of our consumers in fresh way and new places.

Understood. And then just following piggyback on that, then looking at your SG&A structure, you did nice job of controlling that in the quarter and it sounds like you will again in Q4. This change in portfolio which somewhat probably implies may be a total lower overall sales, is that -- is SG&A and area where you can look at that and look at the changes in your real estate portfolio, and say, we have opportunity to further bring down that number on an absolute basis moving forward, does that required based on the changes in your portfolio?

Well, generally, yes, look, we continue to be really focused on SG&A and managing the SG&A from the store perspective as a reminder, our occupancy expenses are part of the gross margin -- our retail gross margin, so we will continue to manage our SG&A through the use of technology, we continue to really update our systems and make sure you know that we can still provide a great experience and manage our expenses really tightly as we have done all year along. The mix of the portfolio will have some of those changes as we continue to shift more to the concourse shops that tends to have a higher contribution margins than our traditional stores. But in addition to that from the SG&A perspective we believe, as Sharon was talking about our traditional stores that there is opportunity as we go and we are negotiating these leases to further get some traction in reducing our overall occupancy costs.

Great. Thanks for answering my question and good luck.

And one more thing, Jeremy, just like, worth mentioning, we don’t expect our total revenue to decline, we expect our total revenue to increase.

Got it. Thanks.

For quarter-over-quarter and beyond.

Thank you. [Operator Instructions] Our next question comes from the line of Mark Rosenkranz with Craig-Hallum Capital Group. Please proceed with your question.

Hey. Good morning and thanks for taking my questions. I wondering if you could talk a little bit about the comments you made regarding the impact of the weather and the web platform resent. How much would you attribute says categories in terms of the difference between the slight revenue decline versus you anticipate a slight revenue increase in the quarter?

Well, these were unfortunate events that were outside of our control especially when we think about hurricanes that impacted some major market for us in a quarter. We really haven’t quantified talked about this specifically one versus the other, we talked, as I mentioned, on the one of my earlier responses. We believe that our total revenue would be slightly positive compared to the last year if we were to adjust for the impact of those two items and we also quantified EBIT impact from these events.

Okay. That’s fair enough. Then switching you mentioned on the comps, they are missing about 20% of stores due to downsizing in the stores are less than one-year-old. Just maybe talk little bit more about the performance of those stores and when you might see those layered into the comp throughout ‘18?

Yes. I mean, as you have seen like we have been increasing our store count is up 7% versus last year, also we are changing the mix of our portfolio. We have more concourse shops as we have been also remodeling our traditional stores in the new Discovery format. These stores go in and out of comps. And they represent a big chunk of our overall base. So we still expect overall our total revenue to continue to grow and as these stores go in and out of comps when they anniversaried their opening or remodel dates.

And we -- when we remodel to the Discovery store, we generally see very positive comps, closing in on double digits, sometime passing a double-digit in that first year. Additionally, the remodeled stores, when they are remodeled in place stay in the comp just to give you a little bit of color, but what a lot of our negotiations are in each one of these in our malls is to move the store to more desirable location with a smaller square footage. Those fall out of the comp for year, because we see the sales increase on a smaller square footage, a very efficient move.

Great. That’s helpful. Thanks for taking questions and good luck in the fourth quarter.

Thank you. Our next question comes from the line of Brad Leonard with BML Capital Management. Please proceed with your question.

Hi, guys. Thanks for taking the question. I guess the first question is, you mentioned something about sequential improvement throughout the quarter and then also, I think, you said something about double-digit comps on the new e-comm platform and I kind of along with that kind of would gives you confidence on the Q4 guidance and full year outlook?

Yeah. So definitely -- hi, Brad, the sequential improvement we saw this, as I mentioned, month-to-month all through the quarter and then it continued into October even with some of the comp -- the e-comm disruption. So that’s a lot of that is driven by improvement in the store base. But to your point the double-digit improvement as when we flip the switch on e-commerce even as we stabilized and understanding there’s always something that’s going to has -- be a bit of a disruption when you flip over to new platform, we has been -- I would say careful with how much of advertising we’ve been doing on the dotcom since we flip the switch to kind of stabilize the platform, yeah, we are still seeing this double-digit improvement. So, yeah, we are hopeful that when we actually turn on the marketing machine associated with this and move into the fourth quarter, we should see some very positive results, particularly if you recall compared to last year when we struggled a bit by not being able to actually meet the demand that was being generated on our dotcom because of backend and fulfillment disruption. So that is certainly playing into it, but if not all of the reason why we believe that we have some opportunity. We are also wrapping dotcom on the stores themselves, if you remember particularly as it related to December. And feel this of the multiple impacts of that, some of which were traffic driven that are little more out of our control, but we felt and I think we clarified this last year that some of the things such as catalogues and moreover marketing and some were more in our control and we have certainly correct it for some of those things as we are moving into the quarter this year.

Okay. Thanks for that. And then just a couple more quick ones here, if how many vast pros you are going to go into for the Q4?

Yeah. It’s really a test this year. It’s about five. We are excited about this. If for those of you that might not be familiar with it, but it may seem a little odd of the cost, but they have a wonderful highly experiential Christmas area that is very successful for them and they are really excited to have us as a part of that offering for their guests and consumer base. And clearly on both sides, if this is successful, we feel that there is a tremendous opportunity to expand to a broader reach for there -- in their location.

Great. And then I have a couple just quick balance sheet ones for Voin, if Voin, one, would you care to give a range of where you expect year-end cash to be, and then, two, what is the decline in the accounts payable?

So, Brad, so like, we still are very focus on managing our cash. We expect to finish the year probably above our cash levels from last year, assuming our -- we hit our guidance and our sales come in line with expectations. As you know, some changes in the balance sheet, especially in the accounts payable line item are related to changes in our sourcing agreements and some payment around changes. We are paying for our inventory sooner than what we have done in the past but we are getting significant benefit in our margin that’s -- that we expect to continue. So, that’s the big change in accounts payable is the timing of cash payments.

Okay. Thank you. That’s all I have. Good luck.

Thanks, Brad.

Thank you. [Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Ms. Price John for any closing remarks.

Thank you everyone for joining us on the call today and I encourage you to join us in this weekend birthday celebration at Build-A-Bear Workshop at a store near you. We look forward to reporting the fourth quarter call and have a great day.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.