Greetings. And welcome to the Build-A-Bear Fourth Quarter 2017 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. It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR. Thank you, Ms. Malkin, you may begin.

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 fourth quarter and fiscal year performance and review the priorities we set for the business as we begin fiscal 18. 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 questions. 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 a 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 and good morning everyone. As we review our results for 2017 through the lens of the multi-year strategic plan that was initiated in the back half of 2013, the year showed progress on key initiatives that advanced us towards our long-term goal of sustained profitable growth, including delivering pretax profit that exceeded guidance. Marking our fourth consecutive year of profitability. As we believe that the underlying principles of our strategy reflect the realities of the rapidly changing retail landscape while focusing on monetizing the value of and the consumer affinity for our powerful brand as we diversify our business model beyond traditional mall, retail. Of course none of this progress would be possible without a team of passionate and dedicated associates and with that in mind, I would like to take the opportunity to congratulate the entire organization for once again being named to the Fortune 100 best companies to work for list for the tenth consecutive year. With the announcement coming just this morning. Now, I would like to recap the year's results and highlight the accomplishments that we expect to move us toward our long term goals. Specifically, 2017 included total revenues of $358 million as growth in e-commerce sales, commercial and new nontraditional retail as well as income from international franchising almost entirely offset a decline in comparable store sales which in part shows the positive impact of the strategic shifts that we've been making to diversify revenue streams. At 170 basis point expansion in retail gross margin to 46.9% reflecting the improvements that continue to be made throughout the organization in process and cost savings as well as the efficiencies gained from investments in infrastructure. Notably retail gross margin for fiscal 2017 was 800 basis points better than the results prior to the initiation…

Thanks, and good morning everyone. We are pleased to report a pretax income in the final quarter and for the full fiscal year surpassed our guidance driven by gross margin expansion and a disciplined management of expenses. For the fiscal year, we delivered $13.8 million in GAAP pretax income compared to $5.3 million last year. While traditional mall traffic declined significantly contributed to lower compatible store sales. We ended 2017 with a healthy store base, lower markdowns, improved margins from continued sourcing efficiencies and ongoing reductions in our occupancy costs help to maintain solid profitability across the store base. In addition, we saw improvements in key operational metrics led by higher conversion and dollars per transaction. With these improvements in mind and plans in place to deliver increased revenue in 2018 for clarity we believe the evolution we have made in our business model to address the ongoing changes in the retail environment enables us to continue to grow pretax earnings in a negative comp scenario as we demonstrated in 2017. Before I review our fourth quarter and full year results, I would like to provide some perspective on the impact of the recently enacted US tax reform. One of the key changes in the tax law was the reduction of the federal corporate tax rate to 21%. Given this rate change and our deferred tax assets position at year-end we incurred a one-time non-cash expense of $1.4 million in the fourth quarter. We have excluded this expense from the adjusted results that I will now discuss. Turning to our fourth quarter results, total revenues were $107.6 million a decrease of 2.5% compared to the fourth quarter of fiscal 2016. Retail gross margin expanded 510 basis points to 51.1% reflecting a 260 basis point expansion in merchandise margin and a…

[Operator Instructions] Our first question comes from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your question.

I wanted to ask about a couple of your growth initiatives for 2018. Firstly, on ecommerce plans to grow that double-digit; do you feel that in 2017 you could have done double-digit ecommerce growth if you had the upgraded platform and that's what was really holding you back? It certainly seems like the ecommerce results have been pretty volatile and not necessarily coinciding with your own same-store sales in your retail stores. So if you could give us some color on how that might progress throughout the year and what the drivers of that would be? That would be helpful. Thanks.

The results that we have enjoyed post the launch of the website would certainly indicate that we could have done double-digit growth throughout the course of the year. We had plus 12% growth in the fourth quarter and we saw that the impact of that and that we ultimately started to approach at least the low end of what would be the norm of ecommerce sales as a percent of brick-and-mortar in the fourth quarter with 9% of our sales coming from ecommerce where it's usually 5% or less. The norm in brick-and-mortar is in the 10% to 20% range now and we certainly believe we should be on -- in the midpoint of that. So yes, we do believe that and that's without the analytics turned on; I don't want to overamp on it but clearly the marketplace is moving in the direction of ecommerce and we have as we've noted, multiple times, been unable to fully participate in that marketplace due to our platform and the struggles that we've had with that platform that have caused us some challenges in the past. So we're really looking forward to a fully consumer centric ecommerce and omnichannel approach to this, it also gives us opportunities to be much more efficient and effective in our media choices as digital is all kind of one big approach to that, you have really have to have a robust ecommerce site to optimize your digital marketing as well. So we're looking forward to optimizing this.

I also wanted to ask about the outbound licensing; I know that's something that you guys have talked about for a couple of years now. It sounds like that's really starting to come to fruition now for the first time with some viable deals in the pipeline in some action. We'd love to get a sense of how much resources you have devoted to this in terms of fixed cost or headcount and at what level you would expect outbound licensing to be breakeven and become accretive for the company?

Outbound licensing, it certainly takes a while to build a meaningful business because you're working with a lot different companies and a lot of different categories and it takes -- once you sign the deal, clearly it takes them a while to develop the programs and products that didn't get launched into other retailers but the benefit is great. For one, it's almost -- it's royalty based, so it's almost immediately accretive to your question. But of course, we're not getting the enterprise value of that, we're just getting the royalty value of those products. The additional value that we get is exposure being present in a number of different retail venues outside of our own venue; so there is marketing value to it if you think about it that way, it's really just extracting brand equity that already exists in our brand. The other thing though is that we currently -- and this is not atypical to get started, we're using an agent to help us build those relationships with some of the outbound licensing program, some of them we hold inside but we have a partner that helps us do that where they do take a percentage of the royalty, do that -- so or added if headcount is minimal, very minimal, in fact most of it we've absorbed into -- the things that we need to do, we've absorbed it into our head count as it fits. When the outbound licensing becomes a big enough piece of our total business, of course, we will look at perhaps a different structure.

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

Just looking forward here at the potential licensing opportunities in 2018 and get a sense for some of the potential movie launches that you see as key for this year; I know last year you had some nice success with Beauty and the Beast in the spring time, there is a little bit of an Easter shift. But in terms of the near-term and what you have visibility on, at this point what do you see is maybe key opportunities; whether it's -- again, something like the Incredibles 2 or Christopher Robin, any commentary on that front?

Sure. Yes, we are comping against Beauty which was bit of a surprise hit for us last year because more of the Beast sales were outperformed our expectations but -- and we're comping against that right now but when you look out on our licensing front, there is news and there is a lot of licenses that we have that are really bread-and-butter for us -- things like Pokémon and Power Patrol continue to deliver, those have been really great partnership for us. But when you look out beyond that, what like the Spikey Good new news, we have Peter Rabbit right now which hopefully will do quite well for us as Easter starts to approach, we have Black Panther which will be -- this is a really big PR movie right now, it's getting a lot of tremendous buzz; we'll head the -- back in the Marvels business which we usually are with the Avengers movie release, we are back in business again with Girl Scouts which we took a respite for a while, so we're excited to do that, that's -- sometimes have had been in the past a very big party business for us. So there is a lot of excitement going on as we lookout into the future on some licenses; they are not any of the big chunky breakthrough films that you might have seen in the past, perhaps maybe holding out Marvel -- some of the Marvel properties, but still that's an important part of our overall portfolio.

And then just in terms of -- with the change in the fiscal year, can I assume that the timing of Easter moving forward to the end of March is kind of a non-event this year?

Yes, it's April 1 this year and that's one of the key reasons why we wanted to shift our fiscal year to be -- to get that Easter noise out of the shift from first to second quarter which it does many times, so -- I think that ultimately the shift will make things a lot more comparable for you guys and for us as well.

And then on the SG&A front, I wanted to just get underneath -- kind of the outlook in '18 and getting to understand if this year kind of ended up delivering pretty strong Q4 despite the softness on comps, so nice profitability. What impact in terms of comparing '17 versus '18 on the incentive compensation front? How closer are you to achieving standard incentive compensation? Do we need to account for any of that in our modeling in 2018?

We continue to manage our SG&A and overall control, both that we have to the best of our abilities and that's showing in our results. We will continue in 2018 to manage our SG&A. I'm not going to talk specifically about the performance based comp. But like over next year, we continue to expect to leverage out SG&A and we continue to expect to make investments in business but we will expect our dollars to be much in line with what we had this year.

Okay, got it. Last one, the gross margin performance really, really impressive in Q4. As we look forward not just in 18, but beyond that how much more can you kind of squeeze out on the gross margin side if we don't see kind of a little bit higher list on the sales front is there multiple hundreds of basis points from here or something maybe a little less than that if we don't get more acceleration on sales?

So, there are several things that impact our retail growth margins. We continue to believe there is room to expand our merchandise margins and we will continue to do that through sourcing efficiencies to cost reductions, to selective price increases things that we can control. We are also going to see a headwind as it relates to gift cards breakage accounting changes that we talked about going forward especially over the next three years. But we believe our occupancy management and reduction in our overall occupancy cost will help us continue to leverage and improve gross margin even though if we deliver flat or slightly below prior year total revenue. The idea is to drive the top-line revenue and to continue to expand gross margins. Historically, our high was close to 49.5%, so we still believe that's a nice goal to have over next several years.

Okay. And then just one point of clarification. In the release you indicate that there is a little over 600,000 shares I think purchased since the beginning of – I'm sorry since the end of 2017. Okay, so does that leave about $10 million left on the buyback authorization over?

Yes, exactly.

Okay. Okay, great. Thanks guys and good luck.

Thank you.

Thank you.

Thank you. [Operator Instructions] There are no further questions at this time. I'd like to turn the floor back over to Sharon John for closing remarks.

Thank you. Thanks for joining us today on the call. We really look forward to reporting first quarter on the next call and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.