Greetings, and welcome to the Build-A-Bear Workshop First Quarter 2018 Results Conference Call. [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. You may begin.

Good morning, and thank you for joining us. With me today are Sharon Price John, CEO; and Vojin Todorovic, CFO. For today's call, Sharon will begin with a discussion of our 2018 first quarter performance and review the progress made on the priorities we set for the business as we began the year. Vojin will review the financials and guidance, and then we will take your question. 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 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 risk 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. For the start of the year, we noted and anticipated headwinds from the negative impact of the changes in revenue recognition, the significant comparative challenge of the January closure of our most productive store in Anaheim and continued traditional traffic declines in traditional retail. In addition to these anticipated hurdles, the quarter saw what we believed to be a short-term negative impact from the liquidation sale Toys“R”Us, which seem to exacerbate the traffic situation in the quarter. These factors combined, some anticipated and some not, resulted in first quarter sales and profit which trailed the prior year's quarter and fell below expectations. In contrast, the quarter showed positive results across key operational metrics including improved conversion, dollars per transaction and units per transaction even with simultaneous disciplined management of expenses and inventory. Additionally, the ongoing engagement and consumer affinity for our brand is demonstrated through the sales growth in our proprietary products although not enough to overcome the comparative double digit decreases in licensed movie sales versus last year when we were enjoying carryover success of properties that excelled against our core growth segment and had broad appeal, which aids in capturing traffic from nontraditional guests. These shifting dynamics plus the Toys“R”Us liquidation, which by the way we believe to be a positive for us in the long run led to a larger than expected double-digit traffic decline in the first quarter. With that, our goal is to stay focused on advancing our strategy to evolve and transform our business model away from primarily being an in-line mall-based retailer to becoming a more diversified multi-faceted consumer brand. To that end, notably, we recorded a double-digit increase in e-commerce and growth in franchise revenue which was buoyed by the exciting addition of our recent China…

Thanks, Sharon, and good morning, everyone. Before I begin, I want to note that given our previously-announced fiscal year-end change, all the references to prior-year results are based on the recast 13-weeks ended April 29, 2017. This change, along with the strategic evolution of our business model, will create more complicated quarterly comparisons while we are going through this transitional phase. As such, we are focused on total revenue and profit as key measurements of our business with a long-term goal of sustained profitable growth. Turning to the first quarter of 2018, our performance was below expectations. We anticipated challenging traffic trends, the negative impact of adoption of the new revenue recognition standard, and the closure of our most productive location in Anaheim to result in lower sales and profit for the first quarter versus the prior year. We did not anticipate that Toys"R"Us liquidation proceedings and its negative impact on our business. That said, we are pleased with the strength that we saw in a number of areas of the business we not only progress made in our operational initiatives such as rebalancing our footprint to more productive locations and formats. Financially, the quarter saw expansion in merchandise margin and lower expense versus the prior year quarter and a continued strong balance sheet. Now, I will review the first quarter financials in more detail. Total revenues were $83.2 million, a decrease of 8.8% compared to the first quarter of fiscal 2017. This reflects an approximately $3 million negative impact from the adoption of the new revenue recognition standards and the January closure of one of our most productive stores, which was operating in the prior year. In addition, as I mentioned, sales during the quarter were unexpectedly impacted by the Toys"R"Us liquidation. Approximately, 75% of our stores had a…

[Operator Instructions] Our first question comes from the line of Stephanie Wissink with Jefferies. Please proceed with your question.

I want to share and unpack a bigger picture question to start. I understand that Toys"R"Us was disruptive from a traffic perspective in the first quarter and probably a little bit here in the second quarter just given the liquidation activities. But as you think about a post-Toys"R"Us world, what are the opportunities that you see? We know that Toys"R"Us had a very sizable Plush business. Is there an opportunity to step in and take advantage of that specific category in terms of the consumer opportunity? And then secondly, with respect to Toys"R"Us being absent from the market, are there opportunities for you to think about your real estate particularly on some of the licensed properties and maybe pull in some products that wouldn't be traditionally Plush but might be supportive of a larger basket size as you do drive traffic into your stores? Thank you.

The Toys"R"Us situation I think caught everybody by surprise on exact timing. Clearly, this has been a long time coming but I think the timing caught everyone a little bit off guard and that - it’s a $8 billion to $9 billion company. So, that's a lot of product that was dumped into the marketplace at a lower price in a pretty abrupt way. But in the long run, you're pointing out something really important and something that we also have identified. Yes, they did have a very big plush business and we do believe there's opportunity for us to take advantage of that. Then, most importantly and I alluded to it in the comment is the birthday business. Toys"R"Us had a big birthday business, a big birthday club, and we feel like that amping up our birthday program is actually really good timing. We'd already been planning that portion of our sort of reinvigoration and reinvention to recapture a lot of the activity in the birthday side, given some of the research that we've seen on where we’re associated with the rite of passage of childhood and really want to push into that as well. So it's a two-pronged strategy for us to try to assure that we get our fair share of what will be left over from this large toy market that won't all disappear. It will - most of it will be absorbed by other retailers, so that’s inclusive. On the real estate side, yes, we're certainly looking at different options. And as we evolve from not from being just not that long ago and almost exclusively mall-based retailer, we're looking at a lot of different options on where we can reach consumers, where they're going for fun and entertainment. And you're also correct in your assumption on is there a way to broaden our assortment on some key items and get into a bigger toy business. We have certainly started to look at that as well on some specific efforts.

And then if I could just one follow-up, Vojin, I wanted to take on a little bit of the sales cadence. So in the quarter, I think you qualified about a third of the sales decline you had expected. The other two-thirds roughly $6 million was unanticipated. Is it possible to qualify the Toys“R”Us effect if you try - it sound like a good three-quarters of your stores were within vicinity or how should we think about that delta to plan as we kind of progressed through the year, you're going to make up the bulk of it? It sounds like that does imply that the back half is going to see a step function higher. So, help us to bridge that gap between the sales mix relative to what your expectations were and how you plan to grow into a year-over-year increase in the back half?

So, yes, definitely Toys“R”Us liquidation impacted our sales and impacted traffic coming into our stores, as we talked about the proximity of the liquidating sites closeness to our existing stores. We saw definitely some real correlations and the strength of the performance in stores further away from these Toys“R”Us liquidation, was definitely better. Now, it's, again, across the whole chain, it's tough to really quantify what that impact was and all these liquidations and timeliness of them across the country. But we believe that there was definitely an impact both in our stores, as well in our website from these Toys“R”Us liquidation. Now, we expect over the course of the year that our traffic trends compared to the Q1 and impact of Toys“R”Us are going to improve. But also we are working, as Sharon talked about, a lot of these new initiatives in our prepared remarks and about things that we are doing to really drive traffic for the rest of the year. In addition to that, we expect our e-com business to continue to grow. We expect the diversification initiatives, both from our commercial revenue, as well as from our international franchise segment to continue to drive growth, as well as we expect some of these new tourist locations that are in the pipeline to continue to drive the topline. We have done good work to really manage our expenses, our inventory to position this to deliver the full year profitability. We also, as we mentioned, we had 23 concourse shops that are going to be annualized plus we said that they're going to be opening some concourse shops expecting to finish the year with about 40 to 45 that they'll also help drive the topline revenue for the rest of the year. Again, most of those initiatives that are in the pipeline are going to impact the second half of the year more than Q2.

I also just wanted to highlight the tourist location piece of that. That's been a long range strategy for us. And those are - as I mentioned specifically in the script, it takes tremendous planning and tenacity for us to find the exact right tourist location and get the exact right deal. And it's a longer horizon than perhaps it used to be to be able to roll out new stores in malls for example. And Disney, for example, if you just straight line about what we're applying to the Disney revenue impact from the first quarter which is about $2 million, could you straight line that is an $8 million hole right out of the gate. Right. So, that eight average doors for us. And we're rebuilding that and you might recall that Disney had a radius restriction on us that was keeping us from really taking complete advantage of the Los Angeles marketplace which is the second largest market, of course, as you know in the United States and one of the largest tourist markets in the United States. So, it takes a while for us to rebuild that $8 million revenue and we knew that going in but getting some of these tourist locations like Pier 39 right beside the merry-go-round or New York City right - basically right beside the Empire State Building, picking these exact locations that we believe will have a 10-year bonus for us in many cases depending on the ways, it’s not an everyday activity. It's a long process to get the exact right deal and the exact right place. And we're being both I think cautious but properly aggressive.

[Operator Instructions] Our next question is a follow-up from Stephanie Wissink from Jefferies. Please proceed with your question.

Lonely out here guys. Wanted to just follow-up on the leases, I think Vojin you mentioned you're driving down your average store occupancy. Can you talk a little bit about where you are in that progression? How should we think about not just the next 12 months but maybe the next two to three years of store level costs? And then on the contrary side to that labor how should we be thinking about the labor equation at the store level particularly as you get in to more of these events around birthdays. Does that mean you need the staff specifically for that and how should we think about that labor model? Thank you.

Yes. First from the lease perspective, we continue to put tremendous amount of emphasis on bringing those costs down and we are seeing some nice results as we continue to drive those cost down and really create more flexibility for the organization. We are extending a lot of our leases short-term really a bit more favorable lease terms and that's partially offsetting and allow us to keep those stores open as they are still very profitable, and these rent concessions are offsetting some challenges in traffic that we are seeing in these malls. In addition to that, we are trying to get more advantageous leases in form of percentage deals, what we have in our concourse location, and that's really helping on the downside if the traffic challenges continue. When we think about the store labor, definitely in a lot of our stores, the declining traffic is putting more pressure from the hourly wages, as well as from the hours that we have in stores. We continue to manage those expenses and continue to find ways to be more efficient and effective. We actually are applauding for more and looking forward for more parties and different events in our stores because again, it's multiple people coming to the stores and really driving all these additional sales helps us leverage the labor cost. But definitely, there are some headwinds from the increasing labor cost across the entire country.

Right. If you think about it, Steph, that’s one person managing on average 6 or 7 people through the process which is usually a really high value transaction.

Thank you. There are no further questions at this time. I would like to turn the call back over to Ms. Sharon Price John for any closing remarks.

Thanks for joining us today and we look forward to updating you on our progress next quarter.