Earnings Labs

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

Q4 2018 Earnings Call· Wed, Mar 13, 2019

$37.85

-0.16%

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Transcript

Operator

Operator

Greetings and welcome to the Build-A-Bear Workshop's Fourth Quarter 2018 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, Allison Malkin of ICR. Thank you. You may begin.

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 2018 fourth quarter and fiscal year performance, review the progress made on our strategy and the priorities we set at the start of fiscal 2019. Voin will review the financials and share guidance. We will then open the call to 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. 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. In addition, I want to remind you that given the previously announced fiscal year change, references to the prior year results are based on the un-audited recast results for the fiscal year ended February 3, 2018. Finally, during this call, we will refer to adjusted results which are non-GAAP measures. The press release we issued earlier this morning includes a reconciliation table presenting GAAP to adjusted total revenues for the 53 weeks ended February 03, 2018 to the 52 weeks ended February 02, 2019 and a reconciliation table presenting GAAP to adjusted pretax loss for the fourth quarter and full fiscal year as well as GAAP net income and EPS to adjusted net income and adjusted EPS. And now, I would like to turn the call over to Sharon.

Sharon Price John

Analyst

Thank you, Allison and good morning everyone. 2018 was financially disappointing for Build-A-Bear and for me personally, as after delivering four consecutive years of profitability we posted the first full-year loss for the company since I took the helm in mid-2013. We believe there were a number of major headwinds unique to the year which were reviewed and communicated in January. Even with the impact of these significant and arguably anomalous disruptions, we had starkly different results geographically as our largest market, North America posted a low single-digit sales decline and a modest profit on an adjusted basis. However, the negative impact from our largest international market, the United Kingdom more than offset the North American performance as uncertainties surrounding Brexit weighed on consumer confidence, the currency and our business results throughout the year manifesting in a double-digit negative failed, persistent decline in the UK. The business was further challenged in May with the enactment of new consumer privacy laws commonly known as GDPR which significantly impeded our ability to effectively and directly communicate with our core consumer base for the balance of the year. In addition to the UK specific issues, other 2018 challenges included, the closure of our single largest and most profitable multimillion dollar retail location, the unforeseen bankruptcy and subsequent liquidation of Toys "R" Us, the impact of new accounting standards and tax policies, and the significant reduction in high-impact family centric license movie properties. Although we believe any one of these headwinds would have been disruptive to the business, the convergence over the course of a single year could have stressed the company to the point of strategic disruption. However, I'm proud that our team has remained resilient and focused on managing both the short-term and the longer-term strategic objectives. During the year we systematically…

Voin Todorovic

Analyst

Thanks Sharon and good morning everyone. From a financial perspective, we had a challenging year in fiscal 2018. As Sharon mentioned, we believe we made operational advancements to move our strategy forward despite several challenging events throughout the year, particularly those impacting the business in the United Kingdom, our largest international market. For the full year we incurred about $10.8 million in nonrecurring charges of which $9.1 million represented non-cash asset impairment costs. These charges, along with the losses in the UK business, ultimately led to us establishing a $3.7 million non-cash valuation allowance on our foreign net deferred taxed assets. My comments will reflect results for full 2018 fiscal year followed by sharing 2019 guidance. Total revenues were $336.6 million compared to $364 million in fiscal 2017. On an adjusted basis, excluding almost $10 million dollars from changes associated with revenue recognition and the impact of the 53rd week in fiscal 2017, total revenues declined 4.9%. This reflects a 17.6% decline in Europe and Asia, primarily related to the United Kingdom while revenue in North America declined 2% impacted by the significant reduction in family-centric movie properties. And as a reminder, 2018 saw a $7 million revenue reduction in North America due to the closure of our largest store located in Anaheim, California. Retail gross margin was 42.7% compared to 47.2% for the 53-week period ended February 3, 2019. The decline in retail gross margin was impacted by promotional activity related to extended voucher redemption period following Pay Your Age Day events and the deliveries of our occupancy cost. The company was successful in maintaining flat rent expense for the year even with the additional 19 new stores. SG&A was $1.6 million, less than the prior year even with over 5% growth in store count. During the year, we…

Operator

Operator

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

Sebastian Barbero

Analyst

Hi. This is Seb on for Steph Wissink. Thanks for taking our questions. We wanted to unpack [ph] your key growth drivers for 2019 and then also if you can give us a breakdown of your gross margin decline in the fourth quarter?

Sharon Price John

Analyst

Sure. Hi. I'll start with the growth drivers and then turn it over to Voin for the second part of the question. We feel like, one just as a reminder, the few years that I've been here, we've had consistent profitability. This is - the last year was a bit of an anomaly. So we feel like some of the potential or big portion of the potential to return to growth in order to grow in 2019 has to do is just all of the novelistic challenges that occurred in 2018 as a contrast to the positive tailwinds if you will for 2019. And we believe we've got most of those behind us, all but Brexit and the uncertainties around that really being arguably one time event. So, as you look forward to 2019 we then have almost an opposite impact from the slate of movie properties as a great example. This coming slate inclusive of what we've already launched, How to Train Your Dragon which is hopefully a bellwether to the expectations of what we're going to see going forward has been very positive for us followed by as we mentioned on the call, Aladdin and Lion King, and Frozen 2, and some other films also embedded in there hit throughout the year and really in an opportunistic pattern that we believe could benefit us quite well. We also believe that we will expect to continue to see this ongoing double-digit rate of e-commerce growth as I noted in the comments, we are positive right now year-to-date and that is driven by being positive in North America and that's the combination and as I noted, How to Train Your Dragon and some of our really great gifting business coming out of Valentine's and our e-commerce business. That e-commerce growth…

Voin Todorovic

Analyst

Okay. Regarding the gross margin question in Q4 just Sebastian as we talked even in the past, we did have a significant impact of deleverage in Q4 with our decline in sales as well as, you know we did take some one-time charges that impacted us in the quarter, as well as we think about the overall promotional activity in the Q4. We did run some additional promotions especially in times prior to the key holiday season period right before Christmas. So our promotional activity is a little bit more elevated, but most of the decline in gross margin was related to deleverage of our occupancy cost as we saw sharp declines in total revenue in particular in those few weeks leading into Christmas and the overall softness that we have seen in our UK business.

Sebastian Barbero

Analyst

Cool, thank you for that.

Operator

Operator

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Sharon Price John

Analyst

Thanks so much again everyone for joining us this morning and we look forward to speaking to you when we report our first quarter results. Have a great day.

Operator

Operator

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