Greetings, and welcome to the Build-A-Bear Third Quarter 2019 Results Conference Call. [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.

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 2019 third quarter performance and review the progress made on our strategy. After, Voin will review the financials and share our guidance. We will then open the call to take your questions. [Operator Instructions] 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. 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.

Thank you, and good morning, everyone. For the third quarter, we advanced towards our long-term goals with improved results compared to the prior year as we maintained our focus on executing our key strategic initiatives. In the quarter, which is the smallest of our fiscal year, we had sales growth in both our direct-to-consumer and commercial revenue streams as well as expansion in gross margin. We improved our operating loss compared to the prior year by $2.3 million. The period saw no borrowings on our line of credit, and we finished the quarter with no debt and $6 million in cash. Overall, we remain steadfast in our mission to monetize the power of the Build-A-Bear brand. Our brand's consumer metrics are in line with those of much larger companies, including aided awareness with moms in the U.S. of over 90%, over 8 million opted in e-mail addresses for direct marketing and communication and 4 million active loyalty club members that represent an estimated 20 million consumers. Additionally, on an annual basis, we brought nearly 45 million guests to physical store locations and have an additional 110 million combined digital impressions through our website, YouTube channel and other social media platforms. Our goal is to leverage the consumer affinity that these metrics represent and diversify revenue streams beyond the mall and traditional retail model and drive growth in areas that can add incremental revenue and accretive profitability. Looking in more detail at our revenue growth in the quarter. We saw improvement from this evolving business model, including a 2% increase in net retail sales, with improvement across geographies in both North America and Europe, and inclusive of the eighth consecutive quarter of double-digit e-commerce growth and an 18% increase in our commercial revenue segment, led by growth in wholesale primarily through…

Thanks, Sharon, and good morning, everyone. The third quarter saw growth across key financial metrics and traction against our strategy highlighted by increased revenue, expansion in gross margin and an improvement in pretax loss versus last year's third quarter. Specifically, for the period. Total revenues were $70.4 million, an increase of 2.5% compared to the third quarter of fiscal 2018. Retail gross margin expanded 400 basis points to 39.5% compared to the prior year. This expansion was driven by stronger merchandise margin from less promotional activity. In addition, we leveraged fixed occupancy expenses due to rent reductions through aggressive real estate portfolio management. The balance of the improvement in retail gross margin was primarily related to noncash impairment charges incurred in fiscal 2018 third quarter. SG&A was $35.4 million, an 80 basis point improvement in the SG&A rate as a percent of total revenue. This improvement was driven by disciplined expense management, including lower marketing spend, partially offset by an increase in accrued incentive compensation. Separately, we also had a favorable noncash currency impact as the British pound strengthened at the end of the period, offsetting losses from earlier in the year. Combined, this drove a $2.3 million improvement in pretax loss compared to the fiscal 2018 third quarter or $1 million improvement from the prior year after adjusting for costs primarily related to noncash asset impairment charges. Turning to the balance sheet. At quarter end, cash and cash equivalents were $6.2 million with no borrowings against our revolving credit line. This compares to $8.6 million at the end of the third quarter last year, which had $7.3 million in borrowings. We ended the quarter with approximately $66.2 million of consolidated inventories, representing an $8.9 million increase compared to the prior year. The inventory increase was driven by receipt of…

[Operator Instructions] Our first question comes from the line of Eric Beder with SCC Research.

In terms of the quarter and looking forward, how should we be thinking about longer term, where the mix should be between online and stores and where the store count should be kind of excluding the Walmart initiative?

On the mix between common stores, we -- it's only been a couple of years now since we launched the robust Web platform. And as we noted, we've seen the 8 consecutive years of double-digit growth. So without a doubt, that's outpacing our core store business model right now. But it's still a smaller percentage of -- a small percentage of sales, we believe, compared to other brick-and-mortar e-commerce comparative rates. That said, that provides us with the concept that we believe we have a good runway here. And we also haven't actually activated all the levers that we have available yet to continue to drive and enhance and improve our e-commerce sales and traffic as well as conversion rates. And so we're feeling good about the continued growth of e-commerce and continuing to outpace our store base. Right now, we're in the -- between -- depending on the quarter, we'll be between 5% and 10% of our total sales. There are many retailers where it's 15% to 20% of total retail. We're certainly shooting for somewhere in that, probably the lower end of that range in the foreseeable future. And we believe that also, as a note, our e-commerce sales are profitable for us. So I know there are some retailers where it's not as profitable, but it's a profitable endeavor for us.

And Eric, your question regarding the store count, we continue to cherish the optionality that we have with our leases as we have 70% of our leases coming up for renewal over next 3 years, which gives us tremendous leverage in discussions with our landlords. What we said that over next couple of years, we may close up to 30 locations. A lot of those locations may be outside of our North American market. We continue to work with our landlords in U.K. as well to possibly exit some of the unprofitable stores at their natural lease events. So this really helps us push through some of those things as we continue to work finding that optimal store count in addition to what we are doing internally to reduce our reliances on traditional mall-based retail. As we talked in our prepared remarks, there is a continuous effort to accelerate expansion in the third-party retail channel so that Build-A-Bear brand can be present in more locations and that we can find a more economic model for us to really capture and monetize the value of the brand. But again, at the end of the day, it's a discussion with each landlord one store at a time. We are in the business of operating profitable stores. We tend to do a good job of managing those expenses reflected in the margins that we are showing. So we continue to do that work, and we believe that we are positioned well in the upcoming negotiations. And depending on the willingness from landlords to work with us, it's going to depend on how many of those stores we may close up over next 2 years.

Right. I think strategically, it's important to understand that we need to maintain a balance between the brick-and-mortar retail and the e-commerce retail. Our experience is a big part of why we believe we have an opportunity to continue to diversify the company. It's why we build this brand strength with consumers is largely based on having that experience at retail. So although we have been able to leverage and build that e-commerce space, particularly related to expanding our consumer appeal to the teens and the adult consumers, which I mentioned in -- is over 20% of our business, it is just important to understand that we're not trying to transition away from brick-and-mortar retail and become an exclusive e-commerce site -- e-commerce company like a lot of other companies are. We don't believe that that's the best for our ongoing strategy. I did just want to correct something. I think I said 8 consecutive years. I meant 8 consecutive quarters, apologies for that, of continuous double-digit growth on e-commerce.

And just a quick follow-up. I know -- actually kind of pertains online, you have been much more aggressive in offering online-only exclusives, obviously advertising into the store. What has been the response to that? And is that, I would assume, something we're going to see even more of going forward?

Yes. That's been a very strong strategy for us. And it's reflective of what I just mentioned, Eric, in that we are actively pursuing a diversification of our consumer base as well. Many of those online exclusives are specifically targeted toward an adult affinity group. A lot of them are licensed. Some of them are kitschy. A lot of them are gifting. We started some of this really more pushing the envelope kind of approach last Valentine's. You're going to see a little bit of that this Valentine's as well, on being the ideal gift for an adult to an adult. So that's been successful for us. And it also generally achieves a premium price.

[Operator Instructions] Our next question comes from the line of Stephanie Wissink with Jefferies.

This is Ashley Helgans on for Steph Wissink. Fiscal year guidance for pretax income remains consistent despite reduced Q4 sales expectations. Is this a function of cost saves or other levers that were not anticipated before?

Thanks for the question. Yes, we continue to really stay focused on our controllables as we have done throughout the whole year. We continue to really drive our retail gross margin expansion as we have shown with a 400 basis point expansion in the current quarter and throughout the year. We continue to leverage our occupancy and push in those negotiations as we have this big lease optionality that we talked about. We did look at our SG&A structure, and we do continue to make daily choices to reduce our structure, to eliminate some of the redundancies. So we continue to push on that front, and that's definitely reflected in our results throughout the year. And we expect to continue with those initiatives, giving us a high level of confidence that we can develop the results that we are guiding to.

Ms. John, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Yes. Thank you, and thanks for everyone for joining us today. And we certainly hope you have a happy holiday. Look forward to updating you on our final results on our next call.

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.