Greetings, and welcome to the Build-A-Bear Workshop Second Quarter Fiscal 2021 Earnings 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. Please go ahead.

Good morning. Thank you for joining us today. With me are Sharon Price John, CEO; and Voin Todorovic, CFO. For today's call, Sharon will begin with a discussion of our second quarter fiscal 2021 performance and our outlook for the year. After, Voin will review the financials and guidance in more detail. We will then open the call to take your questions. We ask that you limit your questions to 1 question and 1 follow-up. This way, we can get to everyone's questions during this 1 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. 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. With that, I would now like to turn the call over to Sharon.

Thank you, Allison. Good morning, everyone, and thanks for joining us today to discuss our results for the second quarter of fiscal 2021. We're pleased to have delivered the highest profit in our history for our second quarter, coming on the heels of a record-setting profit in our first quarter. Accordingly, in fiscal 2021, thus far, we have achieved the highest profit for our first half in our company's nearly 25-year existence. We believe these results reflect momentum that has been building from the execution of our stated strategy, agility to adapt to a rapidly evolving environment and ability to accelerate key initiatives to drive sustained profitable growth while recognizing that the business is also benefiting from pandemic-related factors such as pent-up demand and stimulus funds. I continue to be proud of our team across all areas, from corporate, where we continue to work from a virtual environment, to our store associates enthusiastically engaging with our guests and to those working in our warehouses to move inventory and fulfill orders. Our associates have remained nimble and dedicated to our mission to add a little more heart to life. While we remain appropriately cautious given the uncertainty and course changes due to COVID-19 and its impact on consumer mobility and the supply chain, we began third quarter with continued strength. We are excited about the opportunities that lie ahead to continue our favorable performance in the second quarter -- in the second half of the year, which is reflected in the upward revision in annual guidance that was announced this morning. The quarter's results were outstanding. Total revenues were $94.7 million, up 135% from 2020 and up almost 20% from the fiscal 2019 2nd quarter, reaching the highest level in over a decade. Our brick-and-mortar stores were predominantly temporarily closed last…

Thanks, Sharon, and good morning, everyone. We are very pleased to continue to build momentum as we delivered second quarter profit at the highest level in our history. Combined with our record-breaking first quarter, we were able to report the most profitable first 6 months ever for our company as well. Total revenues, gross profit margin and operating income showed solid improvement compared to the pre-pandemic levels in the 2019 2nd quarter, further demonstrating the validity of our strategy, supported by the focused execution of key initiatives by our team. As Sharon noted, as we look at the balance of the year, we are appropriately cautious given the uncertain path of COVID-19 and potential headwinds stemming from supply chain disruptions. However, our strong first half performance and continuing positive trends give us the confidence to further increase our guidance for total revenues and EBITDA for the 2021 fiscal year which I will discuss in more detail in just a minute. First, let me give more detail for our second quarter results, which include comparisons to both the 2020 and 2019 2nd quarters due to temporary COVID related store closures last year. Total revenues were $94.7 million, a 135% increase compared to the second quarter of fiscal 2020 and a 19.6% increase compared to 2019. We are pleased to see the strong growth partially fueled by pandemic-related factors, but we believe also reflects the ongoing affinity that customers have for our brand and their desire to engage in hands-on and personal experiences. Our sales growth was primarily driven by an increase in average transaction value which grew over 20% in North America compared to the 2019 2nd quarter, and reached the highest level for a second quarter across geographies. Gross profit margin of 53.2% was significantly higher than the prior year's…

[Operator Instructions] Our first question is coming from Eric Beder of SCC Research.

Congratulations on a great quarter. When you look at -- I'm going to ask it differently. So you've obviously picked up a lot of customers here and there was tremendous pent-up demand from COVID. So how do you feel about converting that first-time customer into a many-time customer going forward? And how do you look upon that? Is there an opportunity here?

Yes. Thank you for the question, Eric. You are correct. As we noted in the prepared remarks, we do believe that this is a combination of factors that are driving growth, yes, there is some impact of the pent-up demand and stimulus funds. But we do believe that some of the fundamental changes that we've made in the business from infrastructure, particularly IT, technology, e-commerce, opening up our ability to ship from stores, much of what was implemented over the course of years. And interestingly, we flipped the switch on the final portions of some of this with warehouse management system and the new Salesforce relationship in February of 2020. All of that enabled us to manage this in a very interesting way, where it's almost as if it's synergistic. So yes, people are coming back into our stores, but we have omni ways to capture and enhance that relationship with them, and new opportunities, whether it's journey or loyalty program to reengage them to drive that lifetime value. Now to answer your specific question with all of that background, it depends is the answer. Some of these more traditional consumers that we have that might be in the 60% that are 12 and under, we will use a lot of our traditional ways and know what they shopped for before, why they got in -- why they came into Build-A-Bear for the first time, how do we engage with them based on what property they may have purchased or when they're -- perhaps, even if they've provided this information through our loyalty data when their next birthday is. On the adult side, the 12-plus, the 40% that are teens, tweens and adults that are shopping us, that really depends on some of the affinity products. If there's, for example, a Pokémon fan, it's highly likely that they will reengage with us. There's a lot of data about the collectibility of that particular line. If they are engaging with us in some of these new gifting programs, adult-to-adult gifting, we're still learning and evolving on how we then get them to engage with us in the next gifting opportunity, working to shift in the mindset of Build-A-Bear as an optional gift for a wide variety of reasons. And that's a lot of our Internet efforts that we're making to push Build-A-Bear as an option up as sort of in a competitive realm of other natural gifting opportunities. Interestingly, this past year, because people were separated, Build-A-Bear has served as a -- I mentioned in the remarks, just because gift, just people wanting to reach out and send a little bit of heart to someone and let them know that they're thinking about them. And we believe that, that is a big opportunity for us going forward.

Great. And just a follow-up here. So the third-party business, international franchising, those seem to be a little bit more of a lagging indicator than what you're seeing at the stores. Should we be thinking about going forward that those opportunities are going to become much more -- if COVID stays the way it is, much more -- something more aggressively to pursue as they start to ramp up once again?

Yes. And it's a bit bifurcated, Eric. Great Wolf Lodge is tracking not that differently from the rest of our fleet. And Carnival Cruise Line, for obvious reasons, is just now sort of getting the staggered launch up and running. But COVID aside, the third-party retail opportunity is, we believe, quite advantageous for us on a number of fronts, not -- the least of which is the lower capital required to roll out new locations and create new guests, the new memories and new loyalty members as we -- as the next generation gets to experience Build-A-Bear. So -- and we have a few things that we are working on all the time on how do we take this opportunity and drive that low capital expansion of our experience in the right types of locations, which tend to be tourist destinations.

Our next question is coming from [ David Cannon ] of Cannon Wealth Management.

Congratulations, excellent quarter. So a couple of questions. First, for the back half of the year and for next fiscal year, do we have any "transformational initiatives?" So far, you guys, as I see, have done a better job of executing on things that we've done all along. Is there anything new? And what I'm referring to would be the enhanced website that you've alluded to in the past that incorporates virtual reality components potentially getting into the pet gifting category and/or crypto NFTs, or if there's something that I'm missing if you could call that out.

Thanks so much, David. Appreciate your question. We have been very focused on 3 initiatives as we've highlighted on driving our strategy. The first initiative is acceleration of the digital transformation. And as a part of that, yes, we're always looking for ways to engage with consumers in new and different ways and advance the interconnectivity and engagement and experience level even on e-com because that's really the core of who we believe we are as a brand since we're often getting credit for reinventing experienced retail almost 25 years ago. So with that in mind, as a matter of fact, we actually are in the soft launch of the Bear Builder 3D, which we did announce was expected to launch this year on our ICR -- I believe, in an ICR deck earlier this fiscal year. And feel free, you can go online right now. We're soft launching to make sure that we pick up any of the -- it really is advanced technology with a lot of great partners. So we're working through it to make sure that it is seamless and exciting and fun. If you go online, you can find Bear Builder 3D on your laptop/desktop on the upper right-hand corner. And if you're on a phone, you'll have to have to click, sorry, for the e-com language, on the hamburger to get it to pull up. So feel free to experience it. Let me know what you think, on the other front of continuing to evolve and do things transformational. This last year, 2020 was the first year for us to have buy online, ship from store or buy online, pick up in store, buy online, and have it delivered in the same day. So they're all part of a broadened approach to initiatives where we can meet the consumer where they want to be met and where we can meet the need of a broader range of consumers. We believe that Build-A-Bear being multigenerational now has the opportunity to engage with a much, much broader addressable market for many more occasions and all of these different mechanisms, we believe are allowing us to be able to do that more efficiently and effectively.

Okay. So really the only thing that is new in terms -- that's potentially transformational is the 3D Build-A-Bear, which is being launched currently? You're doing a soft launch right now. There's nothing else potentially transformative like another thing I would mention is a new third large national chain for third-party retail. I would view that as transformational, but you don't have anything else like pets or crypto pets, crypto plus NFTs, none of that is currently in the pipeline for this year or next year?

So David, again, the third party, we have noted, we agree with you. We believe that's very important to us. But I just noted on the remarks that we are always looking for good partners and we believe that there is continued opportunity and that is a very efficient model for us. From a transformational perspective, we're very excited to be able to launch a brand new movie with Sony, that is highlighting one of our owned intellectual properties called Honey Girls with multiple Grammy award-winning artists, brand new music. We believe that, that has an opportunity and the continued relationship with our multidimensional, multi-year deal with Sony Pictures Worldwide acquisition has clearly an opportunity to be transformational as well and pushing into all of our other entertainment and content efforts. And NFTs, as we noted on the last call, it is something that we are looking at. And the assessment we're working with some outside companies on the assessment of visibility of that and how we would execute that within the Build-A-Bear property.

Do you have an aversion to making toys for pets? Is that something that you think is not effective use of your time? Or is it something that you're interested in?

David, I'm so glad that you asked that question as well. Apologies please for not answering in the previous response. We actually are launching a new pet line in conjunction with a licensed relationship but we're not ready to speak about it in detail yet. Thank you.

[Operator Instructions] Our next question is coming from Greg Cohen of Rambleside Holdings.

Sharon, congrats on a great quarter. I just have 1 question on capital allocation. By my math, our enterprise value is roughly $250 million. And the guidance actually seems like it might be conservative given the fourth quarter holiday season being very strong one for this company. And so given the valuation could be as low as 4x EBITDA, and we have a significant cash balance, no debt, and it seems like our CapEx is very light. So my question is, do we have any plans to return capital to shareholders in the form of buybacks or anything that would be accretive to earnings per share?

Yes, I'll start and Voin can add in anything if he likes. Yes, we agree. And clearly, we're twice cash balance as we were last year. We also pointed out that some of that is a moment in time where we have a few things that we're going to have to take to bring that cash balance down with the payment of inventory that's still moving in some changes, some pressures on the cash in the back half as well as some of our delayed rent payment. But for the most part, absolutely, I understand your point. We, as always, work with our Board of Directors to assess proper capital allocation and look at different options on many of the things that you pointed out. And as you know, we have in the past implemented buyback programs and do believe in those types of programs to return shareholder value. And I think, though, another note that I had included in the prepared remarks, as of this moment with some of the additional ramp-up of new COVID issues, we do want to stay very fiscally responsible until we understand exactly what's in the future, what the future holds. And I think that we all have learned if we -- I think we can agree that it's very difficult to predict how these types of things unfold, and we -- all of our recommendations and all of our current -- even our changes in our guidance are isolating any ongoing or acute COVID impact. So we really want to stay prudent on that front. And I don't know, Voin, if there's anything you want to add?

I think you covered really well.

Okay. Great. That's helpful. And I guess kind of the second question as a follow-up to that would be, obviously, the stock price is 2 components, right? It's earnings per share, EBITDA per share, and obviously, the multiple of that would be applied to that.

Right.

And I think one of the reasons why we trade at such a low multiple, I mean this is, frankly, one the cheapest stocks I think in the entire stock market. And when you layer on the significant growth that we're seeing, the significant profitability, the significant margin improvement and all these good factors, it's actually shocking that we're trading at such a cheap price? And I guess my question is why do you think that is? I think one of the other callers alluded to the fact that we haven't made at least any public announcements in some of the more progressive forward-thinking digital monetization tools such as NFTs, which you're seeing in similar consumer brands, obviously, Playboy being one, Funko being another. So that's just my personal view because otherwise, I can't figure out why we're trading at such cheap multiples. Curious how -- what you think about why the market is sort of undervaluing the company or misunderstanding the significant value capture opportunity at these levels?

Yes. Again, I'll start with this and open it up to Voin. First, I think that the market looks for consistency in deliverables. And we have had a goal for many years of driving sustained profitable growth. And I think a lot of companies have been somewhat challenged. We've had some issues with that over the past few years. As you know, whether that's with the significant contraction of traffic to mall-based retailers. And we've had to go through this really dramatic transition of our retail evolution, e-commerce evolution, and we had to rebuild our entire infrastructure to get to this particular point. And now you're starting to see that consistency and you're also starting to see some revenue growth, which I know that, that has been something that the investors have been looking for. So we're really excited about that as we believe we're expanding the potential addressable market, as I shared with you, and also being able to get that addressable market to have a longer lifetime value. So there's multiple fronts and levers. The second piece of that on the multiple front, we believe that our evolution to be more of a branded intellectual property company versus "just a retailer" should be able to drive us toward a higher multiple range if you look at life companies. That is the endeavor into a lot of the entertainment and content type of business where there's a different approach on how intellectual property is valued. So I think we're just -- we have to show that consistency, and we need to be able to provide some proof points of this hypothesis. Even though we believe we've shown some proof points in the hypothesis, I believe that the consistency on top of that would likely provide some data that perhaps could provide a little more confidence from the investment community on both fronts. Voin?

Yes. So great question. And again, over the last several years, we have done a lot from the transformation perspective and diversification especially as we think about our web business. And like when Sharon and I joined the company, their web business was like in low single digits as a percentage of total revenue. Now our web demand is a significant portion. So even when we are talking about diversification of revenue channels, significant change. When you think about third-party revenue and getting that asset-light model, the different multiples, different valuation, definitely, that's been one big area of focus for us. As Sharon talked earlier about entertainment, all these different revenue streams do have different multiples. But again, that's -- still the biggest chunk of our revenue is coming from the retail stores, and that's probably partially a reason for some of those valuations. But we are working and we are, as we mentioned, exploring some of those opportunities that were presented, and we are looking forward to be sharing more information at the appropriate time. But we definitely are looking for ways to expand and really create some of that momentum in these different channels. And as you pointed out, over the last few years, like our CapEx has been managed. We've been managing our expenses. We are seeing this revenue growth from different channels and our flow-through to the bottom line has been strong, and we definitely expect some of that to be realized by the investment community in months and years to come.

We do have 1 follow-up question coming from David Cannon of Cannon Wealth Management.

Yes. Some retailers are talking more about, and you alluded to this, being an omnichannel company and giving people product the way they want it, whether it's buy online, pick up in-store, visiting the store, e-com or -- and this is the new thing that I wanted you to add some color to, is same-day delivery, it seems like the market is starting to figure out that in a way, brick-and-mortar retailers actually have an advantage over a pure play e-commerce company, using the brick-and-mortar store essentially as a DC or or warehouse, if you will, and being able to deliver to people same day. Can you talk a little bit about your strategy there? I saw an announcement with Shipt, are there other partners? And how specifically are you going to market that? And is that an advantage for you?

So David, yes, you are absolutely correct that the initiative we started late last year, I think we signed a deal in December of 2020, definitely, that was an extension of that buy online, ship from store, pick up in-store, and as Sharon talked about earlier, expanding our capabilities and providing our guests with whichever option they would like to engage with the brand. This is one of those areas where we believe it's a big opportunity, especially around holidays, when we do have compressed delivery times and time windows shipping from in the past one focal point of our Ohio warehouse. So definitely, as you get closer to holidays, this provides us with tremendous optionality to provide that product and be part of the consideration set as guests are placing these orders. So this last mile program and things you know that kind of like the buzz in the industry is definitely one of those big areas that we are spending a lot of time and energy. We believe it's a big opportunity and it is still relatively new, but it's definitely one of those things that's differentiating us, providing that experience as quickly as possible to our guests, it's critical.

Right. I think the -- this does tail nicely, David, into our discussion about gifting as well. So the gifting side of this were our 2 largest holidays, whether that's Christmas or Valentine's, those last few days are important to consumers. And that same-day delivery can be very critical for us to [Technical Difficulty] the sales opportunity in the final moments providing a gift for a loved one.

Have you specifically marketed that service up until this point? And if not, do you see yourselves putting some dollars behind that initiative?

We have marketed it and we expect to continue to do so, especially at the last days of holiday, just because we believe there's a big opportunity there for -- to meet would which would be -- which would have otherwise been lost sales.

Okay. Just out of curiosity, do you agree, in the past, being a brick-and-mortar retailer was perceived as an arbitrage that perhaps in the marketplace people are beginning to rethink it and possibly perceive brick-and-mortar retailers that have BOPIS, e-com as well as same-day delivery as potentially disrupting pure-play e-com companies? Just curious of your thoughts on that.

I don't want to speak to what everyone else believes, but I'll certainly tell you that we have always believed that well-run, profitable retail locations are an asset, not an anchor for Build-A-Bear. It's a virtuous circle that we're creating and a relationship with the consumer, where they create a really memorable experience and have great brand affinity for us that's proven over time. Our affinity numbers are as big as some of the best-known kids companies today, and it's coming from that experience that they have. And now we've evolved those 300 some-odd locations into many warehouses, as you say, and small delivery pool points. And yes, that is a tremendous asset for us.

Ladies and gentlemen, at this time, I'd like to turn the floor back over to management for closing comments.

Thanks for everyone joining us today. We appreciate it, and we look forward to seeing everyone on our third quarter call.

Ladies and gentlemen, thank you for your participation and interest in today's Build-A-Bear event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.