Greetings and welcome to the Build-A-Bear Third Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Allison Malkin of ICR. Please go ahead.

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 strategy and third quarter fiscal 2021 performance and discuss 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. [Operator Instructions] 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. 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.

Good morning and thank you for joining us today. Late in the third quarter, we acknowledged our 24th anniversary, which marks the beginning of Build-A-Bear's milestone quarter century year of adding a little more heart to life. In preparation for a year-long celebration of our 25th anniversary, I want to thank our founder, Maxine Clark, and everyone that has been a part of this organization through the decades and around the world for the dedication and hard work that has resulted in an iconic brand and beloved company, enabling untold special memory and the creation of over 200 million furry friends for our guests. Since 1997, Build-A-Bear has grown from a single retail location in the Saint Louis Galleria Mall to an evolved and diversified global corporation, reflecting many market and consumer changes. Most of the business model evolution has taken place in the past 8 years since I took the helm in 2013, with this passionate team staying focused on successfully turning around the company that had endured 8 consecutive years of comparable store sales declines by 2012 and to today's thriving entity that is now poised for a compelling future. With that backdrop, it seemed relevant to highlight some of the remarkable progress that has been made since 2012, including: one, a comprehensive digital transformation resulting in significantly more efficient operations and impactful e-commerce growth. In fiscal 2012, web demand was 4% of total revenues or $14 million. In fiscal 2021, we expect digital penetration of nearly 20% of total revenues on a higher top line, reflecting a more than 5x increase in annual web demand, which would surpass the $70 million mark, the best e-commerce results in our history for both revenue and profitability. Two, a meaningful expansion in merchandise margin. In fiscal 2020, we had steadily…

Thanks, Sharon, and good morning, everyone. We are very pleased to continue our positive momentum from the first half of the year. And as Sharon noted, we delivered third quarter and year-to-date profit at the highest level in our history. This performance reflects the success of our strategy, which has provided us with a powerful platform for which to deliver consistent growth. We expect the strength of our omnichannel business model, which includes a very profitable e-commerce and experiential retail store base, complemented by high-margin revenue streams and supported by the improved supply chain as well as disciplined expense and balance sheet management to put us in a solid position for continued future success. Third quarter significantly exceeded our expectations as the month progressively improved ahead of our revenue guidance. As a result, what is typically the smallest revenue quarter of the year turned out to be the biggest so far this year. We are pleased to achieve these strong results in an operating environment that remains dynamic with ongoing macro challenges. Our year-to-date performance and continuing cost discipline 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 information for our third quarter results, which include comparisons to both the 2020 and 2019 third quarters due to the temporary COVID-related store closures last year. Total revenues were $95.1 million, a 27% increase compared to the third quarter of fiscal 2020 and a 75% increase compared to 2019. Our sales improved across geographies driven by both higher traffic levels as well as an increase in average transaction value compared to the 2020 third quarter. Gross profit margin of 52.1% was significantly higher than prior year's…

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

Congratulations on a really great quarter. When you look at the commercial revenue and the international revenue, they've been coming back, especially the commercial. How do you feel about those areas in terms of potential growth prospects going forward?

Yes. Thanks, Eric. On the commercial revenue side, that's a part of what's diversifying our business. But a big portion of that is something we call third-party retail, and those manifest as retail stores just operated by our partners such as Great Wolf Lodge or Carnival Cruise Line. Some of those, as we noted in the remarks, are very strategically chosen at tourist locations. And that's sort of why we saw the lull during 2020 and now why we're seeing some strong comeback as those markets stabilize. The growth in those opportunities is really dependent on finding those partners as we move forward. And there are additional partners that we have targeted and identified as potential growth opportunities for us for the operated locations where the partner buys the fixtures, manage the inventory and maintains the labor cost. So yes, we're looking forward to continued tourist location expansion, but not just in third party. I also noted in the call we still see some opportunistic store expansion on our owned and operating side as well and listed out a few locations where we feel like we have opportunities because -- I think the specific comment was we don't believe Build-A-Bear is overstored. So thank you for the question. But yes, there should be some opportunity. Voin, is there something else you want to add?

Well, I just -- and Eric, you asked us about international. Definitely, considering the pandemic around the world, the situation is different in every country as our different international franchise partners in different locations are dealing with some of the challenges in their respective countries. So that's a little bit outside of our control. And like we definitely believe in our international business in the future, and we would love to find additional partners and work. But at the same time, during this challenging time, especially with the global pandemic, this business is a little bit, I'd say, at a halt.

Just recall, though, that most of those partners in -- whether it's India, Australia and China, those are franchise partners. That's franchise revenue for us. So it's comparatively less negative impact.

Okay. And so in Q3, you had -- I believe that it was PAW Patrol movie. Movies here have become -- are slowly evolving. How are you going to evolve in terms of how you handle movies going forward?

Are you referring to the licensed products, Eric, or our content creation?

You can do both. You had the Honey Girls also come out at...

Yes. So on the licensed product, we have -- we really enjoy some best-in-class relationships and work with those intellectual property owners to optimize not only movie properties that often have like a spike kind of impact on sales such as PAW Patrol. But we create these long-term relationships with evergreen type properties, with Harry Potter being one of our more successful collections from this year or other intellectual properties that are from -- that are sourced from movies like Star Wars, with Grogu continuing to be very successful for us. So -- or Pokémon from a gaming environment. So we think of entertainment as not just the old model, if you will, from the 1990s, 2000, 2010. We really think about how do we optimize sort of macro entertainment in terms of what's in the common sort of popular vernacular. And that is not only now not for children. As we mentioned, we're expanding our consumer base. And so we're also working with entertainment properties like FRIENDS or like WandaVision or Deadpool. So that mash-up of Build-A-Bear with something else that has an emotional connection with a wide variety of our expanded consumer base creates the opportunity for us to not only drive sales, but it drives additional affinity and gives us a reason to communicate and speak with these guests on a more regular basis. On our own content front, we have been, as you know, developing this intellectual property for quite some time to have more balance in the way we present ourselves to the broad consumer base. We don't want to just be a store of licenses, although we absolutely value those licensed relationships. We also want to have that control, if you will, over when and how we launch our own intellectual property or drive…

Okay. Well, great. And congrats and good luck for the holiday period.

Thank you.

Thank you.

Our next question comes from the line of William Zolezzi with Divisadero Street Capital.

Congratulations on the great results. I guess just to start, housekeeping question, what does the EBITDA guidance translate into as far as non-GAAP earnings per share for the year?

William, thank you -- thanks for the question. So our EBITDA guidance of $55 million to $60 million on a full year basis, and we also guided our depreciation to be about $12 million to $13 million, one number -- if you are assuming the tax to be -- tax rate of about 25% for the calculation, that would result in EPS in the range of $2.10 to $2.30 per share.

Okay. That's great. Secondly, I guess are you guys going to ICR?

We are currently expecting to go to ICR, yes.

Okay. Great. And I guess just lastly would just be a comment as opposed to a question. I mean stock obviously is trading at less than 10x earnings, and you guys have history beating and raising. So I know you guys -- I'm very happy to see you guys put that buyback in place. I would love to see you guys execute on it. To the extent you guys go to ICR and keep executing, we're not going to get a chance to buy the stock at less than 10x earnings for long so I would go ahead and execute on that. And love the dividend. So thank you guys for the great execution and nice to see that we're going to start returning capital to shareholders.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of David Kanen with Kanen Wealth Management.

Congratulations. Two questions. First one is expanding your total addressable market, as you said, to teens, tweens, adults. Is there anything that you could share with us in terms of the pipeline of products and collaborations that would further drive sales into that increased TAM opportunity? So that's number one. Number two, if you could comment a little bit on these ATM machines, as you call them, in airports? Kind of what's the average unit volume, if you will, and the opportunity over the next couple of years?

Yes. Thank you, David. So on the expansion of the addressable market, as I mentioned in the comments, the 2 key ways that we're doing that is one is gifting. And we are providing lots of different gifting opportunities, new concepts, new ideas, new occasions. We've tested into Valentine's, for example, adult-to-adult gifting and recognized that our product and our brand resonates in that area and are continuing to evolve with direct marketing and efforts against that adult-to-adult consumer base and see that there are other opportunities and have been building -- creating building blocks against whether it's graduation, Mother's Day, Father's Day, a number of different -- any occasion that you might see as a reason to celebrate or make a memory, we believe that Build-A-Bear can be there. And we certainly expect to be able to share even more specific information as we go to ICR or closing call for our year-end and look forward to that. I mean, obviously, you understand that, that broader market can create a lot of opportunity for us to build the business beyond just kids and get out of the churn of that age -- the age gating that -- or age grading that happens for us when you age out of Build-A-Bear. Now that we're multigenerational, you really don't have to age out of Build-A-Bear. The second question about ATMs, we just have the one ATM in JFK right now. We haven't shared the specifics of that. I can say that, thus far, Hudson's is pleased with our results. They actually mentioned it in their own earnings call that they were pleased with the Build-A-Bear vending machine results. And we look forward to being able to replicate those positive results in partnership with them. We also believe there are opportunity for other types of locations, whether that's children's hospitals, where you have a need for a low-labor model but also a desire for an immediate gift-giving need. And it's just another way, another innovative way for us to be in front of or with -- in front of consumers at the right time and the right place. And we're always looking for those types of opportunities.

Okay. I should have been more clear on my first question. I understand the target audience and the TAM. What I meant is the products or the content, if you will, in terms of collaborations, like you mentioned doing something with FRIENDS. Is there -- are there other specific product opportunities for collaborations that would be more appealing to an adult or a teenager or a tweenager, so to speak?

We have a pipeline, as I mentioned on the call, of licensed properties that we expect to roll out, some of which I mentioned would be WandaVision, which just launched quite successful, as well as we're relaunching our Deadpool product, which has also been very popular in the past. And as I'm sure you realize, David, a lot of these are licenses. So that requires us to have approval to mention those in a public forum, but we do have a pipeline of products that are coming out that are designed to and expected to appeal to that target audience.

[Operator Instructions] This does conclude our question-and-answer session. I'll turn the floor back to Ms. John for any final comments.

Thanks for everyone joining us today, and we do look forward to sharing our year-end results and providing additional updates on our strategic plan particularly as we are starting to the beginning of celebrating our milestone 25th anniversary year. As mentioned on the call, we currently are planning to attend the ICR Conference in January and look forward to seeing any or all of you there and have a happy holiday.

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