Greetings. Welcome to the Build-A-Bear Workshop Fourth Quarter 2021 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, Allison Malkin with ICR. Thank you. You may begin.

Good morning. Thank you for joining us. With me today are Sharon John, CEO; and Voin Todorovic, CFO. For today's call, Sharon will begin with the discussion of our fourth quarter and fiscal 2021 performance and the priorities we have set as we begin fiscal 2022. 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. As fiscal 2021 came to a close, we were thrilled to kick off our year-long celebration of Build-A-Bear's milestone 25th anniversary on the heels of the most profitable year in the company's history. Today, we will reflect on the record-breaking results from 2021, which were achieved while navigating through the challenges, volatility and uncertainty of a global pandemic and provide an update on the strategy that contributed to our positive outcome. We will also share a few details about newer initiatives that we're working on for 2022. First, it's important to note that the advancements this company made in 2021 reflects the successful execution of a multifaceted strategy that has required years of planning and investment. The model was primarily envisioned to elevate and monetize our iconic brand while evolving the company into a digitally driven, diversified, omnichannel entity, enhanced by dynamic and efficient vertical retailtainment presence. With many of the building blocks now in place, we believe Build-A-Bear is fundamentally different than it was when we began this process or even prior to COVID. In fact, many of the necessary changes in transformative initiatives actually accelerated during the pandemic. Additionally, we believe these efforts have provided the company with a platform for a compelling future as we continue to leverage and build on these new capabilities with the goal of creating ongoing shareholder value. To achieve this transformation, this leadership team initiated and led wide-scale, long-horizon efforts designed to evolve the company, both during and in response to a variety of external pressures, included changes in consumer shopping habits, resulting in the rapid rise of the digital economy and shifting mall traffic patterns. We systematically invested in and executed plans to improve operations and profitability, including an organizational restructure and…

Thanks, Sharon, and good morning, everyone. Our performance continues to reflect the success of our strategy, which has allowed us to put the building blocks in place to develop a powerful platform to support our initiatives, to deliver consistent, profitable growth. We believe our elevated omnichannel business model, which includes a highly profitable e-commerce and experiential retail store base complemented by diversified revenue streams and disciplined expense and balance sheet management, puts us in a solid position for continued future success, which includes a strong start in the first quarter of this year. We are pleased to finish fiscal 2021 near the high end of revenue and profit guidance provided in early January, even as the surge in COVID variant cases led to temporary closures of certain locations, reducing the number of operating days in the month by about 4%, negatively impacting our revenue by approximately $1 million. Even with that, we delivered full year pretax profit of $50.7 million, which has been noted as the highest in our company's history. Due to strength of these results, we reversed the tax valuation allowance in North America, which reduced our tax expense for the year. Accordingly, for comparability purposes, I will focus my comments on pretax income and EBITDA. Let me now share more information on our fourth quarter results, which include comparisons to both the 2020 and 2019 fourth quarters due to the temporary COVID-related store closures last year. Total revenues were $130 million, a 38.8% increase compared to the fourth quarter of fiscal 2020 and a 24.3% increase compared to 2019. Our sales improved across geographies, driven by higher traffic sales -- higher traffic levels as well as an increase in average unit retail compared to the 2020 fourth quarter. Gross profit margin of 53.5% increased more than 300…

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

Congratulations on an impressive year.

Thanks, Eric.

Thanks, Eric.

We've talked, and I know it's a big push to get to the teen, tween, adult customers, what are the economics of that customer? Do they buy more product? Do they pay more full pricing? How should we be thinking as that kind of shift goes in terms of their value as a customer?

Yes. That's a good question, Eric, but it's kind of a multifaceted answer, unfortunately. First of all, just to level set, we've evolved that consumer base to now represent about 40% of our total consumer base. So we were comparing -- making some comparisons to 2012, that's a significant improvement or a significant expansion. And by doing that, we believe that there is a longer-term, more consistent potential in the broader addressable market that that represents versus the kids market, which is still critically important to us, obviously, still the majority of our business. But I think that most people understand in the kids business, there's a bit of a churn that you have to -- there's a leaky bucket of kids that age in and age out than of your market. So there's an ongoing marketing initiative that we have to keep those kids renewed in there. On the -- specifically to your question, they kind of group into -- I'll talk about the 2 biggest areas. One is a collector. Those are incredibly valuable consumer sets. They're very efficient consumers for us. So we'll just use Pokemon as an example. Those average purchases are above our average DPT. Our average DPT in the mid-50s and where -- that's usually a minimum purchase is $60, $65, sometimes $75, and we know who those consumers are, and we're able to efficiently and directly communicate with them. We're also able to tag Pokemon collectors and with our advanced digital marketing capabilities. So they tend to buy efficiently, they buy online, they usually buy mobile, and they over-indexed in our e-commerce business. The other side is this giftables market, and that's a new opportunity for us -- a newer opportunity for us that we've been building that. We started building it 3 or 4 years ago really in a more overt way with some of our adult-to-adult Valentine's gifting that really did explode this year with the After Dark initiative. Those are -- what we're doing with that is we're tagging other giftable types of searches to find these consumers to position Build-A-Bear as an alternative to other adult-to-adult type gifting. HeartBox fits in that category as well. So as we, I believe, introduce and educate people with Build-A-Bear in this multigenerational aspect as a gifting alternative, we'll have more opportunity to build out that business. They won't -- and the goal is that they will repeat for additional occasions. So when we talk about expanding consumers, expanding occasions and expanding products, that's a perfect example of that. So in both cases, both that market as an example, the sheer size of it, of the addressable market of the teens, tweens and adults is bigger than our core market from a mining perspective. But the categories that we're pushing like gifting or collectibles is bigger than plush or toys. So we feel like that this is an important initiative for us for future growth.

Okay. The other question is the new stores, you talked about expanding into more tourist-driven locations. What are you seeing from that? What, in terms of, I don't know, maybe metrics or pieces here makes you want to be more aggressive in terms of that -- rolling out that business even more than you had before?

Right. So we did mention our expectation to roll out new stores over the next 2 to 3 years. As we've discussed and shared for some years now, tourist locations tend to over-index on all key metrics or many of our key metrics. It's a marketplace where there is a different mindset we found of a consumer. They look at Build-A-Bear as the best possible souvenir in some cases. We have procured products that are pushed out from a micro distribution perspective to make that even more special, maybe something about a specific feature, the right -- the correct sports theme or any -- something that's city-based that makes it very memorable, very memorable part of the trip for a family. And there's usually a little bit of a more open wallet when you're on holiday, which is usually what's happening in these tourist locations. We believe that there's a lot more additional partnerships as well with our third-party retail, not just our own types of one-off locations in some tourist destination areas. And the tourist destinations that we shared at the end of our third quarter call, they are currently out, at least for the end of 2021 -- by the end of 2021, which we're reporting on, they were outperforming their pro forma. So we're very pleased with the selections that we've made and feel very good about our strategy in this regard, particularly since we don't believe we're overstored and that we have a very efficient model on how to roll out. I think the one of the more exciting things that we shared though on the store openings was the Build-A-Bear Adventure, which is an entirely new way to experience Build-A-Bear and amplify. One of the consumers favorite things about Build-A-Bear is the celebratory party aspect of who we are.

Right. I just want to -- before I -- one quick clarification. You said those 15 and 20, that's your openings? Or is that in conjunction with other people?

What we specified in the remarks is it's a combination of both.

Our next question comes from the line of David Kanen with Kanen Wealth Management.

Guys, team, great job. Congratulations on an excellent year.

Thank you.

Thanks, David.

So I've got a number of questions, so please bear with me, be patient. You spent a lot of time sketching out incremental opportunities, and there are a few of them. So I've got a number of questions if we could drill down on that. So if you could start with, let's call it, the expanded total addressable market opportunities getting into collectibles, teens, tweens, adults. Could you give us a little bit more color there and talk about the size of that opportunity? And what you think you can accomplish over the next 3 years versus -- or in comparison to your core historical business?

Thanks, David. So I just -- one thing that I'd want to start by clarifying, I don't think we're trying to position that we're "getting into the collectibles business." We've been in the collectibles business for some time now, which is how we've accomplished the 40% of our total sales being attributable to teens, tweens and adults, which -- that's over indexes with that. We've partnered with a lot of these licenses over time from -- we started to see this emerge all the way back to, let's say, How to Train Your Dragon, where that over-indexed with our adult consumer and now with Baby Yoda was a good example, Harry Potter is a great example of our ability to generate meaningful sales at good margins with this different type of consumer base. And as I mentioned, some of them are highly repeatable kinds of consumers. So -- and then now with After Dark, which was another -- I don't know if you were able to -- you caught some of that in the -- maybe you were one of the billion-plus impressions that we received from After Dark. Now we have not shared what we believe that potential is, but we know that given our multigenerational aspect that there is a desire to see Build-A-Bear, particularly mashed up with other -- what's called the mash-up with other popular brands. And it is -- tends to be a higher price point, higher DPT with an accretive margin. And when they are engaged in a single sort of like Pokemon, like I used as an example with Eric, that's the second and third and fourth purchase is very efficient for us to market to them because we know their history. And so they do drive -- once we get them in that kind of consumer profile, they do drive a strong lifetime value.

Okay. So I mean, could you talk about the opportunity and quantify it? Do you think that over time, over the next 3 years, that is a business that can equal or exceed your core business?

David, we've not shared information like that over the -- future information over the next 3 years by segment. But clearly, given that we're emphasizing it and we are building out online experiences like Bear Cave, our specific marketing efforts like After Dark, expanding some of our core licenses into things like Matrix or FRIENDS. We believe there is a significant -- enough opportunity for us to divert our time, energy and capital with the proper return to make that decision.

Okay. And then you spoke about the store fleet right now, and please correct me if I'm wrong, it sounded like you're averaging 25% store-level EBITDA. If that's incorrect, please clarify. But if that is the case, could you talk about the opportunities, white space areas where you can fill in and potentially match or exceed those results within your fleet?

So David, yes, as Sharon had in her prepared remarks, we talked about the progress the company has made since 2012, and the 4-wall contribution was under 10%. We finished the year with 97% of our stores being profitable on a 4-wall basis with over a 25% 4-wall contribution. We are actually -- 99% stores are profitable on EBITDA, 4-wall EBITDA, so really strong performance in that EBITDA number. It's a few percentage points higher. So we are definitely pleased with what we have been able to do and achieve. Definitely, as we think about white space in some of those areas, we believe, as we shared previously, opening stores in tourist locations, and in places where people and families go for fun and entertainment, continues to be very accretive for us. And we shared on previous calls, some of the locations in tourist places that we opened recently. We continue to work with different partners, both for stores that people don't operate -- own and operate and third-party retail stores. So we definitely believe that there's opportunity, and we called out 20 to 25 stores that we are planning to open over the next couple of years.

Okay. So 20 to 25 new doors over the next couple of years?

In North America, correct. Yes.

Okay. Okay. And then -- I'm sorry, I have so many questions here, but they're very important to me. So just bear with me. I'm declaring COVID over now, and people are going to start doing birthday parties. It seems like we're in agreement. Could you help us understand maybe as a percent or just some rough idea, how much was that of your business back in 2019, so we can size up what that opportunity is going forward? And by the way, I'm -- if you could just clarify, I'm assuming there were very few, if any, parties in Q1 with Omicron raging and so forth? Could you also just comment on that?

Happy to. As we mentioned in the remarks, historically, birthday parties represent about 5% of our business. And no, we did not have any birthday parties in the first quarter because we had not restarted them yet. We are expecting to restart them in the next quarter. We have announced the restart, so people can start to sign up for them, but we have not yet executed a party. We're quite excited about it, as I shared, though birthday parties have historically been an important part of who we are. It's millions of kids over the course of our last almost 25 years have used that as a rite of passage. It's also a really efficient trial mechanism. It's almost paid for trial, all the other kids that are invited fall in love with Build-A-Bear, too. Our average party is about 5 to 6 kids. So we're -- our bear-builders have all been re-trained since many of them -- some of them, obviously, the newer ones since we've been closed down 100% for 2 years due to the pandemic. So there could be some pent-up demand here. We don't really have a good sense having just since the e-mail exactly how that's going to shake out, obviously, but we are expecting a positive response to that.

Okay. And then you spoke a little bit about your new concept store, Build-A-Bear Adventure. Could you delve into the store economics there? What do you think the prototype in Chesterfield, what do you think it costs to build that box and then what the ROI potentially will be? And what's the early read? I know it's like very early, but is there any initial response in terms of bookings, parties and events and so forth?

So David, it is a little bit too early to talk about that store. We just -- I think the first weekend is -- last weekend was the first weekend you know that we had some events there. Definitely, this is one of those opportunities that we continue to look and diversify our real estate portfolio. When we think about cost and economics of these stores, it is too early because usually when you do this first prototype, and we are looking to innovate and be creative, typically, you don't get a scale that we can get at a point, like assuming this is going to be successful and you start rolling it out. I think we have a good track record and history that in the past when we draw these things out and do things, we were creative and we will drive cost down of these things and return strong -- and deliver strong ROI. That's manifested in that number that I shared previously with you, that 25%, 26% 4-wall contribution. So definitely, we have expectations for these stores. They are in these contrasted field area that you called out. So definitely, we believe with favorable rent structure and being in different places that we are going to be able to drive growth, drive sales. And this is going to be like part of that strategy to diversify off mall.

Okay. And then my next question is, you spoke about incremental opportunities, the expanded TAM and with collectibles, teens, tweens, adults, e-comm is a growth opportunity, 20 to 25 new stores. What you didn't talk about is pets. I believe that pet, gifts, toys are an enormous opportunity, equal -- maybe even equal to the current business over time. In the past, you referenced there was something in the pipeline. Has that slipped? Or is that still something that you are currently working on and that we could expect in the future?

Yes, David, we did share that we had signed an outbound licensing deal for Build-A-Bear with pets. It has not slipped, and we are still continuing to work with that organization, and we will make likely a consumer-facing announcement when it is appropriate.

Okay. And then I'm going to wrap it up but with a quick question and then a comment. So my question is, with our stock trading currently at 3.5x EBITDA, maybe 3.75, depending on what quote you used from this morning, I'm very surprised the stock is down. You guys have not been real aggressive in terms of going out and telling the story. We have very little -- I think Eric Beder does a great job, but we have very little sponsorship from the sell-side. You haven't really been at conferences. Things are opening up now. This year, do you expect to be out there and to tell the story? That's number one. And then just my commentary for you guys and the Board is a special dividend. I mean, I appreciate that money going into my bank account, but there's no -- the market doesn't put a multiple on it. It's a one-shot deal. You don't get credit for it. A buyback over time shrinks the share count and increases EBITDA per share, as you guys know very well. As we continue to generate very strong free cash flow, I would -- my message to the Board, many of which don't have a lot of stock, is for us shareholders, it's very important to retire the share count and drive EBITDA per share. Not only will it increase EBITDA per share, but the market will ultimately say you guys are great capital allocators and then you get a premium valuation. So just that's my commentary and message for the Board on a go-forward basis after you guys exhaust the remaining balance of this 20 -- $25 million buyback. I would like to see you guys reload and continue if we're at these kind of levels to shrink shares. So then I'll let you talk about the conferences. Thank you, and best of luck for the remainder of the year.

Thank you, David.

[Operator Instructions] Our next question comes from the line of Robert Sussman with Bentley Capital Management.

Can I just say that the moderator started out the call by asking people to limit their questions to one. A number of the questioners, especially the last one, asked numerous questions that went on for quite a period of time, and there are several people on this call. And I think if the moderator is going to say that, you should enforce it. What I'd like to say is that, obviously, your stock is getting hammered. And I assume that it's because -- and the headline was that the company is seeing inflationary pressures. But you saw inflationary pressures, I assume, in the fourth quarter, you're seeing it in the first quarter, yet you're still forecasting record earnings, and you have just quite a bit of inventory to stock up. Can you talk about what the impact that inflation is having and whether it's completely changed your outlook for 2022 because the market seems to think this is a very, very big deal, but it doesn't seem that way to me?

Yes. Robert, thank you so much. That's not our headline. That's somebody else's headline. That's the journalist headline. Our headline was Build-A-Bear Workshop reports record pretax income. So we do feel good, and that's why we wanted to announce the first quarter -- give some guidance on first quarter to kind of moderate what could be misinterpreted. But at the same time, and I'll hand this over to Voin, there are some realities, and the situation is not that we don't -- we've mentioned multiple times in the remarks that we feel confident that we have the building blocks in place. But I think that it is also clear that there is some uncertainty, and we want to be able to provide accurate guidance on a full year basis. And that's -- we chose to be cautious in this situation, but it does not mean that we don't feel that our building blocks are in place, it certainly does not mean as we shared multiple times in the remarks that we have -- we're not seeing positive momentum right now at first quarter year-to-date, which we are.

Robert, thanks for your question, and you called it out in -- throughout last year, we were able to mitigate and manage some of those inflationary pressures that are also reflected in Q4, and we continue to manage things that are within our control. Yes, we were more aggressive and proactively we were buying inventory throughout last year and also this year to really mitigate some of those inflationary pressures. Those are real, and they continue to change and evolve. And more recent geopolitical uncertainty and situation that's been created in Europe, it's definitely -- we don't know what the full impact of that's going to be. It's definitely more difficult to manage something when it's a moving target as inflation is at this point in time. But we continue to stay focused, and things are within our control. We have levers and things in place that we can continue to pull. We continue to work with our vendors and suppliers to create efficiencies in supply chain to mitigate some of these potential challenges. We continue to be very disciplined from the promotional standpoint, from expense and balance sheet management. So those are things that we have at our disposal. In addition to that, we've been selectively increasing prices last year, and we are going to continue to look and reassess and at the end of the day, we have been able to deliver strong results last year. As you pointed out and we called out, we expect to deliver again a record Q1 profitability and improvement in revenue versus last year. So we definitely feel good about things that we have seen so far. But again, there is just future uncertainty as especially it relates to some of the oil changes and some of the prices that we are seeing in the geopolitical front.

Right. And just some data to support that. As an example, our DPTs are at or near historic highs, and our promotional percentage is at or near historic low.

Okay. Well, I think you're doing a terrific job managing through it. And I think that, as you say, the headlines are extremely misleading. So thank you very much.

Thank you.

Thank you.

At this time, we have reached the end of the question-and-answer session. And I will now turn the call back over to Sharon for any closing remarks.

Thanks. In closing, I'd like to note that we are participating in the D.A. Davidson virtual conference later today, and we expect to attend the ROTH Investor Conference in person early next week. Separately, we intend to provide details in the coming weeks regarding a planned Build-A-Bear Workshop virtual investor meeting to be hosted by Bristol Capital, an Investor Relations and Capital Markets advisory firm. Thank you again for joining us today on the call, and we look forward to updating you on our first quarter results.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.