Greetings, and welcome to the Build-A-Bear Workshop Second Quarter and First Half 2022 Earnings 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 second quarter and first half fiscal 2022 performance and update the progress we have made on our key priorities. After, Voin will review the financials and guidance in more detail. 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. 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, Allison. Good morning, and thanks for joining us today. We are pleased to announce another strong quarterly performance for Build-A-Bear. Following the most profitable year in our company's history, we have built on that performance to deliver an all-time high for total revenues and profitability for the fiscal first half of 2022. We believe that our strategic plan, which capitalizes on our powerful brand executed with discipline and agility is the primary driver of our results. This morning, I will begin with some highlights of our second quarter, followed by an update on the progress of our strategy that focuses on continuing our digital transformation, accelerating our store evolution and leveraging expanded omnichannel capabilities while utilizing our solid balance sheet and free cash flow to support key business initiatives intended to drive further profitable growth. Combined as noted, these initiatives led to a solid second quarter and record-breaking first half even as we navigated continued freight cost pressures and supply chain disruptions. Our overall sales trends and traffic patterns at retail have continued to be positive as we start the third quarter. And while we are mindful of the macroeconomic uncertainties, we have demonstrated an ability to remain nimble and adapt our more diversified business model to navigate challenging circumstances and had already anticipated these supply chain issues and inflationary pressures. Therefore, we are reaffirming our annual guidance. Now let me turn to some highlights of the second quarter and first half. Total revenues were $100.7 million, an increase over our strong top line results in last year's period. For the first half, total revenues were $218.3 million, a record-setting performance for our company's first half, representing a 17% increase over the prior year. pretax income was $7.6 million for the fiscal 2022 second quarter and includes the…

Thanks, Sharon, and good morning, everyone. As Sharon noted, we are pleased to have delivered a strong second quarter in fiscal 2022, which contributed to a record setting per half for total revenues and profitability. In the second quarter, we delivered solid gross margin even with the impact of much higher freight costs and other inflationary pressures as well as we leverage our SG&A. This brought pretax income for the quarter to $7.6 million, inclusive of incremental freight expense of approximately $3.8 million. Overall, for the first half of the year, we had total revenues of $218.3 million and pretax income of $25.8 million, which, as noted, were all-time highs in the history of our company. As shared in this morning's press release, we have continued to see positive momentum in our business with growth in overall sales and increased retail traffic levels. The combination of a strong first half, ongoing momentum and a strategy that has led us to sustain profitability gives us confidence that we will achieve our financial goals for the year and are reiterating our annual guidance. Moving now to a review of second quarter results. Total revenues were $100.7 million, a 6.3% increase compared to $94.7 million in the fiscal 2021 second quarter. Our revenue growth was led by retail stores and our commercial and international franchise segment, which expanded over 40% compared to the prior year. Web demand declined 8.4% compared to the fiscal 2021 second quarter as growth in Europe was offset by a decline in North America. As Sharon noted, we believe the decline was driven by a challenging comparative prior year period, which benefited from the introduction of key products that over-indexed in North America as well as the current transition process in advance of the launch of our redesigned website.…

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

Congratulations on a strong Q2 in the guidance. Could you talk a little bit, how -- could you talk a little bit about your ability to pass along inflation -- the inflationary pressures you are seeing and your ability to pass them along to consumers and to offset them. What are you seeing in terms of your ability to do that now?

Thanks, Eric. So Eric, as we think about inflationary pressures, we started to phase those early last year in the second quarter, we started by selectively increasing our prices and that made some of our comparisons from the margin perspective a little bit more challenging in this quarter, but we continue to really stay focused on things that are within our control. We are seeing some unprecedented levels of trade increases caused by supply chain disruptions over the last 12 months. Those are starting to slow down, but as we continue to look at our overall business, we continue to deliver these strong results. And we are trying to find the right balance to make sure that we are passing some of those costs through higher prices increases. But at the same time, we are cognizant of the fact, with the overall macro environment challenges and inflationary pressures and maybe changes in consumer discretionary income levels. So we are still driving the strong business. Our transactions are up, our business -- our traffic is high. So like we believe that the overall results that we are sharing on a year-to-date basis that are a record level topping, record level results from last year, continue to show strong execution that the team has to really support this ongoing challenges and to support our strategy. That’s reaffirming our annual guidance.

Yes, Eric, I think too, it’s usually important to -- for you to understand some color around that as well, that when we do go in and increase prices, it’s very specific, very scaffold. We don’t just use that term peanut butter, our price increases, because of our diversification strategy to different consumers, with different types of products; those giftable products of collectible products have a lot more elasticity. So we’re able to increase the sale, increase those the prices of some of those bundles of these big license collectibles, while keeping some of our core products more approachable, particularly our birthday treat there that still remains a Pay Your Age product that from the Count Your Candles program. So we do want to have accessibility to a broad range of consumers from adults to kids, but also different socioeconomic strata. And we believe that we’re well positioned, because of some of that thinking and strategy if indeed we do see continued economic strap.

Great. And I know that you guys have been rolling out in-store parties. What has kind of been the response to that? And what’s kind of learnings for that going forward?

Yes, we’re -- we have -- we did launch those in April of this year, because we had been dormant on those from a COVID-related perspective for quite some time. And we’re in the ramp up and rollout period still, we’re still seeing increases in parties on a week-to-week basis, but we have not achieved our pre-pandemic levels yet.

Do you think that’s positive? Is that a goal?

Oh, sure. Yes, it’s certainly a goal. And we are excited about that goal. Parties are an important part of our strategy. Parties not only are clearly a large transaction, because they’re usually multiple units. In many ways the party business serves as a great opportunity to introduce kids to Build-A-Bear that otherwise hadn’t been to Build-A-Bear. And we love having that memory for kids for the rest of their lives too.

Great. And just a quick housekeeping question, in terms of the share buybacks, assuming no more share buybacks, and I’m not assuming that what is the share count going forward?

So just Eric, maybe like probably is, we are going to have a little bit more detail in the queue, but I would use around $15 million approximate current share have assuming no buybacks at this point.

Right. And that assumes nothing incremental from the new $15 million.

Correct. Just announced. Yes.

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

Congratulations. And just quick comment for you and the board. I appreciate you guys listening to the shareholders in particular, large follow-on buyback, getting them to Pet Toys and then, sort of dipping your toe in with the NFT. So I appreciate you guys listening to the shareholders. So just 2 questions, one of them follow up. The first one is on this deal. This Pet Toys deal, did you say it was PetSmart and PetCo and then is there an exclusivity to it or do you have the flexibility to expand upon it in the future?

Yes, we mentioned that it’s 1,600 PetSmart store locations that we expect it to be our Pet Toys to be in. And if you could help me with your question on, what do you mean by expanding?

Yes. Is there an exclusivity to it? Could you then move on to PetCo or Pet Store plus or different online venues? Are you limited to selling product to them only?

Well, as a reminder, it is a licensed relationship. So it is our licensed partner that is selling this to PetSmart. And this is a, I believe for the season, it is exclusive, but that does not mean that it is exclusive forever to my understanding. But for this season, there is some exclusivity to it. So that when you create relationships like that, there’s usually, some benefit that comes with it. And I know that there’s going to be some, it’ll be a featured product line for them. And we were full -- in their full distribution.

Okay. So when you say Christmas, it’ll be in stores probably in by November, correct?

And I think usual set for a big box is at mid to late October.

Okay. And then going on transportation costs that was sort of the Delta, between last year’s EBITDA and this one and then some, so you alluded to second half of the year transportation and freight cost coming down. Could you give us a little more detail quantify it? I think year-over-year we were up what, $3.8 million incrementally. How much of that do you think we’ll get back in the second half of the year?

Yes, David. So we have been experiencing the higher level of freight cost for last -- through the entire, basically Q4 of last year Q1 and most of that Q2. We are starting to see freight rates to come down. How much we are going to see if the matter of timing as well as the inventory sell through. We still have like portion of this inventory with a higher freight cost. So I would expect Q3 freight costs still to be higher than what we would see in Q4. These rates continue to come down. Are they going to stay at those levels? It’s hard to say, but again, assuming the current rate, we would start to see sequential improvement compared to the first half of the year in Q3 and then in Q4.

Okay. I’m going to be greedy. I’ve got one more quick question. On the buyback obviously in the pre-market there was weakness, which I view as an opportunity, given the growth we have in front of us with some of these new initiatives, are you blacked out for 48-hours, due to the earnings or are you covered under your 10b5-1, where you could potentially even be in the market today?

So David, as we think…

Oh, sorry, David. Yes, there’s generally a cooling off period. And post that we’ll assess the opportunity and as we have done in the past, take advantage where it makes sense to buyback appropriately.

Our next question comes from the line of Gary Schnierow with RiverPark Capital. Please proceed with your question.

So first a quick housekeeping question, for the second half of the year. Is it still fair to assume that free cash flow is equal to your net income? And then we should adjust that for the inventory adjustment?

That’s probably fair to assume.

Okay, great. And then can you help us with your -- to second quarter to third quarter revenue seasonality, obviously because of the last few years, things have been, it’s hard to look at that. It was, you were kind of flat second quarter to third quarter of last year. I don’t know if that’s typical. Can you help us understand one, what’s typical and then 2, I’m guessing you’d have a little tailwind from the continued parties ramping and new stores, but what’s general seasonality?

Well, when we think about seasonality, quarterly seasonality, clearly as we always said, like Q4 and Q1 are 2 – top 2 quarters. Q2 and Q3 typically are lower revenue quarters, some of that stuff based on like how they are going to be compared to each other may depend on the promotional activity and different type of product launches that we may have. We haven’t, we are not providing specific guidance for Q3, but like everything’s within the full year guidance that we haven’t changed on the full year basis. Still that $440 million to $460 million we still expect second half of the year as historically has been the case, be higher than first half of the year. As we said, we are -- our momentum going into Q3 is strong and we are pleased with our performance on a year-to-date basis that gave us that confidence to reiterate our guidance. But that’s probably know like the best I can do at this time from giving you a little bit additional color.

[Operator Instructions] Our next question comes from the line of Jeff Feinberg with Feinberg Investments. Jeff Feinberg;Feinberg Investments, LLC,President: Can you guys please talk a little bit about some of the new launches and new products that you’re most excited about?

Absolutely. We have quite a nice pipeline of products that we’re looking forward to as we look out onto the Halloween and Christmas and Black Friday. And as I mentioned in the remarks, we are pre-launching some of our holiday products. In fact, you can go online and look in there right now. We’ve gotten a new pumpkin spice assortment that actually got quite a bit of online pickup. So you never know with Build-A-Bear. It’s really interesting how much impact we can make with some of these. I mean, we, it’s not unusual for us to get quite a bit of media impressions with some of these unique and interesting gifting kinds of concepts that aren’t just always for kids. But as we look into forward in the year, we mentioned some of the 25th anniversary, Silver Celebration products that we partnered with key licensers we’ve had, for example, the silver tooth list from how to pay, How To Train Your Dragon. We’ve had Silver Darth Vader Bear and now we have coming up very highly anticipated Hello Kitty, Silver Anniversary Hello Kitty, as well as the Silver Anniversary Spider-Man Bear. And we will be finishing our collection of historic favorites from Build-A-Bear as we finish out the year towards this 25th anniversary. Mentioned a few, one of the movie properties that will be reintroducing is Lord of the Rings. We’re also bringing out the second version of Puss in Boots. And a lot of course, is usually driven around our Merry Mission product line. That’s been historically our best-selling product line during the holiday period, particularly Glisten, which is our key, our own intellectual property product, which is a white reindeer that is our best-selling product generally in the December time period. So a lot of excitement as we look forward. Jeff Feinberg;Feinberg Investments, LLC,President: Wonderful. And would you expect the new product mix to have on average the same or a little higher price points?

On average, we’re going to -- they have a little bit higher price points. And that first question that Eric asked is, we want -- and when you make understand that we have this -- a kind of a pricing arc that we look at and we tend to be very scaffold in the way we increase those prices, but we’ve had to have in general, an increased pricing strategy to mitigate some of these freight costs, just like almost every other retailer. Jeff Feinberg;Feinberg Investments, LLC,President: Okay. But this should budget and really assist in the second half?

That’s right.

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.

Thank you so much for joining us today. And we look forward to updating you further 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.