Greetings, and welcome to the Build-a-Bear Workshop Second Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Investor Relations. Thank you. Sir, you may begin.

Thank you. Good morning, everyone and welcome to Build-a-Bear's Second Quarter 2024 Earnings Conference Call. With us today are Build-a-Bear's CEO Sharon Price John; and CFO, Voin Todorovic. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the Risk Factors section. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings release, which is distributed and available to the public through our Investor Relations website. And now I'll turn the call over to Sharon.

Thank you, Gary. Good morning, and thanks for joining us for Build-A-Bear's Second Quarter Fiscal 2024 Earnings Call. For the past several years, we have shared our strategy to evolve the company's business model with the goal of sustained profitable growth by leveraging the power and affinity of the Build-A-Bear brand. We have occasionally referred to this as approaching the business as a way to expand into with new people, new places, and with new types of product offerings. With that in mind over the past few years, we have worked to extend Build-A-Bear's consumer base beyond kids to take advantage of our growing multi-generational appeal. We have done this with primarily collectibles, trim products, licensing and gifting, resulting in an increase in our teen and adult business now representing approximately 40% of our total retail sales. We have continued to drive our consumers' first engagement with Build-A-Bear at its experience location by broadening our geographic reach and store types beyond our historical US focused mall-based traditional footprint. We have become more global with more store types in a variety of shopping environments with new business models. This effort has led to an acceleration of store growth and by the end of fiscal 2024, we expect to have opened nearly 90 net new locations over the past two years, all while continuing to maintain and integrate with a meaningful web business. And we are evolving product categories beyond the iconic make your own customizable cadre of characters with new introductions like the successful Mini Beans collectibles which have already sold over 1.5 million units since their launch earlier this year. These efforts have resulted in a more diversified business which, when coupled with more efficient operations, has, as envisioned, delivered more products in more places to more people at a…

Thank you, Sharon and good morning, everyone. It's good to speak with you again today to share our second quarter 2024 results. Before I touch on the financials from the past quarter, I want to recap a few highlights. This was our best ever second quarter as we continue to deliver on our strategic initiatives. Even though we faced headwinds working through transitory web challenges, our strong results reflect the ongoing diversification of the business. Also as the result of consistent performance and strong cash flow generation, we continue to return capital to shareholders. We paid our second quarterly dividend and during the quarter, spent $9.1 million to repurchase shares. In addition, since the end of the second quarter, we have spent $1.7 million. On a year-to-date basis, we have repurchased over 5% of our outstanding share count. Now moving to second quarter results. For the quarter, total revenues were $111.8 million, up 2.4% year-over-year. Net retail sales were flat at $103.5 million. A 28.2% decline in web demand was offset by growth at existing stores plus the addition of new locations. As we discussed on our Q1 call, last year's 53rd week caused a shift in comparable weeks this year. First quarter's impact was mostly reversed during the second quarter, benefiting store sales. Additionally, retail sales for second quarter last year increased nearly 8%, driven by the timing of product launches both in-stores and online, creating a more difficult comparison for the quarter. Our store traffic outpaced national traffic though slightly down for the quarter and was offset by increased store conversion. Traffic improved in July, and that trend has continued into the third quarter, most likely benefiting from the earlier investments in our brand campaign, The Stuff You Love, as well as new product launches. Web demand was…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Eric Beder with SCC Research. Please proceed with your question.

Good morning. Congratulations on a solid Q2 and a strong start to Q3. Thanks. So Mini Beans, great new product, a little bit lower price than a full size bear. Are you seeing that being as more of an add-on or incremental or just a single purchase. How is that helping to change the overall mix of, I guess units add and pricing in terms of the stores?

Thanks, Eric. Appreciate that. We -- the Mini Beans have been a labor of love for us. We love the fact that we not only are we creating unique Mini Beans, but a lot of the ones that we create from a design perspective are what we call takedowns of some of our most popular products. One of the reasons we do that, it might be a little counterintuitive, but a lot of people want to buy the Mini Bean as a product that they've already purchased the larger make your own item. So that dynamic often drives the add-on purchase for Mini Beans. And one of the key reasons -- so net-net, we're seeing, as the sales would reflect. In total, we are seeing an increase, although there is a combination of people coming in for just a Mini Bean or 4 or 5 Mini Beans sometimes. And that -- but that lower price point also helps us drive our conversion which Voin mentioned if somebody is coming in, and that's an easy pickup purchase for them. But there is this other dynamic that is also an add-on purchase. And so you're seeing on total an increase overall of our sales and a slight increase in conversion as we talked about. One of the reasons, though, strategically that we launched the Mini Beans was not just to put them in our stores. But as a proof-point of the power of the brand to stretch beyond the make-your-own concept with plush, and we wanted to prove that inside of our own retail locations. That opens up a wholesale opportunity for us because there is not that make-your-own experience process necessary for you to enjoy these products. And we are in the process of working with other retailers, not only here in the United States but across the globe, to sell Mini Beans, as just their own plush item.

That's a great point. Quickly on the international and the licensing opportunity, I would assume that as this is a success in one country, you are going to see people come to you for other locations, other territories. How should we be thinking about where we are and the potential growth for this group? And where should we be thinking about it going longer-term? Thank you.

So thanks for the question, Eric. International opportunity as it relates to this partner operated location is really one of the bright spots for the organization. We are very pleased with the success that we have been seeing so far in some of the countries that we are operating and expanding and definitely positive feedback from our partners. As you may recall, over the last couple of years, after COVID, it was really challenging for anybody to travel and to go and expand some of those relationships. We have many inbound requests about some of these opportunities, and we are working on some of those, and we continue to evaluate, and we want to make sure that we explore all the opportunities and find the right partners that can scale in the respective markets that they are operating, but we believe this is going to be an opportunity for many years to come.

When you think about where could this go, we have mentioned this in the past Eric, just from a macro perspective, and this would be inclusive of the operated stores that we have in the UK, and Canada and Ireland. But most of the time US-based companies look at store opportunities or even business opportunities in general, as the scale in the United States usually is about half or 40% of what's possible on a global basis. So we've mentioned before that we feel that it is not unreasonable to believe that we could have as many stores outside of the United States as we have inside the United States. But just note when you're modeling that, that right now that's leaning toward more partner operated and franchise operated, which is a little different way to calculate it from a retail revenue perspective.

Excellent. Thank you. Enjoy the early Halloween and stores look great, and good luck for the rest of the year.

Thanks, Eric.

Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Okay. Thanks. The back half guidance suggests much better trends than the first half, I think, even better than the second quarter, which seems reasonable because you're doing really well. But I guess what sort of risks or if you can flesh out the back half guidance, your holiday expectations, how do you think about besides you guys, we are seeing a lot of consumer -- negative consumer data points, people are concerned about the election, how does all that play into your outlook that again, the second half seems like it is going to be just a lot better than the first half?

So I'll take that. Mike, thanks for the question. Our guidance really hasn't changed from the beginning of the year, we keep reiterating. We have known, this being an election year, there is going to be a lot of ups and downs, as well as we have some choppiness in our comparison with the prior year. We always said that it is going to be back half weighted. And when you think about -- we shared about store count, we opened about 23 stores so far on a year-to-date basis, 17 we added in the second quarter, 16 first quarter. We expect some of that stuff to accelerate to get to at least net 50 by the end of the year. So we believe that's a big piece of some of that growth. In addition to that, our commercial business has been very strong, and we expect to see the expansion in that particular segment. Also from the product launch perspective, we talked about some of the things and some of the strong trends that we are seeing in Q3. Again, that's all contemplated within our full year guidance, but when some of these launches and timing of product arrivals happens Q2 versus Q3, there is some noise. But speaking from the comp perspective and some of the comparisons with last year, second quarter was our toughest comp quarter because we saw some strong results last year. And as we went last year into Q3 and to Q4, our business was a little bit softer. So we believe we have some more opportunities later on in the year. And as well, we’re excited about the Halloween success that we have seen so far and the amount of investment that we made in that product. And so that gives us the confidence as we think about the full year guidance. In addition to that -- there is still some uncertainty. That's why we have the high and low end range of the guidance. We feel good about things that are within our control and what we can do. But the external outside factors that could impact us are clearly outside of our control, and thus, some of that impact or the range the way we have it.

Yes. Makes sense. A lot of good things there. Another I think good news situation, but maybe a little more color is just to clarify, so web demand was down 28% in the second quarter, and you're saying it's up in the third quarter. Did you say up double digits in the third quarter? So I just want to make sure those metrics are sort of apples-to-apples. You swung from down 28% to now up double digits? Or am I hearing that wrong?

So we were down on a full quarter down 28.2%. We are up strong double digits so far on year -- on a quarter-to-date Q3.

Okay. And so then I guess a follow-up there is, is that just -- I presume we should see, is there anything in the comparison that's influencing that? Is it just -- is that improvement because of the better search, all the initiatives that you talked about and the benefit you are getting from bringing in Salesforce consultants, et cetera?

It is the combination of things, as we noted in the prepared remarks. It is some of the improvements in our SEO strategy, some shifts in search engine -- that is search engine, excuse me. SEO strategy, some other of our efforts on website integration, but most importantly, I think and we note this, we've had some product timing shifts. And then we mentioned that even in the last call, and those product timing shifts are impactful for the web, particularly. So for example, when we launched this Halloween product collection, the first Hello Kitty phase -- the first Pumpkin Kitty phases that we mentioned, which was the vault product, they were online only, and that really did drive the business significantly. And we had not launched any of the Halloween product as an example, until much later in the third quarter last year.

Okay, that make sense. Okay, thank you very much.

Our next question comes from the line of Greg Gibas with Northland Securities. Please proceed with your question.

Hi, good morning Sharon and Voin, thanks for taking the questions. Congrats on the strong results. I wanted to follow up on just new store growth and your expectations there. A solid step-up in Q2, 17 versus 6 in Q1, reiterating your expectations for the full year. Just wanted to get a sense of maybe the cadence of new store growth in Q3 versus Q4? And also, if you could maybe discuss, I guess the geographic breakdown of the new store growth that you had in the quarter?

So I'll take that. So thanks for the question. Again, definitely we are pleased about our opportunities from the store count growth perspective. We would, of course prefer to open those as quickly as possible, especially if our own stores or even for our partners to maximize the opportunity for this year. The goal is definitely to take advantage of the fourth quarter and open them as early as possible. Some of those things, especially internationally partner-operated locations. There are some additional logistics things to work through and especially with some of the challenges around logistics routes around the world that are impacting and delaying in some cases some of these openings or the product and equipment flow. But again, the goal would be to open all that stuff to be ready for the holiday season as much as possible. When we think about some of the growth we said, a lot of those are going to be partner operated between both domestic and international. And there is some of the owned and operated locations that we are expanding in some of the key markets and Sharon touched on few of the stores in some of the key tourist areas that we are opening that we are excited about.

Great. That's helpful. And just -- I know you don't like to necessarily point to kind of same-store sales growth. But I wanted to get a sense there, just given there were a good number of openings this quarter and with web being down, I know it makes it a little challenging. But I just wanted to get a sense of maybe same-store sales kind of on a brick-and-mortar front.

So we don't talk about the same-store sales, but I'll try to provide some color about, as we mentioned earlier in the year, because of the 53rd-week shift, when you are making that true comparative of week-over-week, our gap 13 weeks this year versus 13 weeks last year are benefiting from the same thing that we were having some headwind in the first quarter of the year. So if you are looking at the existing store sales plus this week shift like in existing store, we have seen an improvement. We also have seen some growth from the new stores that's offsetting this decline in web demand being flat for the quarter. And also another thing to point out, this 28% in web demand that we are seeing compared to last year, 25% to 30% of our business that we've seen from the web demand perspective gets fulfilled through our store locations, and we see and we report those sales based on the location where the stores are -- where the shipments are fulfilled from, in this case that's from our stores. So if the web demand theoretically was flat to last year, and we kept the same things, our stores would have seen even stronger results.

Great. That’s helpful. Thank you.

Our next question comes from the line of Steve Silver with Argus Research. Please proceed with your question.

Thanks operator. Congratulations on the Q2 milestone. So a lot of the questions have already been answered. But one I have is the discussion around certain items from the Halloween collection being depleted. I know you guys have spoken on previous calls about the investments in the supply chain and managing inventory levels. But can you just talk a little broadly about how the supply chain is set up to replenish items quickly, I guess, given the fact that the company is so heavily involved with seasonal and holiday items, just can we talk a little bit about how the company just is able to replenish so quickly in the supply chain? Thanks.

On some of these seasonal items, it's obviously more difficult because the more truncated the time period is, the harder it is to push something to the supply chain process. But we work very hard with -- to try to be as predictive as possible based on our history. And we have also learned through the years whether that's through not just seasonal items, but also sometimes items associated with hot licenses that might be event-driven like a film to manage the inventory. And oftentimes, as I mentioned, for Halloween last year, we will sell out before the date. Now in this particular case, we learned as we try to do under those circumstances, that there is a big shift in Halloween, and we did the research to support that shift that there is much more interest from consumers across the board on Halloween. So as we mentioned in the remarks, we increased our inventory, our breadth of product. And in this particular case with the Pumpkin Kitty launch, we actually have a flow coming in. So it's hitting web first and then it hits the stores. So we still have a couple of bites at this for the flow of Hello Kitty -- of Pumpkin Kitty. We didn't have it all come in at once. We wanted to get a sense and if we could catch some more of it and increase in the number of units that we order for the last flow, we were able to do that. So there is a lot of different levers that we try to pull to optimize without getting ourselves way over our skis when we don't have specific knowledge. In this particular case, we did have some good knowledge because we have had Pumpkin Kitty in the past. The supply chain process is a whole -- is an entirely different kind of challenge for us that has issues kind of across the board with from sourcing to shipping. But the other thing to think about that I think is really important is although we do have seasonal and licensed products, still the majority of our business is consistent, ongoing, evergreen items that our core business is made up of classic Teddy bears, birthday treat bears, Pawlette bunnies, we still do the majority of business there. And we are able to manage our supply chain, and basically, and I'm careful in making statements like this, always have something available for the consumer, whether online or in-store, that we hope they will like. It might not always be the licensed product or the exact right seasonal product. But because most of our business is evergreen, it does allow us to sometimes order long, order short, stay deep, stay in inventory, in a way that it might be difficult for some others because again, there is no -- it doesn't matter from a seasoned sizes, there is no aged inventory for some of these core classic products. Teddy bear, always appreciated.

Great. Thanks for the color. Congratulations again.

[Operator Instructions] Our next question comes from the line of Doug Lane with Water Tower Research. Please proceed with your question.

Yes. Thank you, good morning everybody. I was just curious because really business is good here, and financially, you're very strong. And I'm just wondering, is there an opportunity to accelerate the reinvestment in your business, either through more capital expenditures or perhaps acquisitions? Just what are your thoughts on that front?

So thank you for the question. Yes, we’re very pleased with things that you are sharing that our balance sheet is healthy, that our profitability has been solid and that we continue to find ways to optimize the business and support our growth. When you think about there are opportunities like we have regular discussions with our Board and look at ways between investing in the business, that's always our number one opportunity, returning money to shareholders and looking at other opportunities to grow the business. One of these things, even though we are expanding significantly our presence globally, we are doing it through this asset-light model where we are opening stores through our partner-operated locations and very asset-light. So we are in more places without spending a lot of capital. In addition to that, we are looking at opening stores and Sharon covered some of those stores even in domestic markets. And in UK, we shared some stores that we opened last year in the tourist locations. So we are definitely looking at ways to open more locations, be in more places. We have -- we are not saturated from the store count perspective. And then as we think about all the other opportunities, we are always open and interested in hearing and learning. And if there is a strong ROI, we'll definitely would consider things.

And what is the track record with acquisitions? Have you looked at any small ones? Is there an opportunity for a big one? Or is it just really not feasible or not practical?

I think it's important to understand, it's a publicly traded company. Obviously, we can't share what we are looking at or not looking at from an acquisition perspective or not. But on that front, we have often mentioned that we -- there's -- we have an open mind to the right types, the right size. And most of the time, when we're considering it. We are thinking about something that like everybody else is additive or synergistic. And in some cases, we are making concerted investments in the company. And you may want to, which we recognize is often the case, buy the capability versus build the capability. And if there's something that can accelerate, particularly a strategy that's already proven and working for us that makes sense, we would do that. The largest acquisition to my knowledge that we've made as a company, however, was the UK acquisition of the stores themselves. There was a competitive company running a like Build-A-Bear concept in the UK, and we purchased that entity some years ago prior to both me and Voin. And that is what we operate there is still the bones of that operation.

Okay, that’s good color. Thank you.

We have no further questions at this time. I'd now like to turn the floor back over to management for closing comments.

Thank you so much. We appreciate everybody being on to hear the results of our record-breaking second quarter, and we look forward to sharing third quarter results with you.

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.