Build-A-Bear Workshop, Inc.
Q3 2021 Earnings Call Transcript

Published: 1 Dec 2021

[Operator:]

Greetings, and welcome to the Build-A-Bear Third Quarter 2021 Earnings Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

[Allison Malkin:]

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. We ask that you limit your questions to one question and one follow-up. This way, we can get to everyone’s question during this one-hour call. Feel free to requeue, 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, 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.

[Sharon Price John:]

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 St. 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 eight years since I took the helm in 2013 with this passionate team staying focused on successfully turning around the Company that endured eight 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

[Voin Todorovic:]

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 omni-channel 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 results of 44.6% and 39.4% in the third quarter of fiscal 2020 and fiscal 2019, respectively. The growth in total revenues drove leverage in fixed occupancy expenses, and we also benefited from the renegotiated lease starting to take effect in 2020. Our merchandise margin expanded as we reduced promotional activity, leading to lower discounting. We also strategically increased prices on highly sought after products in an effort to mitigate supply chain and inflationary pressures that we continue to anticipate being headwinds for the foreseeable future. SG&A dollars increased compared to both the 2020 and 2019 third quarters. However, SG&A as a percent of total revenues improved to 43.8% versus 44.3% last year and 50.3% in 2019. The increase in SG&A dollars compared to the prior years was driven by higher store labor expenses given the reopening of location and extended operating hours. We also recorded full corporate salaries this year as opposed to fiscal 2020 that pandemic-related cost containment initiatives included temporary wage reduction. In addition, the change in SG&A reflects an increase in variable costs driven by sales growth initiatives, inclusive of higher marketing expense and funding of performance-based incentive programs. Notably, we delivered the highest third quarter pretax profit in our company's nearly 25-year history of $7.9 million. This represents an improvement of $6.2 million compared to the prior year's quarter and an increase of $15.6 million versus the third quarter of fiscal 2019. For the first nine months of fiscal 2021, total revenues were $281.6 million, an increase of 74% compared to the first nine months of fiscal 2020 and a 20% increase versus the first nine months of 2019. Pretax income was $30.6 million, an improvement of $61.5 million from the pretax loss recorded in the first nine months of fiscal 2020 and a $36.6 million improvement compared to the first nine months of fiscal 2019. And adjusted EBITDA was $39.1 million, an increase of $52.2 million compared to the first nine months of fiscal 2020 and an increase of $34.8 million compared to the first nine months of fiscal 2019. Turning to the balance sheet. We ended the third quarter with cash and cash equivalents of $48.5 million with no borrowings on our credit facility compared to $25.8 million at the end of the 2020 third quarter. The increase in cash reflects the improvement in profitability for the quarter, partially offset by increased inventory levels and cash tax payments as well as capital expenditures. As we have previously shared, we proactively accelerated the timing of many of our order placements and increased quantities for core products and merchandise collection to support our business momentum and is part of our efforts to mitigate ongoing supply chain disruption. At quarter end, inventory was up $10.4 million, an increase of 20.2% from last year's third quarter. Assuming no additional material COVID impact either in factories, logistics, consumer sentiment or store operation, we are still targeting to have increased inventory levels compared to the fiscal year-end of both 2020 and 2019 to meet our anticipated business needs. As noted, yesterday, we announced specific capital allocation plans to return value to our shareholders. In addition, our use of capital will continue to focus on investments supporting initiatives that are expected to generate positive returns. For the first nine months of the year, our capital expenditures of $4.6 million and on a full year basis, we expect CapEx to be in the range of $8 million to $10 million, again, assuming there are no additional significant COVID-related disruptions or delays in availability of goods and services. Also, as our performance expectations improve, we made about $9 million in cash tax payments this year. Based on our strong third quarter performance and positive trends, we are again raising our guidance for fiscal 2021 total revenue and EBITDA as compared to the guidance we shared in conjunction with our second quarter earnings release. Specifically, we currently expect total revenues to be in the range of $390 million to $400 million versus our previous guidance of $375 million to $385 million in total revenues and EBITDA to be in the range of $55 million to $60 million, an increase from our previous expectations for EBITDA in the range of $45 million to $50 million. In addition, we expect depreciation and amortization in the range of $12 million to $13 million. Our full year guidance assumes no additional significant negative impact from the pandemic such as prolonged store closures due to the government mandate. Our guidance does reflect the funding of performance based incentive programs as well as current expectations for inflationary pressures from product, freight and minimum wage increases. In closing, we are pleased with our record setting first nine months and our momentum so far in the fourth quarter, and I want to thank and congratulate teams across the globe that has driven these results. Our associates continue to make a difference every day in our stores, warehouses and corporate offices, along with support from our vendors logistics supply and other partners in order to drive high growth. We remain focused on accelerating the execution of key strategic initiatives, and we are confident that we are in a position to achieve our goal of long-term sustained profitable growth. This concludes our prepared remarks, and we will now turn the call back over to the operator for your questions. Operator?

[Operator:]

Our first question comes from the line of Eric Beder with SCC Research. Please proceed with your question.

[Eric Beder:]

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?

[Sharon Price John:]

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 Live 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 maintain the labor cost. So 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?

[Voin Todorovic:]

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 the -- we definitely believe in our international business in the future, and we would love to find additional partners in work. But at the same time, during this challenging time, especially with the global pandemic, this business is a little bit, I'd say, lull.

[Sharon Price John:]

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.

[Eric Beder:]

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

[Sharon Price John:]

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

[Eric Beder:]

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

[Sharon Price John:]

Yes. So on the license 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 for movies like Star Wars with Rogue continue to be very successful for us. So -- or Pokemon 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 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 Wanda Vision 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 license relationships. We also want to have that control, if you will, over when and how we launch our own intellectual property or drive our own content. And that's reflective of Honey Girls. So we launched Honey Girls back in 2015. I want to say it's been one of our most successful lines. And we envisioned it as a live action film starring Ashanti and launched this the very end of the third quarter. Our sales rose 20% in the midst of that, and our DPT on the Honey Girls line is at $90. And you might recall, I mentioned that we were around $56 on an average DPT, which has risen from $35 in 2012. So you can kind of see that engagement that happens when you get -- you have that kind of high -- intellectual property engagement with your guests. So we have a lot in the pipeline on our own content side. And one of the other reasons that's so critical is because of the changes in the marketing environment, particularly to kids, that model of creating commercial and putting it on television and expecting to be able to drive sales just as robust as it used to be. You have to be a lot more diversified and you have to have ways and means to communicate directly with children, particularly through content.

[Eric Beder:]

Okay. Great. And congrats and good luck for the holiday period.

[Sharon Price John:]

Thank you.

[Voin Todorovic:]

Thank you.

[Operator:]

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

[William Zolezzi:]

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?

[Voin Todorovic:]

William, 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 rate of about 25% for the calculation that would result in EPS in the range of $2.10 to $2.30 per share.

[William Zolezzi:]

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

[Sharon Price John:]

We are currently expecting to go to ICR, yes.

[William Zolezzi:]

Okay. Great. And I guess just lastly, it 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 are -- 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.

[Sharon Price John:]

Thank you.

[Voin Todorovic:]

Thank you.

[Operator:]

Our next question comes from the line of David Kenen with Kenen Wealth Management. Please proceed with your question.

[David Kenen:]

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?

[Sharon Price John:]

Yes. Thank you, David. So on the expansion of the addressable market, as I mentioned in the comments, the two key ways that we're doing that is one is gifting. And we are providing lots of different gifting opportunities, new concepts, new ideas, a new occasion. We've tested into Valentine's, for example, adult-to-adult gifting and recognize 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 the age gating that -- or the 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 being front of -- or in front of consumers at the right time and the right place. And we're always looking for those types of opportunities.

[David Kenen:]

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 for 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 teenager or tweenager, so to speak?

[Sharon Price John:]

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 Wanda Vision, which just launched quite successful, as well as we're re-launching 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:]

Ladies and gentlemen, this does conclude our question-and-answer session. I'll turn the floor back to Ms. John for any final comments.

[A - Sharon Price John:]

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.

[Operator:]

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