Build-A-Bear Workshop, Inc.
Q4 2022 Earnings Call Transcript

Published: 9 Mar 2023

[Operator:]

Greetings, and welcome to the Build-A-Bear Workshop’s Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A 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, Allison Malkin of ICR. Thank you. You may begin.

[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 the discussion of our first quarter fiscal 2022 performance and update the progress we have made on our key priorities. After Voin will review the financials in more detail and introduce our guidance, 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 questions during this one hour call. Feel free to re-queue 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:]

Thank you, Allison. Good morning. And thanks for joining us on our fiscal 2022 earnings call following the completion of our fourth quarter. Fiscal 2022 was successful on multiple fronts and we finished the year on a high note with the key fourth quarter performance, achieving growth in revenue and an increase in pre-tax income of over 30% versus the prior year. And as mentioned in this morning's earning release, our positive momentum has continued into 2023. With that as a backdrop, some highlights of fiscal 2022 include

[Voin Todorovic:]

Thanks, Sharon, and good morning everyone. We are pleased to speak to you today and share our outstanding finish to another year of record performance for the company. As detailed in our press release, the quarter and year saw double-digit revenue in pretax earnings growth reflecting the successful execution of our strategy. Our performance has continued positively at the start of the first quarter and we expect our favorable momentum to continue. Beginning with the review of fourth quarter results. Total revenues were $145.1 million and 11.6% increase compared to $130 million in the fiscal 2021 fourth quarter. This reflected net retail sales increase of 10% to $138.2 million from the fiscal 2021 fourth quarter, primarily driven by an improvement in store productivity across our company owned store base in North America and in the UK with growth in transactions driven by store traffic. E-commerce sales rose 0.9%, improving sequentially from third quarter. Gross profit margin was 55% up 150 basis points from the fourth quarter of fiscal 2021. Gross profit margin expansion in the fourth quarter reflected an increase in merchandise margin driven by lower freight cost and leverage of fixed occupancy expenses. SG&A expenses were $53.6 million or 36.9% of total revenues, a 110 basis point improvement versus the prior year quarter driven by leverage of fixed expenses due to the growth in total revenues. The $4.2 million increase in SG&A versus Q4 2021 reflected higher store payroll and incentive compensation as well as elevated marketing expense to support new and ongoing strategic initiatives that are driving more traffic to our experience locations. Pretax income rose 30.3% from the fourth quarter last year reflecting significant growth in revenue and expansion in gross profit margin. Income tax expense was $5.7 million, an effective tax rate of 21.8% in the fiscal 2022 fourth quarter compared to an income tax benefit of $4 million in the fiscal 2021 fourth quarter. The income tax benefit in the fiscal 2021 fourth quarter reflected the full reversal of our tax valuation allowance in North America of $7.8 million. This led to an increase in adjusted net income of 20.9% to $19.1 million or $1.30 per diluted share compared to adjusted net income of $15.8 million or $0.97 per day diluted share in the fiscal 2021 fourth quarter. Turning to our fiscal year results. Total revenues were $467.9 million, representing growth of 13.7% compared fiscal 2021. Net retail sales were $446.2 million, an increase of 12.2% compared to $397.7 million in fiscal 2021. Consolidated e-commerce demand declined 7.8% compared to fiscal 2021 and for reference fiscal 2022 e-commerce demand showed an increase of 137.1% compared to pre-pandemic fiscal 2019 fourth quarter. Pretax income was $61.9 million, an increase of 22.1% compared to fiscal 2021. Adjusted net income increased 22.7% to $47 million or $3.08 per day diluted share compared to adjusted net income of $38.3 million or $2.37 per day diluted share in fiscal 2021. EBITDA was $74.4 million, an increase of 18.1% compared to fiscal 2021. Turning the balance sheet. We ended fiscal year with cash and cash equivalence of $42.2 million compared to $32.8 million at the end of fiscal 2021 with no borrowings on our revolving credit facility. During fiscal 2022, we utilized $24.1 million in cash to repurchase approximately 1.54 million shares of our common stock and currently have $46.5 million available under the current $50 million stock repurchase program. As noted in our press release, the Board of Directors declared a special cash dividend to shareholders of $1.50 per share. This special dividend will be paid on April 6th to all stockholders of record as of March 23rd, which follows the $1.25 special cash dividend paid in late December 2021 and reflects our ongoing commitment to return value to shareholders. Inventory was $70.5 million at year end, declining $1.3 million from fiscal 2021, which is in line with the expectations we provided on our third quarter call. We remain comfortable with the level and composition of our inventory. Capital expenditures were $13.6 million and depreciation and amortization was $12.5 million for fiscal 2022. As it relates to our outlook, we are providing guidance for fiscal 2023 with expectations of delivering growth in total revenues and pre-tax compared to fiscal 2022. While our fiscal 2023 is a 53rd week – is a 53 week year and compares to a 52-week year in fiscal 2022, we expect to deliver growth in total revenues and pre-tax profit versus the prior year exclusive of the projected benefit of the 53rd week. For reference, the additional week, which will be reflected in our fourth quarter is estimated to be $7 million in total revenues with approximately 35% flow through to EBITDA. For fiscal 2023, we currently expect total revenues to grow in the range of 5% to 7% compared to fiscal 2022, including expansion in all three operating segments. Pretax income growth of 10% to 15% compared to fiscal 2022, surpassing the record high that we achieved last year. To open 20 to 30 experienced locations through a combination of third-party and corporately managed business models with a majority plan for the second half of the year. Capital expenditures in the range of $15 million to $20 million; depreciation and amortization of approximately $13 million to $14 million; and tax rates to approximate 25% excluding discrete items. Our guidance considers a variety of factors ranging from anticipated ongoing inflationary pressures to the expected benefit of reduced freight costs. Additionally, we note that our outlook assumes no further material changes in the operations of our supply chain, including the ability to receive and ship product on a timely basis, the macroeconomic and geopolitical environment or relevant foreign currency exchange rate. In closing, I would like to thank and congratulate our associates for their dedication, commitment, and many contributions that delivered another excellent and record year. Inclusive of the recent recognition as one of America's best mid-size employers by Forbes for the fifth time. We are looking forward to another great and record break year in 2023 and speaking with many of you at upcoming conferences including the D.A. Davidson Conference in New York on March 21st. This concludes our prepared remarks and we will now turn the call back over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Eric Beder with SCC Research. Please go ahead.

[Eric Beder:]

Good morning. Congratulations on a great quarter and a great year.

[Sharon Price John:]

Thanks Eric.

[Voin Todorovic:]

Thanks Eric.

[Eric Beder:]

Let's talk a little bit about some of the flows here. So parties, so remind us when your anniversary then and when did they really start to once again really ramp-up? And how do you keep that fresh going forward as it starts to the anniversary?

[Sharon Price John:]

Yes. We started parties April of last year so we haven't wrapped it quite yet. And we've been in a – as we – I think we noted this on the last call, it takes a while to pipeline the party bookings. You have to reengage with consumers and a lot of the party business comes from the kids that come to parties and other – for other children and then want to go to the party. So you get this kind of snowball effect as you keep pipelining new parties. We've been in this business for a long-long time and it has historically been about 5% of our business and we've not – we're not anniversary that quite yet, so we still think we have some runway ahead of us with the party business, and it's one of our really valuable tools because it does – it's like paid for trial almost and it endears us to kids in a very special way.

[Eric Beder:]

Okay. And I want you to talk a little bit about movies coming back and about Glisten, so what are you seeing in terms of license opportunity for children's movies? I mean, last year really wasn't, I don't think a huge piece of the pie for them compared to where it was historically and what should be thinking about in terms of the opportunities with Glisten for Q4 and the holidays season? Thank you.

[Sharon Price John:]

We do have a lot of relationships with companies that are expecting to premier feature films. We're just not in a position to share that information yet. But we've had longstanding relationships as with a lot of parties that that are in that business. The ones that we did mention in the call are, more the evergreen types of products that we're anniversary. And, but we're looking forward to, as I’m sure the entertainment industry is at large for people to get back engaged in going out to the theaters and getting involved in these events, marketing opportunities. That strategy has been an important one in our past particularly since of the malls, that are still mall based. Many of them are co-located with the theaters and we often do cross promotion with those theaters and for the kids to get their furry friend or whatever that might be associated with that film either before or after this event. So that would be something that we think is a plus for us as we look forward, given that has not been a part of the plan in its most powerful way as it had pre-COVID. The Glisten and the Merry Mission is still in production that will be out – the plan to be out this clearly this holiday season. We are incredibly excited about this opportunity for us. As I mentioned in the remarks that that particular property that we launched some years ago has been very successful for us, year-on-year Glisten is often, if not, I’m careful here. I think it’s been our number one selling unit, product character every holiday since we launched it. If not, it’s close. And we’ve, on the collective we’ve done a $100 million in that just in the couple of months each year of it being available. It’s a really fun film that’s based on a, under a core story that we’ve been sharing with consumers since we launched it. We’re just bringing it to life and it has stars ranging from Chevy Chase to Julia Michaels to Dionne Warwick. So, we’re pretty excited about the launch of Glisten this holiday.

[Eric Beder:]

Great. And just – can I get a housekeeping question? What’s this share account going to be next year, assuming I guess no more share repurchases?

[Voin Todorovic:]

Well, it should probably be roughly similar to the number that we have right now, pending for some of the regular grants that people get, but that shouldn’t be, immaterial in a big scheme of things.

[Eric Beder:]

Okay. Congrats again and good luck to 2023.

[Voin Todorovic:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question is from the line of Steve Silva with Orbis Research [ph]. Please go ahead.

[Unidentified Analyst:]

Thank you, operator, and good morning and let me offer my congratulations again on the strong results, really robust capital return to shareholders in 2022. Very impressive. I guess my main question is, if you could just speak a little broadly, I know the prepared remarks touched upon it, how the company thinks about or manages, so effectively managing its inventory, given the continued growth in the licensing portfolio, all of the deals that the company’s working on, introducing new characters basically managing inventory so effectively given the fact that the retail footprint remains largely fixed, but yet the demand for new characters continues to grow.

[Voin Todorovic:]

Thanks, Steve for that question. Yes, inventory and the overall sourcing piece of our business has been definitely a focus for us over last several years, and it was really heightened during toughness during pandemic. You know, us being a vertical retailer creates significant benefit because we do control the product from inception to the sale and we control our promotional cadence. So, we are not at risk being competitive at some of the other organizations if there are some promotional activities and like, so VR really focused on what we can control. We do have a wide variety of license product and we mentioned in our remarks before we have up to like 75 different licenses, and we continue to find ways to really manage that business that historically has been up to like, let’s say a third [ph] to maybe like 45% of our total business with comparatively similar margins. But, definitely what we try to do is like look at ways to really provide that great experience for our guests and drive the overall dollar per transaction and really monetize that inventory. And as you also pointed out, we have done more work, especially in expanding our third party retail business and working with our partners in that particular segment and selling to them to on a wholesale basis. So it does make this process more challenging at times, but definitely the teams have done a great job as well as, working on different initiatives to diversify our sourcing base to protect us from different geopolitical or just to mitigate some of the potential geopolitical risk.

[Sharon Price John:]

Yes. Steve, I just want to add a little bit something there too. The team does do a great job on managing inventory. We have great relationships with our factories and we are diversifying, but we’re able to manage that flow. We’re able to test products in our e-commerce before we push it out to stores. And now even with our stores and our omnichannel capabilities with the inventory’s not even trapped at the store level, because we shipped from our stores over a lot of these products. But the important thing to understand with the licensing arrangements that we have, many of which are long-term with really close partners is we really leverage those relationships in a positive way. I don’t want that to sound negative in any way toward our partners, but understanding that the mash up of our brand that is also a pop culture iconic brand with some of these well-known brands ranging from, Star Wars II, as I mentioned to Ted Lasso. These are not just direct interpretations of this intellectual property. They are what the current terminology is, it’s called a mashup of brands, and that’s where this sort of collectibles and affinity, sort of fervor comes from is that Ted Lasso is a – he’s a bear of what we’re offering as is Darth Vader. So it’s, this really interesting edge that is attracting, done a lot of cases, the teens and adults to this type of property, whether it’s Deadpool or Matrix Bears it’s not just that we’re straight line interpreting someone else’s intellectual property. We’re creating value with a co-brand that makes it a little bit different from a lot of other companies that are in the license business.

[Unidentified Analyst:]

Great. That’s very helpful. Thanks and congratulations again.

[Sharon Price John:]

Thank you.

[Voin Todorovic:]

Thank you.

[Operator:]

Thank you. Our next question is from the line of Evan Greenberg with Legend Capital. Please go ahead.

[Evan Greenberg:]

Hello, how are you guys? Congratulations on a wonderful quarter and the great work.

[Voin Todorovic:]

Thank you.

[Sharon Price John:]

Thanks.

[Evan Greenberg:]

Thank you. How are you? How’s everyone today? I’m a little out of breath. I’m just finishing my workout. I wanted to get an answer. Yes, that is a little entertainment. I wanted to understand, you’re talking about 5% to 10% revenue growth. Is there any same-store sales growth factored in there and what was same-store sales growth last year?

[Voin Todorovic:]

So thank you for the question. We guided 5% to 7% this year. We don’t specifically talk about e-com sales. We haven’t been talking about e-com sales for many years now. But when you think about the growth that we are expecting in 2023 a lot of that growth, we expect to come, from our existing store base and productivity in those, as well as from some of the new stores that we said, we expect to open bit as a combination of our experience based locations that are corporately own or third party retail locations. And when you as well as you know, that some of that growth in revenue as we talk just previously, we expect to have like a little bit of easier comparison from party perspective as that business we mentioned was restarting last year in April. So first couple of months we have a little bit of a benefit. And then when you think about 2022 on a full year basis, significant growth in total revenue, and we said that most of that growth was coming from the increase in traffic and transactions in our existing store base.

[Evan Greenberg:]

Okay. Fantastic. And one final question. I guess if you strip out CapEx you get to and certain other expenses, you get to about $15 million in free cash flow. Is that correct? A little bit more than that.

[Voin Todorovic:]

Whatever assumption you use on that, but pretty close.

[Evan Greenberg:]

Okay. It’s fantastic. Thank you so much for and continue the great execution.

[Voin Todorovic:]

Thank you.

[Sharon Price John:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] As there are no further questions at this time, I would like to turn the floor back over to Sharon John for closing comments.

[Sharon Price John:]

Thank you to everyone who joined us today and we appreciate your support and look forward to speaking with you in our first quarter call in May.

[Operator:]

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