Build-A-Bear Workshop, Inc.
Q2 2023 Earnings Call Transcript

Published: 24 Aug 2023

[Operator:]

Greetings, and welcome to the Build-A-Bear Workshop Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Vice President, Investor Relations and Corporate Finance. Thank you, sir. You may begin.

[Gary Schnierow:]

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 performance and update the progress we have made on our key priorities. After, Voin will review the financials in more detail and provide our guidance. 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 unless required by law. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items, which management believes can be useful in evaluating the company's performance. The presentation of non-GAAP financial measures should not be considered in isolation or a substitute for results prepared in accordance with GAAP. If non-GAAP measures are presented, you will find information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the company's earnings release. And now, I would like to turn the call over to Sharon.

[Sharon Price John:]

Thank you, Gary. Good morning, and thank you for joining us for Build-A-Bear's Second Quarter 2023 Earnings Call. We are pleased to report record second quarter and first half 2023 results, and we remain confident in our annual guidance for the year. At a headline level, for the second quarter, revenues increased 8.5% to over $109 million. Pretax income increased 37% to $10 million, and diluted EPS grew 50% to $0.57. For the first half of 2023, revenues increased 5% to $229 million. Pretax income increased 15.5% to $30 million, and diluted EPS grew almost 24% to $1.57. We are pleased to note that each of these data points represent record levels for our fiscal second quarter and fiscal first half. Additionally, Voin will address our revenue and profitability in more detail during his remarks. As we look forward to the second half of the year, we currently expect to see our strong sales momentum continue into the back half. and the important holiday time period to be driven by traffic and ongoing interest in the brand by continuing to execute our strategy with the phasing of our growth initiatives, including

[Voin Todorovic:]

Thanks, Sharon, and good morning, everyone. We are pleased to speak with you today to share our best ever second quarter and first half of 2023. This performance was highlighted by growth across all our segments, expansion in gross profit margin and a significant increase in pretax income versus last year. Combined with share repurchase activity, second quarter diluted EPS rose 50%, and the first half 2023 EPS rose to 23.6%. We attribute our ability to report ongoing positive results in a dynamic retail environment to the increasing resonance and strength of the Build-A-Bear brand and the successful execution of our strategic initiatives, including elevated marketing capabilities to drive strong traffic. Even with an increase in SG&A from higher wages due to inflation and adding talent, our strong store contribution margins and growth in our capital-light partner-operated business model provides us the opportunity to invest for our next sector of growth while still delivering strong earnings and free cash flow. Our strong free cash flow also allows us to continue to return capital to shareholders. Year-to-date, through dividends and share repurchases, we have returned over $33 million in cash to shareholders. Turning to a more detailed review of the second quarter. Total revenues were $109.2 million, up 8.5% year-over-year. Net retail sales increased year-over-year with positive contributions from both stores and e-commerce. E-commerce demand increased 14.1% for the period. Store sales increase to growth in number of transactions as our traffic continues to significantly outpace reported national retail traffic data. We opened a net 5 corporate stores year-over-year including 2 in the quarter. Commercial revenue, which primarily represents wholesale sales to our partner operators and international franchise revenue rose a combined 19.9% versus the prior year. Our partners opened 11 stores year-over-year and 6 in the quarter. and our franchisees opened 2 stores year-over-year and 1 in the quarter. Gross profit margin was 53.7%, an improvement of 410 basis points compared to last year, benefiting from merchandise margin expansion, reflective of expected lower freight costs and leverage of occupancy and distribution costs. SG&A expenses were $48.3 million, or 44.2% of total revenues compared to $42.3 million, or 42% of total revenues in the 2022 second quarter. The 220 basis point increase in SG&A was driven by higher wages, mostly at a store level from inflationary pressures, and at the corporate level from planned investment in talent. As a reference, the SG&A rate is almost 100 basis points lower than in second quarter 2019. Higher gross profit dollars and expansion in store contribution margin more than offset the increase in SG&A and led to pretax income growth of 37.1%, with pretax margin expanding 200 basis points to 9.6% of total revenues. EPS, aided by a lower share count and a reduction in tax rate was $0.57 per diluted share, a 50% increase. For the first half of the year, total revenues were $229.3 million, up 5% year-over-year. Our store traffic also outpaced reported national traffic for the first half of the year. E-commerce demand declined almost 20% in the first quarter before rebounding up 14% in the second quarter to finish down 6% for the first half. The volatility was primarily impacted by the timing of product launches as compared to last year. Driven by our current momentum, we continue to expect e-commerce demand to grow and be positive on a full year basis. Commercial and International franchise revenue rose a combined 43.2% versus the prior year. Gross profit margin was 53.9%, a 270 basis point improvement compared to last year. driven by merchandise margin expansion, reflective of expected lower freight costs and leverage of occupancy and distribution costs. SG&A expenses were $94 million or 41% of total revenues compared to $85.9 million or 39.3% of total revenues in the 2022 second quarter. The 170 basis point increase in SG&A was driven by higher wages, mostly at the store level from inflationary pressures and at the corporate level from planned investment in talent. Higher gross profit dollars more than offset the increase in SG&A and led to pretax income growth of 15.5% to $29.8 million for the first half, with pretax margin expanding 120 basis points to 13% of total revenues. Reflecting a lower share count and slight increase in the tax rate, EPS was $1.57 per diluted share, a 23.6% increase, and EBITDA increased 11.7% to $35.9 million, which is a record level for the first half of our fiscal year. Turning to the balance sheet. At the quarter end, we had cash and cash equivalents of $32.6 million, an increase of $18.2 million compared to the same period last year. We returned over $38 million to shareholders through dividend payments and share repurchases over the last 12 months. Inventory at quarter end was $66.3 million, declining $21.4 million or 24% from the end of the second quarter last year and in line with our expectations. Keep in mind, last year's quarter end inventory was intentionally elevated to avoid potential supply chain disruptions. We remain comfortable, be the level and composition of our inventory as we begin the third quarter and continue to expect inventory to finish the year below last year's $7.5 million level. Turning to the outlook. We are reaffirming our guidance for fiscal 2023, which is a 53-week year, and the full details of our guidance are included in the press release, but I'd like to highlight 2 key metrics

[Operator:]

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

[Eric Beder:]

Congratulations on a great quarter. I want to talk a little bi about the potential with some of the pieces in the stores, you anniversaried the rollout of in-store parties resuming. What are you seeing in terms of trends with that? And how should we be thinking about that going forward as a potential driver?

[Sharon Price John:]

So celebrations, such as parties and particularly, birthday parties has always been a really important part of Build-A-Bear. And as I think many of you know, we did have to hiatus the parties during the COVID time period and recently restarted, as you noted. We are still in the building phase. That's a long pipeline. And although they are up versus prior year, we're still not at pre-pandemic levels. but we see a tremendous amount of opportunity and it's actually started to be much more concerted in our marketing beyond what was the traditional birthday party. Parties with some of our partners like Girl Scouts or even other types of themed parties we're building into that, and we're very excited about the future of that. Now in the past, as we've noted, that's been around 5% of total sales. And so to be clear, we're still not back at that percentage. But as you -- as we noted in today's call and in the past few quarters, our total pie is growing at the same -- it was growing as well, but we still see a tremendous opportunity with the party business.

[Eric Beder:]

Great. And I know we have a lot of excitement coming with the Glisten movie. How do you look at the opportunities rising for this year for regular movies? I know that you had a very successful offering with Barbie and some of the other movies coming out, we are seeing more movies for kind of your core customer. How does that all fit in? And how do you look at how you can best leverage that going forward?

[Sharon Price John:]

Right. Thanks, Eric. So we've had a long history with best-in-class license partners, ranging from those types of high-impact movie events as well as evergreen types of properties that are based on films. And that would be inclusive of a Star Wars, for example, or then a Pokemon product that maybe started with a different type of entertainment, which is gaming, but now also has film. You're right, we did have our Barbie item out this year, our collection rather, very successful, a lot of people looking for that. And that was a broad range of consumers. We recently launched Teenage into Turtles, and we've had a long relationship with Paw Patrol, which is scheduled for movie release later this year. But that is just a part of our overarching plan, and we have a tremendous visibility and a lot of options because Build-A-Bear brings a special type of experience for consumers and those license partners understand the value that we create, and we slot those in over the course of time. And we try to build them in, in a way that it doesn't create such spikiness in our business plan by measuring that against our own powerful our own powerful business. So right now, for example, even in a year of the return of film, our own Build-A-Bear intellectual property is higher than in total sales than our total license business.

[Operator:]

[Operator Instructions] Our next question comes from the line of Steve Silver with Argus Research.

[Steve Silver:]

And let me offer my congratulations on the quarter as well. This morning's press release continues to cite the ongoing effect of inflationary pressures and freight costs among the factors you considered in reiterating the full year outlook. I was hoping you could provide just a little more color on the impact in the half year results. particularly whether inflation is impacting the business much beyond wages as they've come down on more of a macro level? And then just whether there are any supply chain issues of note going on in the business right now?

[Voin Todorovic:]

Thank you, Steve, and thanks for the question. As we reaffirm our guidance on a full year basis to grow revenue 5% to 7% and our pretax income, 10% to 15%, that's been basically the same guidance we shared for the last several months. And the impact of inflation, the impact of freight that we have highlighted in the past was contemplated within that guidance. Just as a reminder, I'll start with freight really to provide some additional color. Last year, in fiscal '22, during the second half of the year, we were starting to see just like the overall market reduction in our freight rates. So from the P&L perspective, this year, in the first half of the year, we were seeing more of a benefit as you know, second half of the year, it's going to be a little bit of a tougher anniversary in comping with benefits that we were starting to realize from freight in 2022. As we are talking about inflation, yes, we -- you are absolutely right. We talked about inflation that we are seeing through wages, both from minimum wage increases that we have seen across the country as well as you know, the wage compression as a result of those. In addition to that, we are making investments in talent that are reflected in our numbers. But the impact of overall inflation that's hitting across many other lines of the P&L, it's still reflected. We are contemplating some of that, despite some of those inflationary pressures and increases that we are seeing, even within the quarter, we were able to improve our pretax margin by 200 basis points. So we are able to offset some of those. And again, some of those things and some of those challenges we are dealing with, we are planning into them. There is definitely a certain level of uncertainty from the economic environment, how people may be reacting to what's happening and what we hear in the news, but we definitely feel good about things that are within our control that we continue to manage that we continue to execute, and we will keep to monitor on the external things that are outside of our control. And I think we have a good track record over the last several years that we were able to manage all the components of the P&L.

[Steve Silver:]

Great. That’s very helpful. And just one follow-up, if I can. Historically, Q3 has been among the higher quarters in terms of inventory. I know that you said last year, there was some buildup ahead of some potential issues. Just wondering whether we should anticipate more of a meaningful increase in inventories ahead of the holiday season as well as some of the new store openings and initiatives you discussed. Obviously, you reiterated your intention to have inventories below year-end levels. Just curious as to what you think the trajectory would be in the third quarter.

[Voin Todorovic:]

Steve, you are right. Like historically speaking, we would see a little bit more elevation in Q3 as we are building inventory levels for the holiday season. Some of that stuff naturally, we would expect to see maybe some similar trajectories. However, I don’t think they are going to be as profound as they have been maybe last year because of some of that intention to pull inventory forward. So we still expect to see some normal inventory builds. But as we mentioned, by the end of the year, we expect inventory to be below last year levels. We feel confident and good about our inventory composition level of inventory that we have. And one of the things that also is impacting us a little bit more than it has in the past, is as we continue to grow our partner-operated business, that inventory has a little bit of a different trajectory than our retail inventory. So again, we are bringing that inventory earlier and then we are selling and the polishing to our partner-operated location. So definitely, there is a little bit of a mix as we think about overall inventory, but that’s all contemplated in that full year number that we have shared.

[Sharon Price John:]

Right. I think that’s a really important point to kind of unravel a little bit, though, as our partner-operated business grows, that capital-light relationship with the things -- with the companies like Great Wolf Lodge, as we mentioned, they buy that inventory as if we are a wholesaler because we’re selling it. So they’re buying it early and then they’re selling through, and we usually sell it to them in bigger chunks, if you will.

[Operator:]

We have no further questions at this time. I would now like to turn the floor back over to Sharon John for closing comments.

[Sharon Price John:]

Thank you for joining us today. We look forward to sharing more information with you about our third quarter results and seeing you at some of the upcoming conferences that Voin mentioned.

[Operator:]

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.