Build-A-Bear Workshop, Inc.
Q3 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Greetings, and welcome to the Build-A-Bear Workshop Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you. Allison, 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 a discussion of our third quarter 2020 performance and update you on our priorities as we enter the final quarter of the year. After, Voin will review the financials 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 questions during this one-hour call. Feel free to re-queue if you have further questions.

[Sharon Price John:]

Good morning, everyone, and thank you for joining us today to review our third quarter fiscal 2020 results. As projected in our earlier preannouncement, we saw an increase in total revenues inclusive of continued triple digit growth in e-commerce, expansion in gross profit margin and a decrease in SG&A expenses compared to the prior year's period. These results were consistent with or better than the expectations that were shared prior to the end of the quarter. These improvements contributed to pre-tax income of $1.7 million, an improvement from the pre-tax loss of $7.7 million in the fiscal 2019 third quarter. We ended this quarter with over $25 million in cash and cash equivalents with no borrowings on our credit facility, and we’re pleased to have positive momentum at the start of our fourth quarter while remaining appropriately cautious given the ongoing impact of the pandemic. After the initial actions to address the immediate challenges brought by the pandemic, we rapidly shifted our focus in order to leverage the circumstances to accelerate our strategic initiatives for the long-term benefit in three key areas. As a reminder, these areas are

[Voin Todorovic:]

Thanks, Sharon, and good morning, everyone. I also want to note how proud we are of our entire team working together to deliver a positive third quarter performance across key financial metrics amidst the ongoing pandemic. After recently sharing our expectations for the quarter, we are pleased to report that we finished the period with results at or above the projected ranges we had provided. As the third quarter has historically been the smallest of the year, we are pleased to report a profitable quarter, ending with a solid balance sheet and strong cash position. Let me move to discussing our third quarter results in more detail. Total revenues were $74.7 million, a 6.1% increase compared to the prior year. The growth includes an 8.7% increase in net retail sales, primarily driven by 167% increase in e-commerce demand, which reflects online generated orders, including those fulfilled through our stores. In addition, on average, our stores were closed about 7% of the quarter with brick and mortar locations operating 25% fewer hours. Despite these challenges, our North American stores recaptured over 100% of the prior year sales. The growth in net retailer sales was partially offset by $1.5 million decrease in commercial and international franchise revenue, mainly driven by COVID restrictions that impacted the opening of our third party retail partners that tend to be hospitality-based businesses as well as international franchisee locations. Gross profit margin expanded 720 basis points versus the prior year with the majority of the expansion driven by the combination of higher sales and leverage of occupancy costs. This primarily reflects the benefit of the aggressive renegotiation of leases, which resulted in rent reductions, deferrals and abatements in 99% of North American locations and almost 90% of those in Europe. In addition, merchandise margin also expanded as we prudently managed our promotional activity in the period, which contributed to increasing our dollars per transaction to the highest level ever in the fiscal third quarter. On the expense side, SG&A was down $2.3 million or 6.6% from the third quarter of 2019, driven mainly by decreased payroll expense due to COVID-19 mitigation efforts. This was a result of combination of lower store payroll, a temporary reduction in corporate salaries, and some permanent corporate payroll savings driven by the planned restructuring that Sharon mentioned. Notably, late in the quarter, the corporate salaries were restored as business conditions improved. We also reduced our marketing spend in the period while shifting to more efficient digital marketing programs. Overall, SG&A was 44.3% of total revenues, representing a 600-basis point improvement compared to fiscal 2019 third quarter. And finally, pre-tax income was $1.7 million compared to a pre-tax loss of $7.7 million in the fiscal 2019 third quarter. Turning to the balance sheet. At the end of the quarter, cash and cash equivalents were $25.8 million, an increase of $19.6 million compared to the end of the fiscal 2019 third quarter, driven by improvement in profitability. We had no borrowings on our asset base credit facility at quarter end. Importantly, we are current on substantially all of our rent payments as the renegotiated terms have been finalized and documented. As part of our discipline approach to working capital and strong management of vendor relationship, inventory was down $14.7 million, a decline of 22.2% year-over-year. As a reminder, in the prior year, we pulled forward inventory as the mitigation to potential tariffs on goods from China. We are currently comfortable with the receipt flow, level and the composition of our inventory. Capital expenditures for the quarter were $700,000 compared to $5.1 million in the fiscal 2019 third quarter, reflecting our tight working capital management and reduction in planned capital expenditures amid COVID-19 environment. In closing, we are pleased with our financial performance in the third quarter and the current strength of our balance sheet. Regarding our outlook for the balance of the year, given the ongoing impact of the pandemic and resulting uncertainty, we do not believe it is prudent to provide guidance at this time. While we have noticed that we have positive consumer demand thus far in our fourth quarter, we plan to continue the disciplined expense management across all areas of the business as we remain cautious given the volatility of the external environment. This concludes our prepared remarks and we will now turn the call back over to the operator for questions. Operator?

[Operator:]

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

[Eric Beder:]

Good morning. Congrats on a solid quarter.

[Voin Todorovic:]

Good morning. Thanks, Eric.

[Sharon Price John:]

Good morning, Eric.

[Eric Beder:]

You guys have done a lot of internal change on the pieces. How should we be thinking looking forward in terms of the potential when things somewhat normalize in terms of hours and flow, the potential SG&A savings and in terms of what should be the inventories? I know now that you're doing by getting buy-online, pick-up-in-store and ship-from-store, the need for inventories is a little bit changed. How should we be thinking about that as we go forward?

[Voin Todorovic:]

Okay. So, let me start first, maybe we can talk about inventories first, and then we'll tie back into the SG&A. Definitely from the inventory perspective, we continue to stay focused on what we can control. We are pleased with the product that we have, the composition of our inventory, how we are managing our promotional activity that's reflected in strong margin results that we have shared. We continue to stay focused and work with our vendors to deliver product timely as well as we are looking at the opportunities to drive increase in our inventory turn, as we are trying to deliver benefits or achieve benefits from investments in all the infrastructure and technology that we've been making over last several years. Our investments in new warehouse management systems are going to enable us to do some of those things. In addition, Eric, earlier this year, we started on initiatives like buy-online, ship-from-store; pick-up-in-store. We are also working on initiatives to deliver from stores, which really is going to help us to be even more efficient with our inventories, and really manage that working capital even better. So, again, what I mentioned in my prepared remarks, some of the inventory fluctuation versus last year is driven by the potential mitigation of tariffs that we were expecting to happen last year that never materialized. So last year is probably not a good comparable data point, but at the same time we are pleased how we are managing inventory and we believe there is some opportunity to further improve our turn with some of the things that I just mentioned. Then on the other side, as we talked about SG&A, again, we are living in some uncertain times. There are closures of stores happening. We just reopened our stores in UK couple of days ago.

[Sharon Price John:]

Yesterday.

[Voin Todorovic:]

It was yesterday. So, definitely, we were making some adjustments. We unfortunately had to furlough majority of the people that are in those particular locations. These things are going to be happening. We are going to do what we can to mitigate everything that's within our control. We've proven, I believe, that we can manage SG&A, but at the same time we need to continue to make the right investments in business and continue to invest in places that still support our strategies and to continue to deliver long-term shareholder value.

[Sharon Price John:]

I think the key here, Eric, is – and we to point I think that we've shown the ability to do this is to find that balance between maintaining tremendous flexibility, managing our cash situation in the midst of uncertainty, while still making strategic investments in the future.

[Eric Beder:]

Yes, it's definitely come through that way. One other question here. You have – you did it with Child and you did it with little Harry Potter buy online first and then shifting it into stores? How do you see that flowing out? Is that something we're going to see more of? And how did the store personnel or the people kind of – how did the different stakeholders respond to that?

[Sharon Price John:]

Right. So the initial effort that we made on a big launch that was online first was associated with the Child, the Disney Mandalorian, Baby Yoda as it's known. And that was simply because all of our stores were closed during the launch period. So we had to – speaking of flexibility and the ability to shift focus and react to the marketplace and the pandemic, we quickly shifted our entire effort to be an online effort and repositioned the launch to – and it was quite successful as we've shared in previous quarters and continues to be so with the new Mandalorian 2 having just launched and created a continued demand for that particular product and some of the add-ons that we've now included in the offering. But we learned a lot during that. We learned that we can reach a different type of consumer, a broader consumer base, a consumer base that might be not Build-A-Bear first, but be affinity products first. So that combined with our new capabilities in digital marketing enabled through Salesforce relationship that we signed in January of this year really drove a lot of these sales and also has expanded our consumer base that we're now bringing into the Build-A-Bear fold, modeling and driving, as I mentioned in some of my remarks, opportunities for additional add-on sales and pulling them into our loyalty program over time. So, there's a number of things going on and we actually learned through that process that it’s ideal given the particular profile of that product to actually launch online first, and then bring it into the store, different types of consumer that wants a different type of experience. And so that is why even though our stores were reopened when we launched Harry Potter, we chose to replicate that approach, because it drove value and stretched out the tail of these particular high affinity products.

[Eric Beder:]

Great. Good luck for the holiday season.

[Sharon Price John:]

Thanks.

[Voin Todorovic:]

Thanks, Eric.

[Operator:]

Thank you. . There are no further questions at this time. I would like to turn the call back over to Sharon Price for any closing remarks.

[Sharon Price John:]

Thank you. Thank you all for joining us today. And we appreciate you tuning in and we wish you all a safe and happy holiday season. Be safe, be happy and enjoy.

[Operator:]

On behalf of the Build-A-Bear team, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.