Build-A-Bear Workshop, Inc.
Q1 2016 Earnings Call Transcript

Published: 3 May 2016

[Operator:]

Greetings and welcome to the Build-A-Bear Workshop first quarter fiscal year 2016 earnings results conference 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. 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 first quarter results and highlight our performance against the key priorities we outlined we began fiscal 2016. Voin will review the financials and guidance and then we will take your questions. Our press release issued this morning included the announcement that the Board has authorized management to review a full range of strategic alternatives. Given that, we are limited in making additional comments or answering questions regarding this review. We ask that you focus your questions on our first quarter results and stated strategies. We also 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 maybe 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 and a replay of both our call and webcast will be available later today on the IR site. Before I turn the call over to management, I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties. Our 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 Annual Report on Form 10-K and 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:]

Thanks, Allison. Good morning and thanks for joining us today. As you know, we recently delivered our third consecutive year of increased profitability and comparable sales growth fueled by margin expansion and improved operational metrics, such as the highest average transaction value in our history while consistently generating strong cash flow. These accomplishments and the consistency of our performance amid ongoing instability in the macro retail environment represent an important milestone in Build-A-Bear's turnaround plan that was initiated in late 2012 as we successfully reversed an eight year trend of comparable sales declines and profitability contraction. Given this, we believe we are on track to move to the next phase of our multiyear turnaround by evolving from our stated objectives of delivering sustained profitability to a focus on driving sustained profitable growth. This shift is a result of the traction we are gaining with our more strategy, which is simply described as profitably monetizing the Build-A-Bear brand by extending into more places with more products to reach more people. With the focus on sustained profitable growth, late last year, the Board and management began to discuss ways for Build-A-Bear to potentially accelerate the execution of key growth initiatives for the future, while enhancing total shareholder value. As a result of these discussions, the Board determined that it was an ideal time to explore a range of strategic alternatives for the company, which could take many directions. As you are aware, there is no assurance that this exploration will result in any strategic alternatives being announced or executed. We will be limited as to any additional comment on this topic as the process unfolds, unless and until the Board determines that further disclosure is appropriate. Now moving to the first quarter. The positive results during two of our largest holidays were bolstered by strong performances of our proprietary Valentines and Easter collection, which contributed to increased revenue, positive consolidated comparable sales and margin expansion for the period. We believe this solid start to 2016, which is ultimately expected to represent our fourth consecutive year of improved profitability and consolidated comp increases places us on track to achieve our stated revenue and profitability goals for the year. In the quarter, as we have noted in the past, we expected expenses related to key investments to have a negative impact on profitability versus the prior year as we chose to continue to improve our infrastructure, including upgrading our retail stores and scaling our global presence. Because these efforts were a part of our planning process, we are able to reiterate our pretax guidance for the year. Some specific details of first quarter include consolidated comparable sales increased 2.2% which follows a 2.2% increase in the first quarter of 2015, our North America comps led the way with a 3% increase, following last year's flat performance, in Europe our comps declined 1.8% following a 14% comp increase in last year's first quarter as Frozen continued to over index in the U.K. during that period. The result is a two-year positive comp in both geographies with a double-digit increase in Europe. New Discovery store sales increased 14%. Retail gross margin expanded 160 basis points to 48.4% and pretax income totaled $5.3 million, a decline of $1.8 million, which compares to pretax income of $7.1 million from last year's first quarter. The 2016 first quarter pretax income includes expenses of approximately $2 million related to scheduled strategic investments. As expected, the majority of expenses are associated with the continued aggressive rollout of the Discovery store format and the establishment of a foundation for further international expansion, including China. It also includes key talents that have been hired to execute these key strategic efforts. Given the early results, we are confident that these investments in Build-A-Bear are clearly aligned with our more strategy and are essential for us to successfully evolve the company to deliver both higher levels of revenue and profitability on a more consistent basis in the future. Having planned for this impact, at the ICR Conference in January, we shared that 2016 is expected to be a tale two halves. In the first half, we anticipated a bumpy road as we make much-needed investment in the company whose real estate and infrastructure upgrade needs has been mostly ignored for almost a decade, while we expect the second half to provide an excellent opportunity to begin reaping the returns of those investments primarily in the fourth quarter. As an example, given the strong results of the Discovery store concept, which I will detail in a moment, we have strategically chosen to make a disproportionate level of investment in the first half of the year. The rationale supporting this longer view investment strategy is twofold. One, it is significantly more advantageous to have as many new stores and remodels open and as few doors closed for remodeling as possible in the back half of the year, particularly during the critical fourth quarter holiday sales period. And two, though earlier in the year we choose to make key investments from remodels to IT, the grade of opportunities to begin to generate expected returns associated with the investment and/or recoup the lost revenue and expenses related to it, particularly in the case of remodel downtime. As mentioned, our big stories for the quarter included both our Share Your Heart Valentines campaign and our Make Your Own Easter Fun campaign which were supported by integrated marketing efforts, including TV advertising and contributed to successfully expanding the concept of Build-A-Bear as a gift destination beyond our core consumer base. These proprietary holiday programs helped to drive an increase in our North American dollars per transaction to another record high of over $46 and our units per transaction to nearly 4.2. Additional top stories included the refresh of our Honey Girls and Promise Pets collections. We continue to make marketing investments to build consumer engagement with our brand and intellectual properties, including digital platforms that range from music videos to apps. Life to-date, there have been more than 25 million digital interfaces including views of our Bearville Alive! episodes on YouTube. I encourage you to view a few Honey Girls music videos online or download the Promise Pets app to understand the multidimensional engagement that we are offering with these collections. In fact, not only does this multimedia approach service high impact organic marketing, the engagement data recently enabled us to secure a new royalty generating outbound license agreement just for Promise Pets. Our powerful entertainment license relationships also continues to deliver. Nickelodeon's PAW Patrol has been very appealing to the preschool set and our boys and teen plus segments are responding to the introduction of new Star Wars merchandise as well as the release of products associated with Warner Brothers' recent blockbuster action hero film Batman v Superman

[Vojin Todorovic:]

Thanks Sharon and good morning everyone. We are pleased to report increased net revenues in the first quarter driven by positive consolidated comparable sales as well as the expansion in gross margin. We are on track to deliver the full-year targeted pretax guidance we shared previously. Our ability to deliver increased comp and strength in our gross margin rate continues to demonstrate that our stated strategy is working. We are increasingly leveraging the strength of our brand and delivering exceptional product stories and marketing that are broadly accepted by consumers, while expanding our reach beyond the four walls of our traditional mall based stores. Our focus in the first quarter was equally balanced between driving our topline and investing in the strategic initiatives that are expected to deliver our long-term sales and profit goals. We are especially pleased to report increased revenue even though some of our top-performing stores such as Myrtle Beach, South Carolina and Tivoli Gardens in Copenhagen, Denmark were closed for a portion of the quarter to be remodeled into Discovery format. In addition, we lost revenue from closure of several high volume stores inclusive of the multimillion dollar locations at Fifth Avenue, New York City and our Convent Garden store in London. Some notable highlights from the quarter included 2.2% consolidated comparable sales increase, 14% average sales increase in our new Discovery format stores, gross margin expansion of 160 basis points and our pretax income of $5.3 million included $1.9 million planned cost associated with preopening expenses and international extensions investment. We are starting the year with solid topline momentum and we remain confident that the disciplined execution of our strategy will enable us to deliver our fourth consecutive year of consolidated comp sales and profit growth in fiscal 2016. This morning's press release includes details of our first quarter financial performance that I will briefly review with you now. The consolidated comparable sales increase of 2.2% followed a 2.2% increase in the first quarter last year. Our comparable sales included an increase of 9.7% in average transaction value offset by a decrease in transactions. Net retail sales increased $2.4 million excluding the impact of foreign exchange. This represented an increase of 3.8%. The growth in net retail sales is primarily attributable to increased consolidated comparable sales, new store sales and gift card breakage revenue partially offset by the impact of currency and closed stores. For clarity, as noted in our most recent Form 10-K, we changed the accounting methods used to estimate breakage revenue on unredeemed gift cards. As part of the change, breakage is now included as a component of net retail sales. In previous years, it was presented as an offset to SG&A expense. Retail gross margin expanded 160 basis points to 48.4% driven by the increase in net retail sales from breakage revenue, leverage in fixed costs and a 40 basis point expansion in merchandise margin. SG&A was $39.7 million or 41.8% of total revenues compared to $37.2 million or 39.9% of total revenues last year. The $2.5 million planned increase in SG&A was a result of a shift in marketing expenses to the first half, increased compensation expense to support growth initiatives in the business, investments in new business initiatives, international expansion as well as the previously noted change in classification of gift card breakage. Store preopening expenses of $1.2 million are associated with the first and second quarter openings of our company's new and remodeled Discovery format stores. First quarter pretax income was $5.3 million versus $7.1 million last year, a decrease of $1.8 million. The majority of it was related to elevated level of investment to support strategic initiatives as planned. The tax expense of $1.8 million gave us a tax rate of 33.3% compared to a tax expense of $200,000 with a tax rate of 3.3% in the first quarter of fiscal 2015. This increase was driven by the release of the tax valuation allowance in 2015. In the first quarter of 2016, our tax rate included net discrete adjustment of $150,000 that drove the rate above our guidance. As a reminder, for the full 2016 fiscal year with no tax valuation allowances remaining, we anticipate returning to a more normalized tax rate of approximately 30%, derived from the expected mix of taxable income in different jurisdictions and the impact of the discrete items in the first quarter. Net income per diluted share was $0.22 compared to $0.40 per diluted share last year impacted by the higher tax rate in 2016 and by expenses associated with planned strategic investments. At quarter end, cash and cash equivalents were $30.8 million and we had no borrowings under our revolving credit facility. During the fourth quarter, we repurchased 133,000 shares of our common stock for $1.5 million. We finished the period with $54 million of consolidated inventories representing a 5.5% increase over the prior year. The inventory composition is in line with our expectations as the majority of the increase is related to in-transit merchandise. For the first quarter of 2016, capital expenditures totaled $6.2 million primarily related to store activity and IT infrastructure. Depreciation and amortization was $3.8 million. Our strong cash flow generation continues to enable us to invest in growth while keeping in mind our goals of ensuring flexibility in capital spending and maintaining a strong balance sheet. As we execute on our strategy for fiscal 2016, we continue to expect capital expenditures to be in the range of $25million to $30 million and depreciation and amortization to be between $17 million and $19 million. Our objective for 2016 is to transition from sustained profitability to sustained profitable growth. With that goal in mind, we reiterate our full-year guidance. As we outlined previously, we continue to expect total revenue growth in the low to mid single-digit range which assumes a low single-digit positive comp. For Q2, we expect total revenue to decline compared to last year. This is driven by our anticipation of a negative consolidated comp and the impact of the Valentine resulting from our scheduled remodel activity in the second quarter. The expected comp sales decline is due to the strength of the Minions product last year, which contributed to the positive 9% comp we reported. For both Q3 and Q4, we are currently planning positive consolidated comparable sales and growth in total revenue. This is driven by our anticipated positive contribution from the increased number of Discovery format stores and powerful product line up in the second half of the year that Sharon discussed earlier, which will allow us to build on the softer back half particularly the fourth quarter. Also, we expect to have initial royalty income from our Build-A-Bear branded license products based on the early selling indications. As it relates to profitability, we continue to expect fiscal 2016 pretax income to grow by 15% to 25% compared to our GAAP pretax income of $17.9 million in fiscal 2015. In the second quarter of 2016, we expect to see increased losses versus the second quarter of 2015. This is driven by the leverage from the anticipated decline in revenue, which is expected to negatively impact both gross margin and SG&A rates, higher marketing spend as we shifted a portion of this expense forward versus the prior year and expenses related to store preopening consistent with the first quarter versus minimal preopening costs in the second quarter of fiscal 2015. We currently expect our second quarter pretax loss to be at least $5 million to $7 million greater than the year age due to the timing of our investment and on the anniversary of strong Minions performance last year. Importantly, our strategic initiatives, which will result in the higher level of investment in the first half of the year, position us to accelerate sales and profitability in second half of the year, particularly in the fourth quarter. To this end, in addition to our expectations for positive net revenue and increased consolidated comparable sales, in the second half of the year we expect SG&A as a percent of revenue to be less than last year. We estimate SG&A dollars to be flat even with a planned increase in store count and higher total revenues resulting from lower marketing expense year-over-year as we shifted investment to the first half of the year, a reduction in duplicative costs inclusive of third party fees due to efficiencies gained from infrastructure investments and process improvements and minimal continued investment spend related to China startup and sell up cost. We also expect lower levels of preopening costs as the majority of the expenses for our new Discovery format stores will be incurred in the first half of the year. Finally, we anticipate ending the year with 340 to 345 stores, 45 to 55 of which are planned to be in our new Discovery format. Thanks for your time this morning. We will now turn the call back over to the operator to take some questions. Operator?

[Operator:]

[Operator Instructions]. Our first question today is coming from Stephanie Wissink from Piper Jaffray. Please proceed with your question.

[Stephanie Wissink:]

Thank you. Good morning everyone. We have a couple of questions. Sharon, if you could just, in the spirit of your announcement this morning about strategic alternatives, not to get into the details but just talk about the context for what led to the Board prospecting and your including that in your release this morning, just in context leading up to but not getting into details behind it? And then secondly Voin, a question for you just with respect to all the timing shifts happening over the course of this year. So you feel like 2016 is going to be the year in which we start to build a foundation? You start to see some of the investment spending moderate towards the back half? Is 2017 the year where we should expect some of the leverage coming from that profitable growth driver into the out year? Thank you.

[Sharon Price John:]

Thanks Steph. Yes. As we are limited as what we can say around the strategic alternatives other than to reiterate that this is a move from a position of strength. I think that that was noted in my script that really it's a situation after three years of increased profitability, comp sales growth, margin expansion, continued strong cash flow and the fact that our investment strategies are working, particularly with the Discovery stores, it's a shift moment from sustained profitability to sustained profitable growth. And in that context, the Board and management began to discuss this late last year, understanding where we were going to end the year and we wanted to look at ways that we could potentially accelerate the execution of those key growth initiatives while ensuring that we are enhancing total shareholder value. So it really is in that spirit and it could take many directions as it has in the past with Build-A-Bear. So it's not necessarily a situation where we are in a must situation. It's in a very exciting shifting moment for Build-A-Bear.

[Vojin Todorovic:]

And Steph, on the second portion of your question, talking about the timing of 2016 being a foundation year, first half to the second half, absolutely. As we talked even previously about our guidance, we always said 2016 is going to be choppy year, a tale of two halves. We are setting up the foundation. We are executing our strategy to leverage our expenses as we continue to reduce duplicative cost that we incurred in the past as a result of the strategic investments we were making in the business. We expect to start seeing a reduction in SG&A, as I called out in our prepared remarks. In addition to that, we are also expecting to start seeing a bigger impact of Discovery stores that are performing very well so far. And over the higher number of stores that we expect to have in the second half of the year, we expect to continue to see a leverage. We are also starting to see some additional revenue income coming from the additional investments that we have made, in particular talking about the outbound licensing and so on. So yes, we are going to continue to see some of those improvements in the second half of the year, but we will continue to make investments even beyond to refresh our chain and continue to drive towards a double-digit operating margin.

[Sharon Price John:]

Yes. So really there is kind of two things going on here. For the last three years, we have been working toward and making investments and improving process. So laying the groundwork like IT investments where we knew we would have some overlap that's going to stop now. The laying the groundwork for being able to sign these licenses with outbound royalty income that should be starting to flow, that takes a long horizon that we are going to start to see the impact of those investments. And then the short acute investments that we are making in the first half on the remodeling of the Discovery stores, we will slow that process significantly in the back half, almost to a halt in the fourth quarter because we want to be totally focused on operation, of course, in the fourth quarter and we expect to see that type of ROI as well. So we are starting to see the ROI in these longer horizon investments as well as the ROI in these acute investments that we decided that we wanted to focus on in the first half after we recognized the opportunity with the Discovery stores. You recall that we opened those Discovery stores starting in the back half of last year and we wanted to get a good test grouping and realized that we really had a tremendous opportunity and made that choice from a capital planning perspective late last year to try to open as many as we could in the first half of the year.

[Stephanie Wissink:]

Thank you.

[Operator:]

Thank you. Our next question today is coming from Rick Patel from Stephens Inc. Please proceed with your question.

[Rick Patel:]

Thank you. Good morning everyone. Thanks for taking my questions. I have a question on expense growth. So in the first quarter, it looks like your total SG&A dollars were up around $3.5 million versus last year on a GAAP basis and you said that about $2 million of this was due to growth initiatives. Do you expect that same level of year-over-year increase in the second quarter? Or will it be even higher than that given the timing of some of your remodels and your marketing shift?

[Vojin Todorovic:]

Good morning Rick. Thanks for the question. Yes, we are expecting similar increases in SG&A growth in the second quarter as we will continue to make investments in our stores and we are making additional investment in marketing spend as we previously called out. The offset to that is going to be in the second half of the year as we are talking about reduction in duplicative cost, we are talking about the marketing shift and we are expecting the second half, our SG&A dollars to be flat to last year despite having additional store count in our base and additional SG&A that we are going to incurring. So definitely there is a lot of timing and the first half of the year is front loaded from the expense standpoint.

[Rick Patel:]

Great. Thank you. And can you also delve into the outlook for gross margin? It looks like that will be down in the second quarter given some expense to leverage, but is it safe to assume that they will be back up in the back half as comps improve? And even outside of the comp increases, do you expect higher royalties to have a material impact on back half margins? Or is this more of an out year contribution?

[Vojin Todorovic:]

So we expect margins on a full year basis to improve. One of the things that we talked about is the gift card breakage and there is going to be a reclassification change and that's going to probably, that's worth of about 50 basis points on a the full year basis. In addition, we expect to see some more nominal expansion in merchandise margin. We saw 40 basis points in Q1, but we are expecting some of the tougher comparable forward from the merchandise margin growth perspective in the second half of the year. So the third part of your question was, I think, on the royalty income. We expect to see some minimal impact in the second half of the year, but we expect that impact to grow in out years as well.

[Sharon Price John:]

Yes. And Rick, you are right to assume that that royalty is mostly profit. And a couple of things too, as we start to implement some of our improved sourcing that I mentioned, we are starting to get a little more aggressive on that front, which is one of the reasons why we wanted to set up an entity in China. It wasn't just to go into the retail environment in China. It's so that we can have a more assertive approach to sourcing that would ultimately the direct with factories for 100% of our base. That won't start flowing through too much in the fourth quarter. These are out year opportunities that we are investing in right now. And also, as we start to optimize a lot of these IT systems, including TXT Retail, there is a little bit of space there to continue to expand margin as well.

[Rick Patel:]

And just a quick clarification, your new Discovery format sales up 40%, was that included in same store sales?

[Vojin Todorovic:]

Yes. That was included in the same store sales and the impact of that was probably about 40 basis points in the overall comp.

[Rick Patel:]

Great. Thank you. And good luck with all the changes in 2Q.

[Vojin Todorovic:]

Thank you.

[Operator:]

Thank you. Our next question today is coming from Alex Fuhrman from Craig-Hallum Capital Group. Please proceed with your question.

[Alex Fuhrman:]

Hi. Thanks for taking the question. I just want to confirm, Voin, did you say with regards the second quarter, you are expecting pretax income to be down? I think you said $5 million to $7 million? And just want to get a sense, if that was the case, where that's coming from in terms of SG&A versus gross margin and try to get a sense of your outlook there for the second quarter? And then I imagine just rough math, discount was pulling back half SG&A to be flat still has a hard time getting your full-year pretax income guidance, if that was correct about the second quarter?

[Vojin Todorovic:]

Yes. That was correct about the second quarter, $5 million to $7 million expected loss compared to the prior year. Some of that, Alex, is related to our elevated marketing spend in the quarter. We also have some additional expenses related to our preopening costs as majority of our stores are going to be either opening or being closed for remodel and opening in early Q3. So we are going to be incurring some additional expenses that we have calling even in the past. We are also going to be incurring some additional China cost as the China stores are going to be opening for us in mid-June. So we are seeing some of these costs that are driving, as on the previous question I answered to, we are expecting similar SG&A increases as we have seen in Q1. In addition to that, there is going to be an impact in margin losses as we are expecting to have negative comps in the second quarter and that's driving further deterioration in our profitability. As we mentioned, we are not going to be leveraging our SG&A and margin cost in the second quarter, but we still feel good about the full-year basis. As we called out, some of the expense savings and some of the timing that we have, we are still feeling good about range that we provided in the full-year basis.

[Alex Fuhrman:]

Okay. That's helpful. Thanks, Voin.

[Operator:]

Thank you. Our next question today is coming from Gerrick Johnson from BMO Capital Markets. Please proceed with your question.

[Gerrick Johnson:]

Hi. Good morning everybody. Voin, I just wanted to clarify, on preopening expense and SG&A, you are breaking that out and you had not broken that out in your financials before. So when you talk about SG&A in the back half, is inclusive of store preopening or is that just SG&A with store preopening still being on a separate line? And if that's the case, can you give us what the store preopening expenses were in those quarters last year?

[Vojin Todorovic:]

SG&A that I am talking about doesn't include preopening expenses. Majority of the preopening costs that we are going to be incurring in 2016 is going to be related to Q1 and Q2 with a little bit limited expense in Q3. Last year and there is going to be some in Q4 because we do have seasonal pop-ups shops, Macy stores that we opened last year. As a reminder, we did spend some money in Q3. We haven't called out that specific number but we expect this year our preopening costs in the second half of the year to be on par or lower over the last year spend. Most of the spend, incremental spend is in Q1 and Q2 of this year.

[Sharon Price John:]

Versus it being in the back half of last year. We ended the year with 10.

[Vojin Todorovic:]

We had 11 Discovery stores.

[Sharon Price John:]

11 Discovery stores at the end of the year. So we had preopening expenses associated with 11 doors that were open in the third quarter mostly and a little bit in the first through the fourth quarter.

[Gerrick Johnson:]

You are right. So what was that dollar amount in the third quarter? Can you let us know what that is so we can do the comparison this year?

[Vojin Todorovic:]

It was about that $800,000 last year in Q3.

[Gerrick Johnson:]

$800,000 in Q3. Okay.

[Sharon Price John:]

Gary, just for clarity, that was also associated with some elevated expenses because it was a Mall of America store.

[Gerrick Johnson:]

Okay. And then the $1.2 million in the first quarter, you mentioned that there was some second quarter reform. How many stores in the second quarter are included in that $1.2 million?

[Vojin Todorovic:]

So let me just explain a little bit for clarity purposes. When we talk about preopening expenses, we start recognizing these expenses eight to ten weeks before the store opens. So in Q1, we opened four stores in Discovery format that we are incurring expenses related to the Q2 store openings. Majority of our remaining openings in Discovery format are going to be happening in Q2 or early Q3. So we have about 20 store or so that are going to be in Q2. Some of them were started in Q1, some of them are going to be started in Q2.

[Gerrick Johnson:]

Okay. Maybe a better way to get what I am trying to get at is, how much is the cost per store? That's kind of what I am trying to get at? And then also what's the goal? You have 250 more stores. So are those all going to be reformatted at some point? Or is it going to be half of all those stores?

[Vojin Todorovic:]

So we haven't provided a specific cost because it varies with different type of stores. Some of the stores that we are starting this year are some of our bigger stores such as Myrtle Beach, we of Disney stores. Last year, we had Mall of America. So some of these stores may be skewing some of the averages. We expect, as long as we continue to get the return on investment that we are getting in these remodels, to continue with the strategy that we believe is working for us. We also have different type of remodels, different costs that we are going to be building out and that also has an impact, how fast some of those things can be completed. In addition, we also are looking at driving some of these costs down as we continue to value engineer, as Sharon mentioned, on the initial stores opened in 2016, our capital expenditures were below planned expectations in those particular stores.

[Gerrick Johnson:]

Okay. All right. Thank you Voin.

[Operator:]

Thank you. Our next question today is coming from Howard Tubin from Guggenheim Securities. Please proceed with your question.

[Howard Tubin:]

Hi guys. I was hoping maybe you can just give us some general thoughts on how you are thinking about promotions in the second quarter and in the fall season? Generally should we expect to see similar essentially as we last year? Is anything something new on the horizon?

[Sharon Price John:]

Well, we have clearly a planned promotional budget and we also, as we had last year and we talked a little bit about it in detail, we have a lot of scenarios that we run given how the market responds to certain things. Whether it's a movie property or just overall mall traffic and we have created a disciplined approach in a toolbox to be able to have the margin we need it to drive business depending on the environment. Right now, we look at our lineup for the back half, we feel very good about it. We have a lot of powerful movie properties as well as the continuation, which I did not mention on the call, but our Merry Mission will be relaunching. It will be in the back half, which we tend not to ever have, we haven't yet had to discount that to drive it through. But we are looking at the second quarter right now and it's really, if we need to pull the trigger, we will. But the Minions were a very difficult comp for us to overcome this year. They ended up really powering through the June time period particularly and delivering a 9% comp for the quarter. So our goal is to maintain as much stability as we can through a 9% comp comparison and make sure that we are managing our expenses as well as we can while making the investments that we need to make to prepare our self for the back half delivery.

[Howard Tubin:]

Okay. Thanks Sharon.

[Operator:]

We have our next question today is coming from Jeremy Hamblin from Dougherty & Company. Please proceed with your question.

[Jeremy Hamblin:]

Good morning. I wanted to follow-up on the Discovery format stores, the remodels. Some of these are at your more important, your bigger locations. Just wondering, in terms of the 14% improvement in results at those format of stores, is that something that we should take as proxy? Or do you think there is going to be some noise because those are some of your bigger and flagship type locations? Should we be expecting may be not quite a strong results at other locations when we get into next year and beyond?

[Vojin Todorovic:]

Hi Jeremy. This is Voin. So our Discovery store like some of those the increases that we are seeing are across the board. And like even though these 14, 15 stores that we talked about, where we are seeing some of the strong growth, only Mall of America is our big flagship store. Now we remodeled some of the stores, the Tivoli Gardens, the Trafford in U.K. as well as Myrtle Beach within the quarter and the impact of those, even though its' positive it's a much smaller dollar base.

[Sharon Price John:]

Like these were actually closed during a portion of the fourth quarter. And one of the things, Jeremy, that we did, we were careful to do this in the back half of the year when we chose stores to remodel, when we were thinking about the potential rollout of Discovery as we put some of the different types of locations, we didn't skew the selection of the doors to assure that it would be a positive outcome. We did a flagship door. We did a store in a lifestyle center. We did a store in traditional mall. We did a store where we moved one inside a mall. We did one in a consistent location. We did a new location. To kind of see under different circumstances how they would respond. The 14% sales increase is an average.

[Jeremy Hamblin:]

Okay. Great. So then that seems like a good proxy. In terms of, I wanted to ask about your e-commerce which maybe was a little bit disappointing from our standpoint, up only 1%. Anything, you have made some investments in capability there, certain trying to connect with a slightly older demographics as well on mobile, any call out in terms of why the performance in that channel sales may be wasn't quite as strong as what you have seen in the last few quarters?

[Sharon Price John:]

Well, that was 1% comp on top of an 8% plus comp from last year. And we had some timing of launches that was a little bit different this year. We had the Cinderella limited edition launch last year that was like an $80 retail that drove a lot of sales through the e-commerce site that we really didn't anniversary at that types of price point. But we expect the total year comps to outperform the brick-and-mortar, as it has in the past year.

[Jeremy Hamblin:]

Okay. Great. And then I wanted to ask about the AMC partnership at the kiosks and just in terms of how that business is going to be managed? Are you sharing an expense of manning those kiosk stations? How is the logistics of that arrangement being organized? And how impactful do you think it can be?

[Sharon Price John:]

Yes. It's a good question. The deal is arranged similarly to our Macy's deal, just on a smaller scale. So it's on a percent basis. We have a new format that we have created, specifically created for actually the Carnival Cruise Lines, which is a total experience on wheels for Build-A-Bear and we expect that we will, as we do in Macy's, is our people and our expense and our checkout and we pay them a percent of the sales for having the location and the traffic to take advantage of. So we are looking at the back half of the year right now. It will be limited to begin with, so that we can master it and see what the opportunity is. It's not hard to imagine from either of our perspectives that it should be an audience that's engaged and excited given that we would have the movie properties products that the people are there to see. So I think it would be an exciting test opportunity for us. But given that it's a percent basis on a kiosk that we have already designed and developed, we are pretty excited about it and we are looking at the overlap of AMCs in malls where we are located and it's kind of like, why didn't we think of this before partnership.

[Jeremy Hamblin:]

Right. Really interesting. Voin, just one last question on the remodels. You mentioned that the costs maybe were not quite as much as you expected or that cost were down slightly? Would you be able to quantify that for us?

[Vojin Todorovic:]

What we have said in the past, we will have different type of remodels, A, B and Cs. A prototype remodel we said would be a little bit north of $0.5 million before tenant allowances. And so far on the openings that we did this year we are projecting we are coming below those numbers. And some of the B and C remodels are expected to be even below those numbers for this year. s we go in out years, we are expecting to continue to work to bring those costs down.

[Jeremy Hamblin:]

In terms of magnitude, are you looking at 10% below projections, 5%, 20%? Any additional color would be appreciated.

[Vojin Todorovic:]

It's still a moving target, but it's probably right there in like 5% to 10%.

[Sharon Price John:]

And here's the thing with those and it's typical. You are out of the gate in your first few stores and they are expensive and they are tough and you make mistakes and then you start to figure out what works and what doesn't. And as we did last year, once we specified exactly what was working in a real environment, we were able to order some of the fixtures on a more mass level which drives your cost down and now we are able to also more efficiently install. So the goal is that it's a continuous improvement process.

[Jeremy Hamblin:]

Great. Thanks for taking the questions. And best of luck.

[Vojin Todorovic:]

Thank you.

[Operator:]

Thank you. Our final question today is coming from Greg Pendy from Sidoti & Company. Please proceed with your question.

[Greg Pendy:]

Hi guys. Thanks for taking my call. Just real quick on, you must have now 30 to 40 remodels left, given the 45 to 55 target and I was just kind of wondering, do you guys have any idea on how many of those 30 to 40 stores in 2Q might have a temporary satellite offsetting it while it's being closed down for the remodeling? Thanks.

[Vojin Todorovic:]

Yes. So Greg, like we are looking at each on those stores as independent events and seeing like if it makes sense for us financially and if we are going to be getting a payback on having a temp location to protect the top line. If we are not getting the favorable rent structure on these things or if the economics don't make sense for us, we are going to pass. But I would probably say, probably some place between 60% and 75% of these stores, we will probably would try to have a temp location.

[Greg Pendy:]

Okay. That's good. And then just want one final thing. Can you just talk a little bit about, you said pricing was 9.7%, can you talk about what the drivers were? And what that looks for the next three quarters of the year?

[Vojin Todorovic:]

I can tell you a little bit more about the Q1. We haven't provided that guidance and we don't talk about the drivers of the comps on the future quarters. But in Q1, we are seeing what's driving that 9.7%, it's split between unit per transaction growth and average unit retail growth.

[Greg Pendy:]

Okay.

[Vojin Todorovic:]

And that's been like a similar story for last few quarters.

[Sharon Price John:]

And as we mentioned, Greg, part of or one of the reasons why the Discovery stores are being successful is in the areas in our measured traffic for the Discovery stores, it's significantly improved, which is bucking the trend of mall traffic. So that's one of the reasons why we have a lot of confidence is, it's not just, I think that the lease line theater is bringing people, new people, different people across the Build-A-Bear threshold that may not have been there and certainly haven't been there in a long time. And so it changes the dynamics of to whom we can market. And I mentioned this in the script as well, on the Mall of America and some of these other flagship stores, when we did the raw data on the highest or the peak times, we were actually leaving money on the table, which I can't say for a lot of retailers that our problem was we had too many people in the store that we couldn't manage the throughput. That should be is a good problem to have but when you have a literally a funnel called the stuffer, you have to find ways to push people through faster and that improves throughput is part of what's driving our key stores like our flagships, like Mall of America even a bit higher than that 14% comp.

[Greg Pendy:]

Okay. Thank you.

[Operator:]

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for an further or closing comments.

[Sharon Price John:]

So thanks again for joining us today and we look forward to speaking to you when we report our second quarter results in August. Bye.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.