Build-A-Bear Workshop, Inc. (NYSE:BBW) Q3 2022 Earnings Call Transcript November 30, 2022
Build-A-Bear Workshop, Inc. beats earnings expectations. Reported EPS is $0.51, expectations were $0.38.
Operator: Greetings. Welcome to the Build-A-Bear Workshop Third Quarter 2022 Earnings Call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I’ll now turn the conference over to Allison Malkin of ICR. Ms. Malkin, you may now 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 third quarter fiscal 2022 performance, and update the progress we have made on our key priorities. After, Voin will review the financial and guidance in more detail, we will then open the call to take your questions. We ask that you limit your questions to one question and one follow-up. This way, we can get to everyone’s 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 John.
Sharon John: Good morning, and thank you for joining us today. We are pleased with our third quarter and first nine months results as we continue to see momentum and consistency in our business with strong brand interest from consumers. Our retail store traffic continues to show double-digit increases, leading to year-over-year growth in transactions across geographies. With our fiscal 2022 third quarter we have now delivered seven consecutive quarters of increased total revenue compared to the prior year’s period with sustained profitability throughout that time. Given our fourth quarter and year-to-date positive trends we are positioned to deliver the most profitable year in our 25-year history building on the 2021 results, which marks our previous high.
We believe this track record of successful growth reflects the consistent and disciplined execution of our long-term strategic model to leverage the awareness and affinity of our brand fuel consumer interaction and drive more transactions through multiple retail channels with a broader addressable market. We believe that the foundation that has been built as this brand leveraging diversification strategy has been instituted, positions us to scale and drive further transformation and profitable growth. Specifically highlights of the quarter includes, total revenues of $104.5 million an increase of nearly 10% over the fiscal 2021 third quarter, even with a unfavorable impact of foreign exchange of over $2.5 million. We saw growth across all reported segments with solid increases in net retail sales, commercial revenue and international franchising.
Pre-tax income close to $10 million, an increase of over 25% compared to the fiscal 2021 third quarter. And we continue to have a solid financial position and strong balance sheet, ending the period with no borrowings on our revolving credit facility. Now let me review in more specifics the progress we have made on our strategic initiatives, which includes accelerating a broad reaching and comprehensive digital transformation, continuing to evolve our retail experience and footprint while taking advantage of our expanded omnichannel capability and leveraging our solid financial position to invest in initiatives intended to drive growth and return value to shareholders. First, we are confident that the digital transformation of our company is providing benefits throughout our organization and to our business model.
Today’s consumers want to engage with brands that provide experiences and emotional connection, when they want? Where they want? And for whatever they want. Optimizing this omni-channel consumer dynamic requires multiple shopping channels and intelligent marketing engagements that elevates the offerings and services of these diverse consumer segments and their needs. As such, we continue to invest in digital technology to expand, develop and refine these capabilities. We believe that each of our multiple channels provides value, both in driving profitable revenue and engaging in servicing consumer demand. In that regard as the balance between digital shopping and in person shopping continues to adjust in the post-pandemic era, we are generally agnostic to any single channel with a focus on driving more visits and lifetime value to consistently deliver profitable total growth.
Specifically, as it relates to our digital demand strategy, in the quarter, we prepared for and launched the planned update of the new global first version of our e-commerce site with extended AB testing and algorithm refinement, being made throughout the period on multiple points from the landing page to checkout. While some sales disruption is expected during this type of upgrade, we saw a greater than planned decline in digital demand in the quarter, which could also be related to what seems to be a macro consumer trend back to in person shopping, simply shifting some of our demand to our retail location, given the strength of our total sales growth in the quarter. That being said, our most recent e-commerce trends have shown improvement and have returned to a positive trend in the current fourth quarter with growth from both the Black Friday and Cyber Monday periods as compared to the prior year.
In addition to providing features for our core consumer base, one of the key objectives of the web redesign was to further engage with our multi-generational loyal brand enthusiasts, with our new offerings ranging from gift giving and heart box, collectibles in the barricades and our new family pajama shop, as well as other web exclusive products and offerings. In conjunction with the updates to our e-commerce platform, we also advanced the technology supporting our omnichannel loyalty program and have initiatives in place designed to increase enrollment and drive lifetime value. In the quarter, with these efforts, we had a higher number of active members in the program compared to the prior year. We saw average annual transactions per active member increase, which we attribute to advancements in our consumer communication and direct marketing as we more effectively use predictive analytics to refine specific buyer journey and target personalized messages based on prior purchase patterns, occasions or merchandise preferences.
Increased average revenue per member with greater than historical average spend from both new member enrollment and repeat purchases, and evolved member benefits with features such as early access to new products, discounted shipping an automated reward delivery intended to drive incremental transactions. The pattern of consumers shopping further ahead at key holidays have continued and we have taken advantage of this trend, by launching and marketing seasonal products sooner than we did in the past. For example, in the third quarter, we launched our holiday assortment for Halloween in early September and saw strong demand contributing to an increase in sales of over 60% compared to the prior year in this category for the period, a record for our Halloween product.
Regarding our content strategy, we are developing viral posts, short form digital content and entertaining programming for various platforms from sites like YouTube and TikTok to social media like Facebook and Instagram as well as streaming platforms. From our live action film Honey Girls based off of our historically best-selling product line, which continues to air on Netflix, to the ongoing popularity of Build-A-Bear Radio on the iHeartRADIO media platform, Build-A-Bear is in the content business. Further driving awareness and brand affinity with multiple projects in the pipeline. These projects include a Build-A-Bear documentary with an award-winning documentarian Taylor Morden launching next year. The recently announced partnership with Reese Witherspoon’s production company, Hello Sunshine, and the development of an animated film called Glisten and the Merry Mission slated for holiday 2023 based on our multiyear best-selling product line featuring Santa’s Reindeer and other characters that have been created by Build-A-Bear with more details to be shared in a press release slated for later today.
Separately, as you may know, we recently entered the metaverse via our successful Web3 partnership with suite to launch our first NFT commemorating our 25th Anniversary followed quickly by unique NFT series. While we have exciting plans to continue to generate engagement with our adult enthusiast and collector in this way, we are also deep in the process of developing a new Build-A-Bear video game on one of the world’s most popular platform. While designed with our younger core consumer in mind, Build-A-Bear’s first endeavor into gaming well over a decade ago through the DS and MNO platforms had very high participation from fans of all ages. And we are looking forward to sharing more information as we get closer to this launch day. Turning to our second pillar, which is to continue to evolve our retail experience and footprint and take advantage of our expanded omnichannel capabilities.
I’d like to share that while we have digitally evolved the company. Our physical stores remain an important component of our diversified business model, which has long been focused on a brand building consumer centric integration of experiences to drive value. Although the multigenerational 25-year history and expertise of Build-A-Bear began in the brick and mortar space, we recognized the significant trend to online shopping, especially during the pandemic and had simultaneously capitalize on the digital opportunity in e-commerce and our expanded omnichannel foundation, while leveraging our high-level of lease optionality to drive profitability in physical stores, which positions us for further growth across multiple channels. Recall that we have long believed that our one-to-one relationships and emotional connection may at our workshops is our killer app, so to speak, and had diligently worked to evolve our meaningful and profitable retail footprint.
Given our years of expertise with clear strategic intent and tenacity, we have created a multi-dimensional retail engine delivering over 25% average for wall contribution with essentially 100% of our locations being profitable, providing both the brand and the business, significant leverage ranging from exceptional loyalty club captures to free cash flow. Now with consumers embracing both online and in person shopping, we see this as an opportunity to continue to sail, scale and grow in a diversified manner. In the quarter, we saw an increase of over 8% in net retail sales compared to the prior year. Its growth in store sales more than offset this quarters decline in digital demand. Again, the value of stores extends beyond the profitable revenue they deliver.
We also fulfill digital demand from our stores, leveraging on-site labor and inventory. As a reminder, the stores act as immersive brand touchpoints, marketing vehicle, and brand building site-based entertainment, engaging over 50 million consumers that cross the threshold of our locations each year. We have an emotional brand, and our stores often serve is the initial engagement that lays the foundation for a lifetime of connection. As previously shared, we see the potential to profitably expand our retail portfolio, including opening more than 20 locations in diverse settings, such our Build-A-Bear adventure store, Six Flags Magic Mountain, and the Pro Football Hall of Fame. Through a combination of corporate and third-party business models in fiscal 2022.
We expect to finish the year with approximately 420 combined corporate and third-party locations compared to 407 at the end of 2021. The third-party retail locations, expected to be at 65 by the end of the year, tend to be in family centric settings and are capitalized, allowing us to efficiently engage with consumers with minimal overhead. It is important to note as this model is on a wholesale basis that retail revenues are understated. He drove our over $4 million in commercial revenue in the 2022 third quarter and $12 million dollars year-to-date, an increase over the prior year approximately 50% and 60% respectively. This multidimensional approach to retail reflects our core belief that we are not over stored as a brand and the strong profit margins across the essentially our entire portfolio supports the opportunity for further growth of our retail footprint in North America and beyond.
And finally, regarding our third pillar, we remain intent on leveraging our solid financial position to invest in growth while generating sustained profitability and returning value to our shareholders. As we look to the critical fourth quarter of fiscal 2022, because business trends remain positive, we have increased our annual guidance, which as I noted has us on track to deliver the most profitable year in our history. We continue to believe that we are in a stronger inventory position with sufficient depth in proven branded properties such as Merry Mission, as well as updated licensed products compared to 2021, which was impacted by supply chain disruptions. Our store traffic patterns have remained positive, outpacing reported national trends on a quarter to date basis, inclusive of the Black Friday shopping period.
We also expect our trend of higher levels of guest acquisition and retention to continue with our advanced digital marketing and loyalty capability. We have seen a positive response to a broad selection of seasonal products across channels. And on the licensing side we look forward to the launch of products tied to the upcoming puts in this movie, and for the teen adult segment with our new Ted Lasso collection. In closing, I want to thank our associates around the globe, our suppliers, partners and enthusiastic brand fans that are at the heart of the growth and success that we’ve achieved. In October, we celebrated our official 25th Anniversary with events that range from ringing the opening bell at the New York Stock Exchange to sharing some of the stories of the almost 225 million furry friends that have been made since the company’s inception.
The celebration culminated with Build-A-Bear Foundation’s Anniversary Gala, honoring our founder and our mission to add a little more heart to life. Thanks to all of the sponsors and everyone that joined in that special event to help raise funds for kids in need. While we have enjoyed celebrating our past quarter century during this moment this year, that is once again expected to be the most profitable in our history, the real story is actually all about our future. Why? Because Build-A-Bear is a company that has recognized and executed change in the face of evolving consumer preferences, sweeping advancement in digital engagement, shifting geopolitical impacts and a global pandemic to become a profitable and growing digital multi-channel diversified site-based entertainment and experienced company, featuring products in more categories that appeal to a broader consumer base than at any time in our 25 year existence.
Although there are some continued predictions of economic concerns, we believe we have proven the resilience of our business model, the wherewithal of our team and the relevance of our brands. Therefore, we remain excited, motivated and determined to continue to drive long-term shareholder value as we take the next steps on our journey to further leverage this business model to monetize the tremendous value and emotional connection associated with the power of Build-A-Bear. Now I’d like to turn the call over to Voin.
Voin Todorovic: Thanks, Sharon, and good morning, everyone. We are pleased to speak to you today and share details regarding another strong quarterly performance. As noted, this marks the 7th consecutive quarter of increased revenue compared to prior year and is also the 3rd consecutive year of record profitability for our fiscal third quarter. Nearly 10% growth in total revenues generated over 25% increase in pre-tax income, which is noted with the prior historical high. We have shown consistency in delivering increased revenue and profitability, which we believe demonstrates the disciplined execution of our long-term strategy, resulting in an increase in average annual purchase frequency across a broadened consumer base that has embraced the power of Build-A-Bear brand.
To put us into perspective, comparing our current quarter to fiscal 2019 third quarter, our revenue grew over $34 million or 48% and profitability improved nearly $18 million. Our unique and proprietary products and experiences coupled with effective marketing have been efficiently driving double-digit increases, retail traffic, which all combined have contributed to our successful results for the first nine months of the year compared to the same period last year. Thus far in the fourth quarter, we have continued to see positive trends in our business with ongoing growth in overall sales and increased retail traffic levels including strong Black Friday and Cyber Monday performance. The combination of our successful results for the first nine months and current momentum, gives us confidence to increase our annual revenue and profitability guidance ranges even as currency headwinds and inflationary pressures continue.
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Moving on to our reviewed third quarter results. Total revenues were $104.5 million and 9.9% increase compared to $95.1 million in the fiscal 2021 third quarter. Foreign currency exchange rates negatively impacted revenue by $2.5 million in the quarter. The retail revenue increased 8.3% from the fiscal 2021 third quarter with strength in retail store sales, more than offsetting a decline in digital demand as consumers adjust shopping behavior between in person and online. Our key metrics show we are driving healthy growth, primarily from continued strength in retail traffic and transaction versus strategic in inflationary price increases. Combined revenue from our commercial and international franchise segments grew over 47%, compared to 2021 third quarter.
Gross profit margin was 52%, increasing sequentially from the second quarter is external freight pressure is as expected. We have been successful in minimizing the impact of significant inflation in macro trade and protocols, which limited the reduction in gross profit margin versus last year’s third quarter to 10 basis points. We believe that our proactive and discipline expense management played a role in mitigating these higher costs, as well as expanding gross profit margin by 1,216 basis points, compared to Q3 of 2019. Overall, for third quarter ’22 gross profit margin reflects a reduction of approximately 200 basis points in merchandise margin, driven by high freight expense, mostly offset by leverage in occupancy and distribution costs.
We expect freight costs to continue to improve and contribute to gross profit margin expansion in the final quarter of the year, compared to prior year. SG&A was $44.4 million, which as a percent of total revenues showed 130 basis point improvements versus the prior year. We delivered pre-tax income of $9.9 million, an increase of 25.3% from the third quarter last year, even with the impact of approximately $2 million in incremental freight costs and 400,000 in unfavorable currency exchange. And turning to our year-to-date, results for the first nine months of fiscal ’22. Total revenues were $322.8 million, representing growth of 14.6%, compared to the fiscal 2021 first nine months, pre-tax income was $35.7 million, an increase of $16.7 million, compared with the first nine months of fiscal 2021.
This growth is particularly impressive when considering that we had incurred over $10 million of incremental freight expenses and $1.2 million in unfavorable currency exchange. At quarter end, we had approximately 14.7 million shares of our common stock outstanding compared to 16.3 million shares at the end of the third quarter of 2021. During the quarter, we repurchase approximately 337,000 shares for about $4.8 million and have approximately $46.5 million remaining on our $50 million share repurchase authorization program. Turning to the balance sheet, we ended the fiscal 2022 third quarter with cash and cash equivalents of $12 million, compared to $48.5 million at the end of the third quarter last year. The reduce cash position at quarter end compared to the prior year reflects the repurchase of our common stock payment of a special dividends and a higher investment in working capital to support strategic initiatives intended to drive further growth, inclusive of the port forward for the inventory received.
At quarter end, we had no borrowings under our revolving credit facilities. We ended the period with $88.3 million in inventory, an increase of $26.4 million from the end of the fiscal 2021 third quarter. Keep in mind, Q3 last year had unusually low inventory due to the impact of supply chain disruptions, compounded by strong sales performance in last year’s third quarter. The year-over-year increase also reflects the strategic acceleration in the timing of our order placement, giving us increased quantities of core products in the main holiday offerings, and evergreen merchandise collections to support our business momentum. And as part of our efforts to mitigate ongoing supply chain challenges. In addition to the plan higher unit levels, the inventory balance reflects both high transportation and product costs.
We remain comfortable with the level and composition of our inventory, and continue to expect our inventory at year end to be below fiscal 2021. While mindful of the overall macro environment, including anticipated continued and favorable currency exchange rate, based on our strong first nine months performance as well as our current positive trend we are increasing our full year guidance compared to our previous outlook. For fiscal 2022, we currently expect total revenue revenues in the range of $455 million to $465 million as compared to fiscal 2021 total revenues of $411.5 million. Pre-tax income in the range of 56 million to $63 million, as compared to fiscal 2021 pre-tax income of $50.7 million. EBITDA in the range of $69 million to $76 million, as compared to fiscal 2021 EBITDA of $63 million.
Income tax rate in the range of 24% to 25%, capital expenditures in the range of approximate fully in the range of $12 million to $14 million, and depreciation and amortization of approximately $13 million. Please keep in mind that our outlook assumes no further material changes in the operations of our supply chain, including the ability to receive and ship products on a timely basis, the macroeconomic environment, inflationary pressures, or relevant foreign currency exchange rate. As we come to the cause of our celebratory 25th year, I’m proud of the hard work and accomplishments of our team that has led to sustain positive performance. Over the past nine months, we have driven evolution, diversification, revenue growth, double-digit profitability, and continued momentum in our business.
We have entered the holiday season from a position of strength and look forward to continuing to deliver further success in the future. This concludes our prepared remarks. And we will now turn the call back over to the operator for questions. Operator?
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