Good day, ladies and gentlemen, and welcome to the Build-A-Bear Workshop second quarter fiscal 2010 results conference call. My name is [Modesta] and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Allison Malkin of ICR. Please proceed.

Good morning and thank you for joining us. With me this morning are Maxine Clark, Chairman and Chief Executive Bear; John Haugh, our President Bear; and Tina Klocke, Chief Operations and Financial Bear. Before I turn the call over to management I want to remind members of the media who may be on our call today to contact us after this conference call with their questions. We ask that you limit your questions to one question at a time. This way we can get to everyone's question during this one-hour call. Feel free to re-queue if you have further questions. Please note that our call is being recorded and broadcast live via the internet. The earnings release is available on our 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 we get started 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 and our annual report on Form 10-K and we undertake no obligation to update or revise any forward-looking statements. Now I would like to turn the call over to Maxine Clark. Maxine?

Thank you, Allison, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal 2010 results. For our call this morning I will begin with comments on our second quarter and update you on our progress towards achieving our priorities we set at the start of the year. John Haugh, our president, will provide additional insight into our product and marketing strategy and then Tina Clarke, Chief Operating and Financial Bear, will review our financial results and outlook. Following my closing comments we will open the call to take your questions. Overall, our second quarter results fell short of our expectations but we remain on track towards achieving our primary goal of increasing shareholder value by profitably growing our sales. As you look back on the quarter, April cost decline met our expectations given the shift of Easter to our first quarter. Combined comp sales for March and April were up modestly, consistent with the increase we indicated during our first quarter call. May, however, fell short of our expectations. Our comp sales trend improved in June making it the best month of our quarter as store traffic improved and the later ending of the school year brought moms and kids back to the mall. In July we've had strong comp sales growth giving us confidence that overall our key strategies are moving us closer to achieving our objectives. Despite the roller coaster results there were several bright spots of the second quarter and some key learnings that will help us better position our business for the back half of the year. Highlighting our accomplishments for the quarter, average transaction value rose 2% or $0.62 per transaction on a consolidated basis. We drew visits of engagement with our virtual world. We advanced our licensing programs adding…

Thank you, Maxine. As Maxine indicated, our second quarter results were short of our expectations but we believe we are on the right track and expect better performance in the third quarter. As you recall, we are focused on five key strategies for the year: first, product innovation that improves the size of our animal launches and the design and value of our products; second, full integration of products, marketing and store operations to create a sense of urgency with each new product launch; third, add complimentary experiential toy products to our assortment; fourth, grow engagement in our virtual world and our e-commerce sales; and fifth, develop new opportunities for our brand to be sold outside of our retail store base. During the second quarter we advanced each of these objectives and we are excited about the lineup we have in place for the rest of the year. In product innovation, our focus on larger merchandise stories was successful with the Enchanted line, Zoo collection and the Ice Cream Bears collection, all of which sold at or ahead of our plans and we have achieved higher out-the-door selling price on the animals. On the product side, our upcoming statements include the Love Hugs Peace bears, capitalizing on a key fashion trend with new animals and coordinated clothing and accessories. In August we will introduce for the first time a SANRIO collection that features Hello Kitty and three of her friends for a more forceful presentation on this strong licensed character. The collection will be available for a focused three-week window with a strong gift with purchase. We will also have excitement in September as we start to gear up for Halloween and kick off a tie in to the 30th anniversary of Star Wars Empire Strikes Back. All in all,…

Thanks, John, and good morning, everyone. I will provide additional details related to our second quarter fiscal 2010 financial performance. For the second quarter total revenues decreased 10.5% to $74.1 million from $82.8 million in the second quarter last year. Consolidated net retail sales decreased 10.2% excluding the impact of foreign currency. The decrease in sales was driven by a 9.7% decrease in North American comp store sales and an 11.2% decrease in European comp store sales. Consolidated comparable store sales declined 10% and included 11.7% decrease in transactions offsetting a 2% increase in average transaction value. Total retail sales from our European operations decreased 11.1% excluding the impact of foreign currency. Net loss from European operations was $1.7 million as compared to a loss of $1.2 million last year. International franchise revenue increased to $661,000 from $612,000 last year. We ended the quarter with 60 international franchise stores versus 61 in last year's second quarter. During the quarter we expanded our franchise business with a successful launch of our first location in Mexico. Turning to licensing, revenue in the second quarter was $985,000, up from $915,000 last year. The increase in licensing revenue reflects higher projected sales from our Wii and Nintendo DS games. As we mentioned last quarter, our 2009 licensing revenue reflects an immaterial reclassification of cost of sales that previously had been netted to licensing revenue. There is no impact on the 2009 net loss. We continue to expect licensing revenue in fiscal 2010 to be in the range of $4.5 million to $5 million, which includes the impact of this reclassification. Retail gross margin decreased 200 basis points to 30.9% from 32.9% in the second quarter last year, a 20-basis point increase in merchandise margin was more than offset by a 220-basis points of deleverage…

Thank you, Tina. I'll conclude the call with just a few comments. While we are not happy with our second quarter results, we feel good about the strong start for the third quarter and are focused on delivering our biggest volume fourth quarter to achieve our fiscal year objectives. While we'll be updating you on the full breadth of our holiday strategies on our next call, I do want to add that we are excited to announce that after our success in 2009, Holly and Hal Moose, our uplifting Christmas adventure will air for its second holiday season on ABC Family. Our holiday television special is an extension of our initiatives and entertainment. It is a meaningful way for us to broaden our broad exposure while strengthening our relationships with existing guests. We will also be featuring these characters and licensed products that are sold at other retails, building synergy across several of our key strategies. This year will certainly have additional challenges but we are confident that our strategies will allow us to achieve our number one objective of increasing shareholder value by profitably growing our sales. We'll now open the line for your questions.

(Operator Instructions) Your first question comes from the line of Tom Filandro - Susquehanna Financial Group.

I don't want to detract too much from the course given business but I do have a multi-part question related to the Zhu Zhu Pets, John. What impact did Zhu Zhu Pets have on sales and margins in the quarter and given the price promoting that you're currently experiencing, the classification, how should we think about the margin impact during the second half? Is it fair to assume no more Zhu Zhu Pet buys will be made and when should the inventory differential related to Zhu Zhu Pets normalize? Just a quick comments; anything on the Zany Bandz.

Let me start and if anyone else wants to jump in please let me know. So first part is sales and margin on second quarter, little to not; we've said before it's a very modest percent of our business and, frankly, as our animals have continued to get stronger it has gotten even smaller. It did test well. We brought it in in kind of late December. It tested very well. It tested well through January at which point we had to make buys. We bought product. Then, as you're well aware, the market just got hit up very quickly and pricing got very aggressive very quickly. So from our perspective it has been a good complementary business that we will work to exit profitably. We do not see at this point an impact to our overall delivered gross margin because as it's a modest part of our business and a proprietary product has good strong gross margin and we've got a couple more things up our sleeve, we think we can more than offset any discounting we're going to have to do to get rid of it. We do not at this point see ourselves buying into that line again. They had a couple other launches, just didn't make sense for us, not necessarily against our core demo and too many SKUs. As an example, the Kung Zhu just would have required a lot of SKUs and not something that would have been accretive to our business. Then I think the last part of the question was Zany Bandz. We took a real small position on Zany Bandz because it's very hot. We've got a proprietary bear head, heart, bear paw set of Zany Bandz that will be in stores in about mid-August. We will run that for about -- kind of through September, October, pick up a little bit of incremental business up at our Take Me Home. All of our reads so far has shown that when Zany Bandz goes out in a transaction it is an added UPT, or we call it a bag, so we feel good about that. I think I missed the one part of your question which is where do we think we'll be from an inventory standpoint? We still have a lot of the year to go but we are working toward exiting the Zhu Zhu product by year end and getting our inventory back in line. So that's our plan right now.

Your next question comes from the line of Sean McGowan - Needham & Company. Sean McGowan - Needham & Company: Could you talk a little bit about Europe and whether you think there have been some significant and during changes in the marketplace there? Related to that, what would be the potential profit implications of the changes that you addressed earlier in your comments in the European marketplace?

In the UK, Sean, we believe that the consumer sentiment will remain weak for some time combined with the election results and not only their [vat] increase January of this year. They are also looking forward to an [vat] increase of January of 2011. But overall, on a long-term basis, we really believe we have continued growth in the UK. We're in good retail locations. We have a strong operation team and we're still newer in our life cycle. We see the opportunity to add more stores over the longer term. Really regarding the quarterly loss, the lower comps caused negative leverage of six occupancy and other costs but also remember they were affected by a switch in Easter also.

Your next question comes from the line of David Schick - Stifel Nicolaus.

This is actually Jamie Albertine in for David. I had a quick question for you, one clarification on the back-to-school bundle promotion. I just wanted to know if that had happened already or if that's coming up in the third quarter. Then kind of thinking more about the second quarter, now that you've transitioned into this new philosophy of promotions, one every three to four weeks instead of one every two to three, just how do you guys think about monitoring performance of that transition and take it in sort of a traffic perspective? It seems like your customer satisfaction scores continue to increase. So just any thinking on that would be helpful.

Why don't I jump in, Jamie? The bundle promotion actually broke last weekend and will run through this weekend. The good thing is with this weekend we think we really have time to -- our Ice Cream bears came in and were very, very successful. As we started to sell out of that and we sold a lot of units, we felt good about that. As we started to sell out of that we broke our $29.99 promotion. We came up a little bit earlier this year versus last year because while it was successful last year, frankly, we think we were a little bit late and this was a better time when we looked at kind of when kids went back to school across the country. So we are halfway through it. We will run through this weekend and then we will follow this with a strong follow up gift repurchase with a messenger bag that we think every single kid in America is going to want to bring to school with them. Promotion philosophy, I think what we really believe in, as we've said, is product leads the way and if we have good product our business works. If that product can get communicated effectively through our marketing and have good, strong alignment at the stores we are successful. So although we have kind of increased our cadence and, frankly, gotten a little bit more promotional, our average ticket has gone up, as Maxine stated earlier. Our traffic is up so we feel like we are moving in the right direction. We are not a promotional business but we do have to be cognoscente of what's going on in the world and when we are in malls and you walk up and down and see the lease lines and everyone's got a lot of promotional signage, we're not going to go toe-to-toe on big discounting but we do need to be able to offer the consumer a reason to make a purchase with us that day. Gift repurchases we've found to be very effective. In some cases it's price promotion. But ultimately good product is what helps us deliver the results.

(Operator Instructions) Your next question come from the line of Janet Kloppenburg - JJK Research.

I was wondering if you could talk a little bit about your marketing spend outlook going forward given that it seems like your promotional strategy is becoming more aggressive in the United States and because it sounds like you'll have to do some more marketing in Europe as well. I got on the call a little bit late. I know you're doing some new product introduction this month and then with Small Fries. I'm wondering if there's a stronger schedule of new product introduction that is programmed for the rest of the season versus last year.

I'm going to jump in. This is John. Apologies, I've got the first part. Somebody's going to have to prompt me on the second part of the question. I apologize.

(Inaudible). Go ahead.

Why don't you give it to me real quick, the second part of the question?

I was wondering if you could talk to us a little bit about the new product introduction schedule for the third and fourth quarter versus last year. I'm thinking that there will be a greater level of new product introduction and I wanted to know how you want us to think about that.

So from a marketing spend we actually -- in 2009 we took a pretty sizeable amount out of our marketing budget from 2008 and in 2010 we have modified the budget yet more. However, we think we've gotten even more strategic and precise with the budget. So we talk to kids through Kids TV. We talk to moms through the digital space, as we've said before. We use our Stuffer Stuffer, our database, which is our loyalty program and we have gotten more effective in terms of the response rate on our communication that way. So we are actually going to spend a little bit less from a marketing standpoint. We are increasing -- our net net is down. We have done some reallocation. We have gotten a little bit more aggressive with signing in our stores and our lease lines. Our best message to the consumer is our real estate. We have great locations in 300 malls across the US and 50 across North America and 50 across the UK. So we really put a lot of energy there in terms of signing and alignment and training with our store teams. So we feel very good about how we are spending our marketing dollars and we continue to bring our A-to-S, advertising-to-sales, down. With respect to schedule of product, when you look at our products for the whole year, we actually -- in 2009 and 2008 we launched lots of product and a lot of good product. We've really tried to group or bucket things a little bit versus just more. So where we might have lost two or three animals in a month, this year we will try to pull those together into a collection which gives us a more unified theme, allows our stores to be more focused. So it's not necessarily a net more animals, maybe a little, but it's much more trying to bring them together and trying to tell fewer but larger messages. We do have all the animals lined up for the remainder of the year and we feel really good about our programs. As we go all the way through December we're going to be bringing back a great equity that's worked for us in the past as well as some really other fun stuff and we'll talk more about that at the next call. As we look at third quarter we think, as we alluded to, a lot of good product. Peace and Love, as we said, breaks this next -- the weekend that we're coming up on, tomorrow. We follow that up with a great SANRIO and we've got strong Halloween and a strong tie in with Star Wars to end third quarter and fourth quarter as strong as well.

Janet, it's Maxine. Just in addition to what John said because I think we used to always look at our launches as just animals, meaning either it was one or two animals in a given month but now we do clothing collections also that launch with them. So for instance in the Zhu collection there was a line of clothing that went with them that actually also was able to be brought to life on Build-A-Bearville. But in the Ice Cream collection we had for each animals, there were four animals, we had four different outfits. The selling correlation with those was very, very strong. So when somebody walked out with a $20 Ice Cream bear they also walked out with an outfit and possibly shoes. In the collection that we have for Peace and Love that's coming out tomorrow is also there's clothing that goes along with it and that's all part of the launch, which we really hadn't done before. Then when we're focusing on Star Wars there is a bear, only one bear in that collection, but there is also a series of outfits that are very adorable and already some of them -- the first collections have sold really well for us. So it gives us an opportunity to sometimes take another part of our -- a very important part of our business to a next level and associate it very strongly. If you look at any of our mailers and even our television commercials you now start to see the animals for the most part dressed and accessorized with the theme that we're talking about. So that's a difference to our strategy in the past.

Your next question comes from the line of Tom Filandro - Susquehanna Financial.

Two quick ones; one, can you just update us on the party business and if you guys are doing anything to further drive the performance there? I just want to ask a cost question. Are you seeing any increases for the buys to 2011? If you are, any strategies in place to put pressure on [ASD]?

Tom, why don't I hit costs first if I can? As you are aware and I think as everyone knows, there's a lot of pressure in Asia right now on labor. Mills are getting -- factories and mills are getting tighter. They're looking for larger MOQs. It's costing more to get stuff from their port over to this side, so we have pricing pressure, frankly, across the line. That said, we've had a lot of pricing pressure in 2010 and, as Tina told you, we've actually, despite that, been able to move our merchandise margins up. We have started planning 2011 already. We don't plan quite as far out as a Walmart or a Target, so we're really kind of into just the first quarter at this point. But we have sat down with all of our partners. Our team is actually on the way over to Asia Monday to work on this and we realize that there will be pressure and so our ways to combat that are to work tightly with our partners and work on lead times and try to produce at opportune times. It is to look at any kind of pricing opportunities when it makes sense for us. We have in some cases made pricing moves within our line and in some cases it's worked really, really well for us. So we will continue to be smart about that but we will not -- we won't go away from what our core business is, which is we're going to offer a $10 bear we have since we started and we still will. Then we will also just continue to take a look at the line and the number of SKUs and say, all right, are there ways to drive these bigger stories, both animals and…

The second part of your question is our party businesses for the quarter is up slightly over last year as we continue it as a focus as part of our store operation and our marketing.

Your next question comes from the line of Justin Orlando - Dolphin Management.

Just one question; given the kind of cost pressure you're seeing on the gross margin line and the revenue performance thus far this year I'm wondering if our total cost structure is right size for the opportunity you guys are seeing. Can you give us a little bit more detail into the SG&A line, maybe a couple of the categories and the percentages that those categories are of the total?

Well, we said basically that our SG&A was up for compensation cost over the prior year and prior quarter that we did not have in the past from a perspective of our overall strategy on retention of our teams. Other portions of our SG&A were up and down slightly but nothing that was major.

That concludes today's question-and-answer session. I would now like to turn it back over to management for concluding remarks.

Thank you all for your questions and we'll look forward to talking to you during the quarter and at our next call next October.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a great day.