Build-A-Bear Workshop, Inc. (BBW) Q3 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Build-A-Bear Workshop Inc.’s results conference call. My name is Marcella and I will be your operator for today. At this time all participants are in a 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, Ms. 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 would like 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 third quarter fiscal 2010 results. For our call this morning I will begin with comments on our third quarter and update you on our progress towards achieving the 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 Klocke, 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. We are pleased with our third quarter progress which demonstrates solid steps towards achieving our primary goal of increasing shareholder value by profitably growing our sales. We delivered positive comparable store sales up 5.3% in North America and up 3.4% on a consolidated basis as well as strong double digit growth in ecommerce sale. Retail gross profit margin increased 210 basis points and we drove a significant improvement in our loss per share versus the third quarter last year with disciplined expense management. As we plan this year's business we are mindful of consumer’s preference to stock up on school essentials versus discretionary products during the key back to school season primarily in August and shifted the timing of promotions appropriately to maximize sales. Overall, our performance reflects stronger new product introduction supported with powerful store visuals, marketing and promotions. By providing either new products for promotions approximately every two weeks we had relevant news to communicate to our guests throughout the quarter. As we told you on the last call, July got us off to a strong start with a double digit sales increase in North America driven by our highly successful Ice Cream bears collection and the movement of our 29.99 bundle promotion into a tighter to weak window from last year's entire month of August. In August even with the shift of our 29.99 promotion to July, a consumer focus on back to school staples, we recorded in an essentially flat comp, repeated new product launched with our lug hugs piece bears and SANRIO collection and we reinstituted a relevant GWP messenger bag to capitalize on the increase in mall traffic that comes with back to school shoppers. In September we achieved low single digit positive comp sales while launching our new small price lines of smaller pre-stuffed animals and outfits. In addition to the North America comp store sales increase, our accomplishments in the quarter included consolidated ecommerce sales of 18.1% excluding the impact of foreign exchange with double digit increases in both North America and the United Kingdom. We continue to grow engagement with our virtual world registering over seven million hours of brand engagement in the quarter. We launched an exciting new program, Build-A-Bear Craftshop Kit in the all Michaels stores as well as a new program with Borders at the end of September setting the stage for long term growth in licensing revenue. We ended the quarter with a strong balance sheet with 24.7 million in cash while we have invested 7.3 million since the beginning of the year to repurchase shares of our common stock. Once again we had no borrowings on our credit line and remain debt free. A total for the third quarter consolidated net retail sales increased 2.2% which included a comp store sales increase of 5.3% in North America driven by an increase in both average transaction value and number of transactions. We continue to face a challenging environment in Europe as a comp store sales declined by 6.6%. For the fourth quarter we will increase our promotional efforts in the UK with stronger in store promotions and by adding branded television advertising beginning in November to attract new guests and to reconnect with existing customers. We believe that this is an appropriate step as our research has shown that people in the UK who know Build-A-Bear Workshop love it, however our brand is still building awareness and we have significant opportunity to increase our market penetration and drive sales growth. Our inventory position is up 13% in total over last year showing significant progress from our second quarter end. In addition to inventory need for Pop Up stores the increase is driven primarily by core product positioning for the fourth quarter as well as higher in transit time due to longer lead times in Asia. We are comfortable with a level and content of our inventory and expect year end levels to be in line with our total sales trends excluding impact of higher end transit levels associated with longer lead times. As we look forward we believe we are well positioned for the upcoming holiday season and as John will elaborate our holiday strategy incorporates a number of exciting new product introduction that are supported with enticing promotional offers and effects. Finally we are on track with our plans to open 11 pop up stores in the fourth quarter. In addition to the revenue opportunity, the pop up stores provided with the strategic advantage of understanding the performance of these stores as well as the overall market, some in advance of upcoming longer term lease decisions we will be making will significantly reduce capital investment and without the commitment of multi-year leases. We expect all of the stores to be open for Christmas and our strategy is to remain open at least through April of 2011 to take advantage of the strong flush business that comes with our Valentine’s Day and Easter business. The first store recently opened in National Tennessee allowing us to partially offset a (inaudible) in the market from the closure of the Opry Mills mall due to the last spring’s flooding. We will evaluate the long term positioning of each store after the Christmas season as well as the potential to expand temporary pop up stores on a wider scale in the future. In summary we are pleased with the direction of our business during the third quarter. Our positive sales and margin performance are evidenced with the progress we are making in achieving our number one objective of increasing value for all Build-A-Bear Workshop stakeholders through profitable sales growth. With that I would like to turn the call over to John to review our product and marketing strategies in more detail.

Thank you Maxine. As indicated we are pleased with the positive direction of our business and believe we are well positioned to continue to deliver improved year-over-year operating performance in the fourth quarter. I will discuss the plans we have in place to continue to move forward on our key objectives. First, product innovation continues to focus on introducing larger merchandise stories and limited edition products. Key merchandise that is (inaudible) is a bridge month into the fourth quarter includes our push to Halloween featuring candy, corn, teddy as well as an expanded line of Star Wars merchandise as a center piece of our Halloween costume collection. In November we will launch our Rudolph the Red-nosed Reindeer story, one of our most beloved and requested collectibles. We have updated Rudolph inquiries with an engaging dialogue feature and added Bumble, the lovable, abominable snowman from the story. We will operate fun, gift with purchase to kick off the introduction as well as strong integrated marketing across multi media. In December we will introduce the Speakers Stars Bear collection. These animals allow guests to attach an MP3 player and listen to their favorite music through a speaker in the bear’s paw. Music coming from the bears is one of the most requested features from kids. We now have the technology to deliver high quality sound through the animals plus paw. Each Speaker Stars Bear comes with free Build-A-Bear Workshop songs to download. Finally to capitalize on gift car redemptions we will launch the Darlene Doggies collection right after Christmas. Also we are very excited about the merchandise line up we have in place for this holiday shopping period. Second, we continue to successfully execute on the coordination of our products, marketing and store operations with exciting promotional offers, store visuals and events. Our marketing continues to support each product launch as a single focus of our stores. In the third quarter we offered a series of gift with purchase promotions for qualifying transactions. Our customers, particularly North America have responded very well to our events and promotional offers which help to drive our positive comp for the quarter. For the fourth quarter, we will build on the success of our GWPs including offering Rudolph minis, Christmas stockings and passports that allow travel to the North Pole in our virtual world. We have also planned an exciting Black Friday promotion to capitalize on the kick off to the holiday shopping season and we have added a special collectible purchase with purchase bear to help build average transaction value through the month of December. We will continue to use fully integrated marketing to show our products including television advertising to kids and moms in the US and as Maxine mentioned for the first time ever we are adding kid TV advertising in Great Britain. Our other vehicles included direct email to existing guests as well as reaching moms through campaigns in the digital space and engaging kids through our virtual world. Third, we continue to look for ways to get consumers more reasons to come to Build-A-Bear Workshop and get incremental purchases from existing store traffic by expanding our assortment of brand regulatory products both through external sources as well as internal development. In September our proprietary brand Smallfrys launched with a strong reaction from our guests. Smallfrys are our line of smaller animals that are already stuffed and packaged in a box resembling a French fries box with captions playing up the brand name such as Feed Your Friendship. As we expected Smallfrys were both added under core transactions as well as being impulse purchases. Smallfrys will continue to be featured as a limited edition product for us with a new collection arriving about once a quarter. Fourth, we have made solid progress on growing our ecommerce sales and increasing engagement in our virtual world. We are pleased to report an increase of 18.1% in our total online sales for the third quarter excluding the impact of foreign exchange. The strong performance was driven by new product launches and special web only promotions that gave site visitors a sense of urgency to make the purchase or increase their transaction value. We will maximize these business drivers throughout the fourth quarter including an exciting Cyber Monday event. Build-A-Bear remains critical in our brand relationship with kids as demonstrated through key metrics such as brand retention and time spent on the site. In fact the traffic and length of visit on Build-A-Bear can combine to equate to 7 million hours of brand engagement for the third quarter alone. We continue to break unprecedented ground in this space. For example in late September we teamed up with US banks to increase financial literacy among children by introducing the US Bank Bear Bills. Citizens love learning about saving and budgeting through interactive gains and online activities. In just over a month citizens have invested over 1 billion Bear Bills and 1.2 million certificates of deposit. We expect to gain added momentum as US Bank co-markets the site in their materials and branches. We are uniquely positioned as the only company that has the ability to reach kids in both virtual and real world spaces giving us a competitive edge to monetize and grow revenues from this asset. In fact in the next few weeks we expect to tell you about several revenue building opportunities from a number of brand appropriate companies that will highlight products on this site to complement Build-A-Bear’s programming and content features. Fifth, we've also made solid progress developing new opportunities outside of our current store base. Our commercial revenue in the third quarter which includes licensing, entertainment and wholesale revenues increased 10% in the quarter excluding a single $5.8 million wholesale transaction which had no gross profit. In September we launched an exclusive cash that is carried in all Michaels stores as well as new program in Borders stores. Importantly these programs include a Build-A-Bear tie-in as well as bounce back to our store, to our ecommerce site. We expect to reach new guests and increase traffic to our stores as kids play and engage with our brands in a fun creative way. In summary we feel good about our core products and the cadence of the introduction and promotional support. We believe we are well positioned to maximize the holiday season with our exciting line up of new products and supporting marketing programs. Just a reminder, be sure to look for the Build-A-Bear Workshop float in the 2010 Macy’s Thanksgiving Day parade as well as get some return of the one hour feature movie Holly & Hal Moose are uplifting Christmas adventure airing again on ABC Family. Now I will turn the call over to Tina to review our financial results and outlook in more detail.

Thanks John and good morning everyone. Overall we are pleased with the progress we made in the third quarter which included improved comparable store sales, improved retail margin and decreased SG&A expenses both in dollars and as a percent of sales. For the third quarter, total revenues increased $100.1 million from 92.3 million last year, an increase of 2.1% excluding the single wholesale transaction. Consolidated net retail sales increased 3.8% excluding the impact of foreign currency. The increase in sales was driven by a 5.3% increase in North American comp store sales partially offset by a 6.6% decrease in European comp store sales. Consolidated comparable store sales rose 3.1% and included a 1.8% increase in transactions and a 1.3% increase in average transaction value. Total retail sales from our European operations decreased 3.7% excluding the impact of foreign currency which compares to a 7.1% increase last year. Commercial revenue which we have previously referred to as licensing revenue increased 10% in the third quarter excluding the single wholesale transaction reflecting the new partnerships with Michaels and Borders. As we mentioned last quarter our 2009 licensing revenue reflects an amateur reclassification of cost of sales that previously had been netted to licensing revenue. There was no impact on the company's 2009 net loss. International franchise revenue was 767,000 in the quarter and 2.1 million year-to-date essentially flat to last year. We ended the quarter with 58 international franchise stores versus 61 at the end of last year's third quarter. Retail gross margin increased 210 basis points to 38.6% from 36.5% in the third quarter last year. The increase in retail gross margin was driven by a 190 basis points of leverage in occupancy, cost and 20 basis point improvement in merchandise margin and distribution cost. SG&A as a percent of sales in the third quarter was 41.5% excluding the single wholesale transaction mentioned earlier compared to 42.5% on the total revenue in the 2009 third quarter. The 100 basis points improvement, resulted primarily from leverage on store salaries and other fixed overhead costs as well as a shift in timing of certain marketing programs. This was partially offset by the foreclosure costs. Net loss in the third quarter was 1.4 million or $0.07 per share compared to a net loss of 4.8 million or $0.25 per share in the third quarter last year. The net loss in the third quarter of fiscal 2010 included charges of 500,000 or $0.03 per share related to the decision to close the small number of stores within the fiscal year. Net loss for the third quarter of fiscal 2009 included a non-cash charge of 2.8 million or $0.15 per share related to our investment in wine makers and a charge of 150,000 or $0.01 per share for the closure of the funds we made retail concept. We continue to maintain a strong balance sheet. At quarter end consolidated cash was 24.7 million compared to 27 million last year with over 60% of our cash on the balance sheet held outside of the US. During the quarter we repurchased approximately 680,000 shares of our common stock at a total cost of $4 million. At quarter end at approximately 23.7 million of availability under the current stock repurchase program, which expires on March 31, 2011. Capital expenditures in the third quarter were 3.8 million, up 900,000 from the third quarter of 2009 primarily due to software and equipment upgrades to our ecommerce platform as well as opening of new stores. We expect capital expenditures for the full year to be approximately 15 million. Depreciation and amortization for the quarter was 6.7 million down from 7 million of the third quarter of 2009. For the full 2010 year, we expect depreciation and amortization to be approximately 27 million. Now I will turn the call back over to Maxine.

Thank you Tina. I will conclude the call with just a few final comments. As I mentioned we are pleased with the solid progress we achieved in the third quarter. While the consumer environment remains uncertain we believe we are well positioned for the upcoming holiday season, our largest volume quarter in terms of our product, our marketing and our operational plans. We will now open the lines for your questions.

(Operator Instructions). And your first question comes from the line of Sean McGowan with Needham. Please proceed.

I was wondering if you could talk a little bit more about this one time wholesale sale what is that, and what should we be looking for in the future regarding that kind of transaction.

It was about $5.8 million and last quarter we talked about needing to move some inventory out so this is a one time transaction for which we got cash and some advertising credit that we will use in the next several years, probably not a lot of this going forward might be a little bit as we have just a little inventory left but not something that we would expect to see on an ongoing basis.

So it’s essentially closer.

It was essentially a way to move some inventory out of our system that we didn't think we could move to our stores.

Okay so that's not related to the Borders or anything like that.

No not Borders, not Michael. So it’s a great healthy good margin licensing businesses.

And any comment on October comps so far.

Well October is the smallest month of the quarter and also it’s the smallest month of the year so we hesitate to use it as a proxy for good of the quarter or bad of the quarter. Last year it just continues to be the smallest, smallest month so November-December (inaudible) and we are very excited about the momentum moving into those quarters, that's the positive part.

(Operator Instructions). And your next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed.

I was just wondering if you could talk a little bit about your strategies for promotions and in the holiday quarter. It seems that you took a tactical approach in the third quarter. The way you shifted to higher traffic periods and I am wondering if we should think that you will be spending more in the Christmas period maybe from Black Friday Maxine as opposed to spending here in October and maybe pre-Thanksgiving and also if you could talk a little bit about the flow of product this year in the fourth quarter versus last year and I am just maybe to help me understand the flow of product more newness and if the promotional events will be a lot different than last year as they were in the third quarter.

Well they will be different, but they will also a traditional cycle because there are the Veterans Day and the Thanksgiving holidays in there. But traditionally we start and I will let John elaborate on this in more detail. Traditionally we start our holiday season the day after Halloween which is next Monday with the kick off of our holiday mailer which will be in the homes of family sometimes until late next week and that has all of our products in there but we are starting differently this year with gift with purchase, there's one that starts for the first two weeks of the month and one that takes us up to Thanksgiving and then right after Cyber Monday we have a very special promotion which is our special bear that we actually used to do this in the UK and we've brought that concept to the United States where if you spend $30 you get this bear for $5 which is bought very opportunistically from a profit perspective and its been a very effective means of traffic driving in the UK. So that's what we are to do here and then we have new products. We always have launched new products down the line towards the Christmas holiday dates because we know that we open our doors on December 26 kids have, each of them have lots and lots of gift cards in their hands and we always have new products to give them that they may not have even seen before Christmas. So that's pretty traditional, its just really the bigger differences in the promotional, the gift purchases that we are doing to help make mom say yes, so reason that's going to get hurt to come to Build-A-Bear over some other store, something that shall be why not do this, we are going to go there anyway kind of ideas and staying in top of our, making sure that we are giving the kids what they want the shin kicking but also the value that she needs because there's no doubt that value is more and more important to mom even as it relates to Build-A-Bear products. John why don't you add some color to that.

Sure if I can, let me just start with product. Rudolph and Clarice and Bumble will break on 11/1. They compare really to our new story last year was Frosty and we have brought those three characters Rudolph, Clarice and Bumble significantly bigger, we really, really believe in them. There's an interactive element between Rudolph and Clarice where they recite the four key lines from the TV show and Bumble who is lovable, abominable, snowman if you remember is having kind of a tough showing so until the guys just had a bad tooth and then he is happy. Normal we would have bought him as a mini. He was so cute, we are buying him as a full size animal. So we believe we will get a $20 plus dress up purchase instead of $7 so if you look at the core product, we bought it bigger and stronger, Holly and Hal will be on TV so they will make an appearance back in our store and we feel good about that. When we look at our products that debuts in kind of mid-December last year was Elvin, and he tied into the movie. It was very successful for us. We have had for years kids saying I want to play music through my bear and we were never comfortable designing a product that had our already and plus and comfort and squeeze ability and hug ability. We have it this year so we have some call the Speakers Stars bear, there are two of them and the sound is really good and you can plug whether you've got the fancy Apple iPod or you have the less expensive generic mp3 player. The sound is very good. So that will come in, in mid-December and then we always have a strong product to break in 12/26 last year was Hello Kitty's 35th anniversary. This year it’s Three Darlene Doggies that's come in its great array of color so from products standpoint we feel that we are significantly stronger and we've put these in front of kids and they are pretty excited. Just to reiterate Maxine’s point on the promotions. It is right now we can all walk through the malls and it’s tough out there. Consumers are looking for value. We deliver value on our product but moms still want to be able to say I've got great value, I got great product and I got a little bit of a deal. So on 11/1 we start with a strong gift purchase that will run for about 10/11 each days and we come back with a different GWP. We have a planned, strong Black Friday weekend product and then Maxine mentioned we've purchased bear that's really cute that breaks on the Tuesday after Cyber Monday, not yet named but I am sure somebody will come up with the name and that will carry us through the (inaudible) day. So when we look at what's going on we are strong and then when you look at how we are going to communicate to consumers we've got more mailers than we had last year, we've got more spend in the digital space for mom, we have moms and kids TV, we feel good about that and then we mentioned earlier we are going to go into the UK with TV which we've never done before. We are optimistic about what that can do, we don't know, it doesn't break until next week but we feel like we've got good spending, roughly the same as last year but we think target a little bit better than last year so when we look at the product and we look at the promotion and we look at the communication. We think we have a pretty good line up and then finally last year we debut if you remember Santa’s Workshop, right Santa called Maxine and said I need a little bit help. We transformed Build-A-Bear Workshop and the Santa’s Workshop. Santa’s Workshop is back. The signs will be outside the front of our store and we've got really neat in store point of purchase materials. The biggest challenge, when it gets, I know I am rambling a little bit but just to close this up, the biggest challenge when we have something like Rudolph and Clarice, we can talk to each other and last up is when its so busy sometimes our associates at Build-A-Bear don't have a chance to show the consumer we share a pretty innovative technology now that gives a real push of the button and see the whole interaction on a little TV screen so we think that will give us a chance to make sure we get credit for that feature even if our Build-A-Bear is engaged with a different guest. So we feel pretty good about November and December.

The two things I want to this because I think they are important, you know everybody always focuses on the bears and those are all obviously our key drivers but we have a couple of other really good things that have shown up in our inventory in the last quarter. One of them was our furniture. We introduced a line of bedding for bears which has been really successful and its only sheets and computer, that is also a part of our license program meaning, you can buy it in the adult sites as well. It blew out of our stores along with the bed in early back to school period. We are able to get back and start with that and we are going to have that for Christmas and I think its going to be a very, very strong seller for Christmas, there's a version for boys with the sports (inaudible) and there's of course the pink version for girls. And this has always been strong. The PJs have always been a very popular part of our business but it’s all coordinated so it really is a potentially very high ticket and also very cute and adds to the lifestyle of your bear and the other thing is that for a long, long time it had a relationship with Skechers. We've always been a licensee of Skechers since like 2000 and very successful and they have a hot brand right now called Twinkle Toes and we have Twinkle Toes for bears that we expect that that is going to be also a very, very strong addition for the fourth quarter and the whole line the concept of shoes that are sparkly and light up kids, which translated for Build-A-Bear and kids recognize it immediately as soon as it hits the floor it was a good seller for us and we sell hundreds and hundreds of thousands of pairs of shoes, we sell millions of shoes for bears in a year. You know that bears only need shoes when it rains or snows otherwise they can be barefoot. But we sell these shoes and these are going to be phenomenal and I think we can maximize other things besides just the bear and Foxy the Snowman and the (inaudible) or Rudolph as we've done in the past, Rudolph fortunately though and Clarice have four paws and they often wear two pairs of shoes each. So they are really good opportunity for adding fashion and adding higher ticket and then last year you might remember we launched a Gifts to Go idea at the front of our stores and we got a lot of feedback from our customers positively and we also got a lot of store suggestions and how to do it better. And I think we have a really good mix of that this year where there's a couple of bears at really good prices dressed like a baby’s first bear and a Mary Christmas bear that you can buy and walk up the store with especially towards the end of the Christmas season and also add to our display presentation so we are also excited about that learning from last year that we are able to expand for this year.

You have a follow-up question from the line of Sean McGowan with Needham. Please proceed.

Is there impact in your SG&A and that litigation with Cepia.

No there's shouldn't be.

Has that been resolved?

It hasn't been resolved. Sean we obviously can't talk about it for kind of obvious reasons. We don't, we are optimistic it will be resolved amicably and don't see it to be a real big thing.

Okay. I think earlier, I am not sure if it was Maxine or Charles, that something was up double digits in your North America and Europe, do you mind repeating that.

To our ecommerce sales.

Ecommerce okay.

For web sales we've really put a lot of efforts behind that this year and it’s absolutely paying off.

Okay and Tina any comment on the outlook for gross margin in the fourth quarter.

Sean as you know we don't give guidance on margin or anything but I will say that we have worked really hard to help maintain the costs from our products from China and distribution costs and as well as when we get positive comps for sales we are able to leverage the fixed charges in retail gross margin. So we hope to be able to continue that trend.

Okay any comment on how the stores are performing and that you used to give about, how the stores are performing by age class.

Yes, actually that continues. The older stores still are doing better than the newer stores so there are some of those were basically flattish for the year getting close to flat for the year. They are slightly ahead and those stores are more so than the others. So it absolutely is following the same pattern it’s always followed.

(Operator Instructions). And your next question comes from the line of Brad Leonard with BML Capital Management. Please proceed. Brad Leonard – BML Capital Management: Hi, can you guys, two questions for you, one the store closings, you closed two and then also bonus accruals for the year in the third quarter.

So what do you want to know about the store closings, we actually closed two. Brad Leonard – BML Capital Management: You closed two so you think your charges are going to be more than it closed or I have not heard of the store closings before. So is it just the two are we are going to have more closings in Q4.

We closed two in Q3 and in the release we said that we anticipated closing a small number of stores by fiscal year end and that was part of the, that was the $500,000 charge we called out separately. Brad Leonard – BML Capital Management: Okay but you are not going to detail how many you are going to close. It’s undecided.

Yes, its undecided and there's a difference between what you might close and what you might impair because you might impair stores that don't look like they are going to be going forward that aren't, that's a difference so we may impair more stores than we close but we will possibly close a few stores based on a lease arrangements with the landlord going towards the end of the year but we are in final negotiations on some of those and you wouldn't want to call our hand on them, in particular yet. Brad Leonard – BML Capital Management: Okay and then what about the bonus accruals for Q3 I know you guys accrued in one and two, what about three.

We are continuing the accrued in quarter three. Brad Leonard – BML Capital Management: And then lastly what about advertising spend, Q3 and year-to-date versus last year.

Where we are overall? Brad Leonard – BML Capital Management: Yeah.

Overall, we have taken advertising spend down. By the end of fiscal 2010 we will spend less in advertising than we did in fiscal 2009. But there have been some shifts. So we have actually put a little bit more into store signage and point of purchase because we feel that that is working pretty hard for us. We put a little bit more into the gifts with purchases. We are as we mentioned going on TV modestly in the UK. So we've done some shifting around but net-net when the year is said and done we will spend less year-over-year in advertising and if you look at in either A-to-S we are continuing to make improvement on that. A-to-S meaning advertising to sales. Brad Leonard – BML Capital Management: Sure and then what about Q4, what do you expect, is Q4 going to be up or down versus last year.

I think we are relatively flat, down slightly but relatively flat. Its about, what we tried to do is, if you think of the year, Maxine mentioned someone asked, I think Sean had asked about October, October is a small month for us, May is a small month so what we really try to do when we think about our marketing dollars and advertising dollars is put them in a key months for us, right that's June, July, August, its November, December, its Valentine’s Day, its Easter. So in a month like October we won't spend, we will hold our powder so to speak and spend it in November-December. So if we look at Q4, Q4 we are relatively flat over last year a little bit, making a little bit of improvement but relatively flat.

And you have a follow-up question from the line of Sean McGowan with Needham. Please proceed.

A couple of questions. Franchises down, is there a bigger story there or is it one guy closed a couple of stores.

Yeah a lot of its just timing of store openings compared to last year and so I think its what we've looked at is on a year to year basis relatively flat to last year, even with decline in stores.

Are you expecting any further franchise decline, stores to be closed.

At this point Sean we don't really talk about future but again what I would say is I would go back to we are basically flat on a year-over-year basis even with a decline in stores.

And in the foreign markets too franchise can take shorter term stores, open and close them, move them around, it’s a much more fluid than it maybe traditionally in the United States. So it just depends on the market but it’s possible that some will open, some will close, we shift as we decide we need a smaller store, or bigger store whatever happens it’s much more volatile leasing arrangement status than in the United States for sure.

Yeah and we anticipate that our franchises will open a number of stores in the fourth quarter.

And then one other clarification just making sure I got this, so the entire one time wholesale sale, that entire amount is in commercial revenue.

Yeah.

Thank you.

Well, thank you for joining us today. We look forward to speaking with you when we report our fourth quarter and fiscal year end results in February. Have a great holiday season.

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