Build-A-Bear Workshop, Inc. (BBW) Q2 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Build-A-Bear 2015 Second Quarter Fiscal Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Allison Malkin of ICR. Thank you. You may begin.

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 second quarter results and the performance against the key priorities we identified at the start of the year. Voin will review the financials and then we will 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 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 John, CEO.

Thanks, Allison. Good morning, everyone. Thank you for joining us today. The second quarter of fiscal 2015 marks our 10th consecutive quarter of improved operating results, with an increase in consolidated comparable stores sales of 8.7%, a 450 basis-point expansion in retail gross margin, a pretax loss of $400,000 versus a pretax loss of $4 million last year, a net loss of $0.04 per share compared to last year's net loss of $0.25 per share. In the second quarter we had positive sales in all regions driven by an increase in dollars per transactions, units per transaction, and an uptick in traffic. With consistent focus on our primary objective a sustained profitability, we delivered pretax income of $6.6 million for the first half of the year compared to $1.3 million in 2014. This is the highest pretax profit at the six month mark that we have reported since 2007. We feel confident that these results are primarily due to our disciplined management of the business and the changes and upgrades that we have made across the company, including organizational structure, processes, reporting systems and skill sets. The evolution of our product development and planning processes exemplify the impact that strategic change can have. As you may recall last year at this time we were experiencing stock shortages on important new product launches that were supported by elevated marketing program. We had begun to demonstrate our potential to drive consumer awareness and demand for new launches. However, we underestimated our inventory needs and have not yet developed the ability to effectively chase hot products. We made changes in our planning approach and preparation for fourth quarter 2014, which included increased initial purchase quantities for select key stories, while improving methods to react to the best selling items. We have continued to improve our processes, which positioned us to optimize this quarters high impact launches such as Minions. Also recall that in 2014 we restructured the product and marketing organizations into consumer segment teams to support our strategic focus on four main consumer groups; older girls, younger girls, boys and the over 12 gifting and affinity consumer. We believe this integrated consumer centric approach to developing products enhanced by elevating story telling marketing is creating a more consistent pipeline of concepts. With this approach the consumer is more inclined who want to experience the full offering of the marketing promise, which has helped us deliver higher metrics such as units per transaction and drive retail prices at select proprietary products to be on parity with licensed properties. As a reference point, in the second quarter in North America our units per transaction reached their highest level since 2008 and our average unit retail reached its highest level ever. The long-term objective in this integrated approach is to orchestrate a consistent cadence of new introductions for each of the consumer groups, balanced with the combination of our own intellectual property and licensed partnership. We work on a multi-year horizon to plan this cadence of launches based on seasonal events, new film properties, character events, and the creation of new concepts. Also, we now assess the impact and value of an entire product story including accessory, sounds and outfits not just the stuffed animals to measure our success. With this in mind, the key collections that drove our positive results in the second quarter by consumer segment were, for a younger girl's segment, we continue to provide and they continue to respond to our popular collection of Hasbro's MY LITTLE PONY products, with the most recent introduction PRINCESS LUNA leading the way. For our boy's segment, Marvel's Avengers line continued to post strong results even after the Age of Ultron movie release. We featured a team Avengers marketing message and offered a promotion and encouraged the purchase of multiple superheroes along with the line of must have costumes, accessories and sounds, achieving an average transaction value of over $70, which is significantly higher than our norms. The most popular collection for older girls was our new proprietary property Promise Pets, which was successfully introduced at the beginning of the quarter. The product line is supported with the free mobile app that enhances engagement and provides play beyond the push. The Pet's have an attachment rate with accessories or apparel of almost 90% and the users have engaged in over 350,000 play sessions on the approximately evidence that the marketing story is resonating with our target. New puppies and kittens will be intermittently introduced through the balance of the year. As mentioned, our collections of Minions had a high impact on our sales in the period. In advance of their release of Universal Studios film we launched the line in May and saw sales build throughout the balance of the quarter. The Minions and their signature add-ons including [indiscernible] sounds delivered nearly five units per transactions, approximately 20% higher than our second quarter average. The products performed across geographies and appealed to all segments including the over 12 affinity consumer. Additionally, our basic furry friend offering which also appeals across our consumer segments continued to deliver the highest unit volumes of any stuffed animal category. In fact, because of the balance offering of basic, proprietary, and licensed products, our analysis indicates that we would have achieved a positive consolidated comp in the quarter even without the Minions. As we have stated during 2015 we intend to evolve from an objective of sustained profitability to sustained profitable growth. As a part of this disciplined approach, we have articulated our more time for business plans that specifies continues improvement in initiative, as well as strategic expansion opportunities including, one, more places. On the forefront of our continuous improvement efforts in real estate, it's the introduction of two new store chart, a break frame specialty store model we're calling the discovery design and the first ever true outlet concept for the brand. In mid-July, we opened the first store in our discovery format in Salt Lake City, Utah. The format was developed to increase productivity and optimize special planning while featuring our refreshed brand look. The design provides the visual focal point highlighting one of our most unique selling proposition, the stuffing process. We have literally moved the stuffing experience which includes our signature heart ceremony, frontend center with the development of an impactful 7-foot tall circular stuffer. We will celebrate the opening of our first in place remodel in the new format on September 1 in our Malls Of America store, one of our most popular tourist location. This is our long overdue update of this flagship door. We are value engineering component of the stores we move from concept stage to a standardized model. We will use the cost-reduced version of the discovery format for new stores and to systematically update existing stores over the next few years, since the majority of our doors have not being meaningfully touched in over a decade. Separately as we have noted, through our data driven cohort strategy we identified store groupings such as tourist and outlets that tend to over index on key metrics. Therefore, we developed a model to offer a true value oriented merchandise assortment initially targeting outlet centers located near kid centric tourist destinations. Our first outlet format store opened in July in Rehoboth Beach, Delaware and plan to open to six more stores in the back half of the year in North America and in the U.K. In addition to driving incremental topline sales, we expect this approach to form an important link in the management of our product life cycle. Also note, in light of our strategic exit from our Fifth Avenue location in New York City, we recently opened a store on the ground floor at the Empire State Building, in order to continue to serve our established clientele, as well as the tourist in its high impact market. Additionally, due to the closure of FAO Schwarz, where we had a shop-in-shop, we partnered with Toys R Us Corporation to quickly relocate to the Times Square Store. We are also pleased to announce that we will continue our shop-in-shop presence and select Macy stores during this holiday season. This year we expect to open at least six locations versus five in 2014. On the strategic expansion front, we plan to leverage the improvement in our company owned stores to restructure and extend our international footprint. Select franchisees has started to apply our successful real estate approach including opening pop-up stores to access long term potential and adding shopping shops with key partners. For example, in fall 2014 our franchisee in Mexico partnered with that country's largest high end department store Palacio de Hierro to open a shop-in-shop within one of their locations. Since opening, the store has exceeded expectations and we expect this franchise to open at least three additional Palacio de Hierro stores in the balance of the year. Across all countries, we expect our franchisees to open between 10 and 15 non-traditional stores in fiscal 2015. Two, more people. In this category we are focused on driving continuous improvement in execution of our stated segmentation strategy to appeal to potential new consumers. We have improved our delivery of integrated product and marketing stories and developed concepts that reach all four of our consumer segment on a simultaneous and more consistent basis. With this in mind, I want to share some highlights from several important introductions for the third quarter. First, on July 24, we launched our initial Star Wars classics collection which targets our boy consumer, as well as a very passionate over 12 affinity segment. We successfully built anticipation for this property with online exclusive pre sale of stuff Your Own Chewbacca and I am Your Father, Father's Day promotion with solid sale ever since. For a younger girl segment, this week we introduced MGA's Lalaloopsy characters corresponding the Lala's fifth birthday celebration. And for the older girl, we will be continuing to drive awareness for a recent introduction of our own innovative Honey Girls collection that I will highlight in just a moment. On the strategic expansion side, this fall, we expect to introduce Build-A-Bear Workshop's Sports Central, a reimagined approach to optimizing our numerous sports license, this will expand all major sports leagues and include many major universities. We will create a branded destination within our stores targeting the over 12 affinity and collector segment. IT system upgrades will enable us to offer an endless aisle e-commerce option, allowing consumers to access and purchase any product while in any store. For example, a consumer will simply be able to purchase a New York Yankees bear even when actually shopping in one of our stores in New England. Three, more products. One of the ways that we have focused on the continuous improvement of product offering is via the development of features that enhance our furry friend stories, such as mobile apps designed to extend the play beyond the plush. We believe this approach, which couples the tech mind set of our core key consumer with elevated marketing, is contributing to the increases in both our units and dollars per transaction, as well as elevating engagement with our brand overall. As an example, as just noted, we kicked off an integrated marketing campaign to watch our new older girl's property with an uniquely Build-A-Bear twist called Honey Girls. This collection expands our play beyond the plush approach with a multimedia experience, that includes an app, music from Grammy award winning songwriter, and high quality CGI videos. The back story has a girl empowerment theme as the Honey Girls, who share a common love of music, discover that they are better together versus competing against each other in a talent show. In less than a month there have already been a million views of the animated video of Honey Girls performing their theme song on YouTube, which is an important platform to interact with our Older Girls segment. We expect to drive our strategic expansion into products beyond the plush via an outbound licensing program designed to sell Build-A-Bear branding merchandise and complementary categories. We've recently completed agreements in the confections, snack food, e-cards and premium children’s apparel categories. An offering of brand dry costume is featured in the recently released catalogue from Chasing Fireflies, a Company which designs and manufactures high-end clothing and novelties for children. Four, more profitability. During the quarter, as previously noted, retail gross margin expanded 450 basis points and pretax profit improved by $3.5 million, cutting our loss to $400,000 as we made continuous improvement in areas such as value engineering and supply chain management. We are updating key systems including our merchandize planning tool, which we expect to further improve our product planning and support the advancement of our consumer segment and store cohort strategies. On the strategic expansion front, we will be upgrading our POS system in the back half of the year and expect to realize enhanced capabilities moving us closer to an enterprise selling solution. To date, in the third quarter our comparable store sales are positive, and while we will provide more detail on the fourth quarter on the next call, I would like to share some of our exciting plans to give us confidence that we will be well positioned for the balance of the year. First, we will add a collection tie to Star Wars episode 7, The Force Awakens, as well as a line of Frozen Fever products, which will update its high successful Disney property. We will also have a tie in with the upcoming film, The Peanuts Movie that is being released in November. We will bring back one of our perennial holiday favorites with the Grinch and his dog Max, and we will introduce a new character to expand on the success of our proprietary Marry Mission Reindeer Story that was introduced in 2014. We will also be featured in approximately 20 million McDonald's Happy Meals from November 27th to December 24th, a highly popular promotion that historically has driven meaningful traffic to our stores. In summary, in many ways today we are a new organization, with a new leadership team, new structure, new processes, and a disciplined focus on our strategic plan. The impact is evident in our results. With our 10th consecutive quarter of improved operating performance, our 10th consecutive quarter of enhanced retail gross margin, our fourth consecutive quarter of consolidated comparable store sales growth, and our highest level of profitability at the six-months mark since 2007, with the largest and typically most profitable half of the year still ahead of us. We believe we are positioned to continue to deliver on our stated objective of sustained profitability or establishing the ground work to evolve to our goal as sustained profitable growth. Now I would like to turn the call over to Voin to review our second quarter financials in more detail.

Thanks, Sharon, and good morning everyone. For the second quarter, net retail sales were $80 million compared to $75 million in the prior year, driven by improved comparable store sales partially offset by $1.6 million negative foreign exchange impact that was not material to our bottom line. Consolidated comparable store sales rose 8.7% driven by an 11.9% increase in dollars per transaction partially offset by a decrease in the number of transactions. By geography, comparable store sales rose 6.5% in North America and 18.2% in Europe. Our comparable store sales were above the low single digit guidance we provided in early June, as the month benefited from a stronger than expected reaction to some of our lead stories. We also saw increased traffic partially driven by kids being out of school this year as opposed to last year when many schools lengthened the year to make up for snow days. Excluding the impact of foreign exchange, e-commerce sales increased by 11.4%. Retail gross margin increased by 450 basis points to 43.5%. This was a result of a 240 basis point improvement in merchandise margin and distribution cost. We also saw 210 basis points of leverage on fixed occupancy expenses. SG&A was $36million or 44.4% of total revenues compared to $34 million or 44.6% of total revenues last year. SG&A in the second quarter this year included a net $300,000 in Management transition cost and currency gain. Last year SG&A included Management transition cost and foreign currency losses of $300,000. Adjusting for these items in both quarters, SG&A as the percent of total revenues was 44.7% compared to 44.3% last year. Higher sales and expansion in gross margin offset the increase in SG&A, bringing net loss to $600,000 or $0.04 per share compared to a net loss of $4 million or $0.25 per share in the second quarter last year. Adjusted net loss was $1 million or $0.05 per share, an improvement from an adjusted net loss of $0.24 per share in the second quarter last year. For the first six months, net retail sales were flat at $172 million as improved comparable store sales were offset by the negative impact of the one weeks calendar shift due to the 53rd week in fiscal 2014 and $3.5 million negative foreign exchange impact that was not material to our bottom line. Excluding the impact of foreign exchange, net retail sales increased 1.9% compared to the first six months of 2014. Consolidated comparable store sales increased 5%, and included increase of the 2.7% in North America and 15.7% in Europe. E-commerce sales rose 9.9% excluding the impact of foreign exchange with continued improvement in profitability. Retail gross margin was 45.2%, an improvement of 360 basis points compared to last year. This increase was driven by 320 basis point expansion in merchandise margin and reduction in distribution cost, with a remaining improvement attributed to leverage on fixed occupancy expenses. SG&A was $73 million or 42% of total revenues including $1.5 million in Management transition cost and foreign exchange losses. This compares to $72 million or 41.2% of total revenues including a net $300,000 of Management transition cost and foreign exchange gains. Adjusting for these items, SG&A was 41.1% of total revenues in both periods. Pretax income was $6.6 million compared to a pretax income of $1.3 million in the first six months of fiscal 2014. Year-to-date income tax expense was $420,000 with an effective tax rate of 6.4% primarily comprised of foreign and state taxes as we still have a valuation allowance on our domestic deferred taxed assets. We continue to expect to reverse the remaining U.S. valuation allowance in fiscal 2015. However, for modeling purposes we suggest that you use no tax expense or benefit this year. Adjusted net income improved to $0.41 per diluted share from $0.06 per diluted share last year. Turning to the balance sheet. At quarter end, consolidated cash was $42 million consistent with quarter end last year driven by net income improvement and offset by increased capital spending and share repurchase activity. In the second quarter we utilized $6.2 million to repurchase 373,000 shares. At quarter end we had $800,000 remaining on our initial $10 million authorization. In July, our Board authorized a new $10 million share repurchase program giving us $10.8 million of total availability. In the second quarter, we have no borrowings on our credit facility. Consolidated inventories totaled $50 million compared to $43 million last year, this represented an increase of 17.5% on the per square foot basis compared to a 6.7% decrease last year. This year's increase was driven by a combination of factors including stronger inventory position on key product stories, the timing of purchases to support third quarter product launches and the overall reduction in square footage. Capital expenditures were $6 million primarily for IT infrastructure and store related capital. Depreciation and amortization was $8 million. For fiscal 2015, we continue to expect capital expenditures to be in the range of $20 million to $25 million to support store updates and openings as well as the ongoing investment in IT infrastructure. We continue to expect depreciation and amortization to be approximately $16 million to $18 million. We currently expect to end the year with six more stores than last year finishing 2015 with approximately 330 stores, which includes 11 stores operating in the discovery format by end of the year. In summary, by staying true to our stated strategies, we delivered solid improvement in revenues, gross margin and our bottom line results leading to our 10th consecutive quarter of improved performance. Through the first half of 2015, our pretax profit of $6.6 million is an improvement of $5.3 million from last year. This is the highest level of pretax profit that we have achieved at a halfway point in the year since 2007. And now I would like to turn the call over to the Operator, to begin the question and answer portion of the call. Operator?

[Operator Instructions] The first question we have comes from the line of Stephanie Wissink from Piper Jaffray. Please proceed with your question.

Thank you good morning everyone. Congratulations on a great quarter. Sharon, a question for you just on the store format, it's a bit of a bigger picture question. But can you talk a little bit about some of formal assumptions on the discovery store, I know it’s new but you mentioned value engineering and this kind of move to standardizing that package as you roll across some of your other stores. So if you can talk a little bit about that that would be helpful. And then maybe the same question on the outlet, I think your offer reference that this would be beneficial to your product lifecycle, should we think about those stores as truly end of life product as well as some of your newer initiative. And then I'm going to throw another one, just sort of curiosity, it sounds like your franchisees are adopting some of the strategies that you have been laying out, I'm just curious if they’re going to change in terms of the corporate outreach and partnership with your franchisees over the last year to two years just trying to come into line with some other bigger challenges that you are putting in place. Thank you.

Yes sure. On the store format front, whenever you redesign in a more comprehensive way, this is really the first comprehensive redesign that we've had since the beginning. There are some costs associated with that complete redesign. And that’s going to show up in your first few doors particularly if you redesign something it’s fundamental as a stuffer. We stored throughout the old box model and wanted to create some in-store theater as we believe that it would be beneficial in terms of just pulling people into the store, there would be a tool for us not just the part of the process but a marketing tool for us. So that's first few doors although comparatively expensive of where we’re going to be, we still two year horizon on the payouts, because they’re actually the first doors are about on par with where we ended up on the average doors at the stores of the future. So we’re starting at a comparable point with where we were with the store of the future and we’re now starting the cost reduction process. Some of the reasons why that was expensive is because the store of the future was based more on technology, real a lot of high-tech under the surface, that cost a lot of money and also have a lot of break fix on it that when we went back to the basics on how we thought the consumer wanted to interface basically the fact that we’re more tactile is one of the things they love about us. So we expect to get that down pretty quickly. I think we mentioned we would have 11 stores in the discovery format before the end of the year. By the time we get to 2016, we should be in a pretty decent cost reduced version on two or three different formats and inclusive of a flagship format that you guys - some of you guys are going to see when you go up to the Mall Of America on September 1, it’s over the top with two stuffers all the way down to how do we just touch the door minimally, so that it looks like it still in the concept and the format with new colors and some smaller version of stuffer. So there will be a lot of different cost associated with that specifically associated to the potential volume of those stores. On the outlet side it's - that’s a completely different look and feel, it’s a much less expensive approach and a very fresh way on how we merchandise, we actually change the store flow. You don't go - you don’t pick your animal first and then go to the - through this process the same way with all the animals over the front, we’ve merchandised in stories, which is pretty interesting and it’s great to kind of watch the way the consumer shop through this. It does give us the way we look the format away to use it as an end of lifecycle for a lot of the products that we have, but we will also feature at full price big story that is the front of the store and what we call the rolling bear band up very close to the front of the store to attract consumers. And the first and this is just one store right in the whole buzz but we’re seeing a lot of value purchases but Minions and Honey Girls are also being sold in these stores as well which is pretty exciting. On the separate question on the franchise front, we are approaching the franchisees in a different way. We're rebuilding just like we are with a lot of our own processes here. And internally we are rebuilding processes to be better partners with our franchisees. And additionally, it's very difficult when you have a franchise model if the mother ship is not performing well, clearly the franchisees are going to do within the realm of the contract what they want to do, because they don’t believe in, that this strategy is working based on the experiences that they’re seeing in the mother ship. But as we’ve turned the page and become now in our 10th consecutive quarter as noted, our improved operating results there, they're looking to us and we’ve had a lot of robust meetings, a lot more I think productive processes put in place and of course they now want to participate and a lot of the choices that we’re making from a real estate strategy, perspective all the way to a marketing strategy perspective and a way that isn’t just compliance but excited.

Very helpful. Thank you.

Our next question comes from the line Greg McKinley from Dougherty. Please proceed with your question.

Yes, thank you. Well, you introduced us to a number of what seemingly are important Q4 branded properties. I wonder if you could just give us a little more color on them, maybe help us better understand what you’re doing exactly with McDonalds? How broad of an assortment are we talking about when we're talking about Peanuts and Frozen Fever and Star Wars and Grinch? And then, are there any unique costs associated with these launches that we should be aware of?

Yes, I shared basically what we were doing for the balance of the third quarter, and then gave you guys some sneak peaks on some exciting news that we have for the fourth quarter. Going from the third into the fourth is the Star Wars collection from the classics into the App 7 – App 7 is the big news for the fourth quarter. We're really excited about that. We expect that to span not only across our boys business but have a high appeal to the affinity consumer. So, that’s one of those that comes along every now and then in the toy industry, and we generally forward to it and so we'll build a good in store presence for that, and we already have a lot of good signals, particularly from our Chewbacca sales, that we have a good opportunity in front us. On your second question about Frozen, it’s the Frozen Fever update. They dropped a, kind of a mini film that provided new costume, new look, new story line and so, we're building product that is reflective of that. It will be about the same size in terms of the skew count as our previous Frozen line. But we believe that -- and as our sales have continued to be robust on Frozen, we believe there is still a lot of interest in the Frozen line and that a nice refresh during the fourth quarter could give us some uptick, we are comping Frozen from last year. So, having something new to say to that consumer is an important part of the portfolio management. The Peanuts film, it’s a classic product, again when you think about what the Peanuts people are doing in terms of reigniting this incredibly generational brand for little kids, for the kid market, it's right in our sweet spot, when you think about it. It will appeal to the affinity consumer, the collector consumer, and with the reintroduction of the film in its really precious CGI look, we expect as they do that there will be some uptick of course with the sales against kid.And it’s a different type of consumer. Again, thinking from a portfolio management perspective from the other two properties. So, it gives us a nice array of products that appeal to any type of psychographic on top of all the different demographics of boys and girls, and collector consumer. We've done Grinch in the past. He lends himself to a Build-A-Bear format, he is big and furry and his heart grows, three size is too big. So, the story line really fits with who we are and we're going to push into that, into the heart ceremony in a way that we have in the past.

When was the last time you had Grinch?

I can, look, by two or three years ago, maybe four. And it has -- when we bring it out, it's successful, people look for it. They’re excited when it comes out. One of the things that we're doing this year with Grinch that's different is, we've always just offered Max, the dog, where he ties the antler to his head if you know, Max. He is going to be a stuff your own, as well. And in the past, he's just been a side kick purchase. So, that’s pretty exciting news for us as well. And then, that we're actually most excited about the reintroduction of our own Merry Mission, overall marketing story. We use that Merry Mission story as an overlay to everything that’s happening in the store at the holiday, all the marketing will be wrapped up in the Merry Mission story. The reindeer were very successful last year. If you recall, you can pick you own reindeer, name your reindeer, one of the classic reindeer. We're introducing an exciting new character that I’ll share with you with more details about that later on. And all of this, the Christmas story will be wrapped up into this McDonalds program as well. Are there any unusual costs? No. There are certainly royalties associated with the licensing programs, but as we’ve discussed in the past, we for the most part price that in and it makes -- now particularly that we're pricing on parity with a lot of our programs such as our Reindeer Program last year, which priced parity with Frozen. It’s not a margin story -- for ten consecutive quarters we've expanded our possibility. So this is an end at the same time our license is a percentage of sales has grown slightly still in that 30s to 40s range, but its bigger than it used to be. And so that’s not -- we don’t look at licensing as margin de-gradating per se. We look at it as a part of an active and successful portfolio managed approach to business. But McDonald’s business, not only do they bring marketing power to us because they advertise the fact that Build-A-Bear is going to be in the Happy Meal during this time frame. The coupons have a long life. We’ll continue to see benefit from that into the first quarter of 2016 based on previous years experiences with the McDonald’s coupon, and interestingly Build-A-Bear has a very unique approach to driving the consumers right back to retail. In fact what you get when you go get your Happy Meal is a little mini stuffed animal, and a coupon not only for a marginal discount to come into Build-A-Bear, but to get a T-shirt for your mini-bear So the kids come back in, and once they are in with that other coupon, burning a hole in their pocket, there’s usually some transactions that go on.

Interesting, okay. Thank you. Anything noteworthy to comment on regarding -- you seemed to have a lot of success late Q4 early Q1 on gift cards, how long of a tale does that have and is that still impacting the traction you’re seeing in the business?

Yes. We use our gift card business as a strategic additive part of our total portfolio again. We have a number of pricey gift cards, there is a standard gift card of course, the sales increased significantly during the fourth quarter. Most of our gift cards are redeemed within 30 to 60 days almost 90% of them, we have a very high usage rate for our gift cards. The interesting piece about a gift cards and why they are valuable to us, specifically is they're usually redeemed at about 60% higher than the face value of the gift card. We also use gift cards in what we call the [indiscernible] upsell to drive subsequent traffic within a certain timeframe like in a high traffic time period, lets say, Easter we might bully with gift card, knowing they'll probably come back in the next 30 days, which is usually for example in Easter, a window that can sometimes be a little more light on traffic.

Thank you.

[Operator Instructions] Our next call comes from the line of Alex Christensen from Craig-Hallum Capital Group. Please proceed with you question. Q – Alex Christensen: Hi Sharon, hi Voin, great quarter. Really impressed by what you guys put out this quarter. I had a couple of questions with regard to Star Wars and what you're looking at there. I saw the, the Chewbacca kind of had a collectable field appealing to over 12s, how much of the collection is going to be geared towards kids versus the over 12 category, what kind of opportunity do you see especially on that collectable side. And is there -- how inelastic do you see that market for over 12s?

We really design our products with kids first in mind. And the collectors are attracted to the fact that we do that. So Chewbacca, although readily appealing to people who remember the first Star Wars movie. He's absolutely fantastic for a little kids. He is bigger on scale than our other bears, as I look it would be, and he's just furry and fine and I think that he'll appeal across the Board. We also have a e-card with Star Wars Bear with the Star Wars logo all over it, they can dress in a number of different Star Wars costumes that will also appeal to both collectors and kids. So in this particular case, we're designing kids first, but with a high appeal to the collector base keeping the collector in mind as a filter, almost like not doing anything that would dissuade a collector versus designing for collector and with the kids second. And that’s pretty exciting, we are seeing a lot of activity both from the collector market, as well as kids buying Chewbacca and the Star Wars there. So we expect to see it appeal across the board. For example two clips from How to Train Your Dragon last year also designed with kid in mind first that ended up 40% of its sales, more to over 12 collector and Minions designed specifically with kids in first 30% as a sales than Minions were over 12. So what's interesting about it is it brings new people into Build-A-Bear. We believe that is additive traffic, new consumers, people that would otherwise not consider Build-A-Bear and that’s good for us.

That's really interesting. Then just a little follow-up on your Empire State Building store, what are the early results that you’re seeing if you can share anything with regard to how that is working out and what kind of - should we be thinking about in terms of the costs savings as opposed to the previous store there and I guess similar to the switch to toys that are from FAO Schwarz.

Yes. We look at New York City given how important it is not just from it base population and opportunity but from immense traffic and tourist traffic they visit New York as a holistic market. And for the last year and a half particularly since we knew we were going to step out of Fifth Avenue, we have been looking at how to think about Manhattan particularly and provide the right amount of stores in the right places to meet the consumer demand in New York Empire State Building given that it is in tourist location and it’s like iconic building and this is a tourist location that kids happen to go to, felt like a great place for us. We’re very pleased with the early results even though it was opening before I could put this new round stuffer in there. We may go back in metro city at some point, but it’s gotten off to a fantastic start, we’re very pleased. But at the same time, it’s not just about the Empire State Building, it’s about a solution for Manhattan and that of course includes the uptown option of the Time Square option where we have now the location inside of Toys R Us. Interestingly, the Toys R Us location and this surprised us a bit is performing if we analyze it at a higher level than the FAO store then we were pleased with FAO. So the traffic, just the sheer numbers that walk through that Toys R Us and Time Square is driving measurable business. And based on our experience with FAO and Time Square, which were open at exactly the same time and you know that they are just few blocks away, they both rose – FAO went up even after we closed Time Square and then FAO went up to shut the doors. We although Herald Square at NYC it is so close to Empire, we don’t expect to see any negative impact because of just the share population in tourist. So we haven’t completely figured out what are upside opportunity in Manhattan is, but it seems like every time we open a new door, almost no matter how close it is to the other, its additive business. On the second part of that question, well Fifth Avenue was not a profitable door. So these are profitable doors so it’s going to be better.

That's great. Thank you.

Our next question comes from the line of James Fronda from Sidoti & Company. Please proceed with your question.

Could you just - I guess discuss a little more on that comp growth that you saw in Europe and what was the main factor., was that Minions or was there something else involved in that, that made it so large.

The mix of sales in the U.S. and North America often not that different. Consumers have a lot in common so, that when we talk about our total business would have been positive even without Minions that's inclusive of the U.K. What's driving the U.K. a little bit on wider outpacing North America right now, is many of these management and distribution and flow changes that were just now gaining attraction in the US. we started in the fourth quarter, and the second half of last year. So, we’re kind of ahead of the curve with the U.K. on improvement and flow and merchandising and even service model. So, hopefully we will able to pick up some of the things, best practices and moving them over to the U.S. That’s one of the reasons why we now have a new COO, Chris Hurt who started recently, I'm very excited. His job is to get the U.S. and the North American market moving at similar pace hopefully as the U.K.

Okay. Thank you.

Thank you. Is there any update you can provide us as it relates to new franchise markets that you’re looking at?

We’re still in the early stages of reinventing our franchise business. I think we've mentioned on the previous call that, not only are we looking at different markets but we’re looking at different models. So for example, in Denmark since January, that particular franchise we actually now own and operate. The Tivoli Gardens location which is their flagship door in a major tourist location and it’s our store not a franchise store. So, it’s really a case-by-case basis on what we are doing but we think that there are possibly some new approaches, creative approaches to how we expand internationally and what the format as a franchise business looks like, and we certainly believe, and had quite a few discussions on the fact that Maxine, the founder said many times that, A hug is understood in any language. This brand, this concept translates into almost every country and so we haven't optimized there. So we will be sharing some stuff fairly soon.

Okay, thank you. And then you had made in you prepared comments outbound licensing. Can you remind us which particular categories you've deals on and what are expectations financially for these types of things?

Sure. We have currently deals on confection snack food, E cards, children’s apparel and costumes and we are in the middle of a lot of other discussions. So we are still in the early stages. If you know the chasing fireflies catalogs, it just dropped at premium children’s brand. We have a really – it's an adorable package in there. Build-A-Bear costumes for kids, there are high end costumes for Halloween. So, that’s really the first thing that’s out there other than some confection that are available in our own stores. And if you visit a Build-A-Bear, encourage you to pick up a Build-A-Bear cookie, they are awesome. There are birthday cakes flavored for a reason. It’s actually a great tool for us on creating a full solution for some of our birthday parties when moms want a snack, as well as a bear. But you’ll start to see some things that are little more material as we move forward but revenue for the license is usually a quarter lag from revenue for the live TV. So, even with some sales possibly the cookies and the chasing fireflies in the back half of this year, we won’t see any of that and it will be pretty nominal until we gain some traffic and we won't see it until 16.

Thank you.

Ms. John, there are no further question at this time. Would you like to make any closing remarks?

I just want to thank everyone for joining us today and we look forward to updating you on our third quarter results.