Build-A-Bear Workshop, Inc. (BBW) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Build-A-Bear's Second Quarter Fiscal Year 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Allison Malkin of ICR. Please proceed.

Good morning. Thank you for joining us. With me today are Sharon Price John, CEO; and Vojin Todorovic, CFO. For today's call, Sharon will begin with a discussion of our 2018 second quarter performance and review the progress made on the priorities we set at the start of the year. Vojin will review the second quarter financials and fiscal 2018 guidance, we will then open the call to take your questions. We ask that you limit your questions to one question and one follow-up. This way, we can get to everyone's questions during this one-hour call. Feel free to re-queue, if you have further questions. Members of the media who may be on our call today should contact us after this conference call with your questions. Please note, this call is being recorded and broadcast live via the Internet. The earnings release is available on the Investor Relations portion of our corporate website. A replay of both our call and webcast will be available later today on the IR site. Before I turn the call over to management, I will remind everyone that forward-looking statements are inherently subject to risk and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the Risk Factors section in the Company's Annual Report on Form 10-K. We undertake no obligation to revise any forward-looking statements. Finally, I want to remind you that we will results for the fiscal 2018 second quarter and 26 weeks ended August 4th 2018, given the previously announced fiscal year-end change references to prior year result are based on the unaudited free cash results for the fiscal year ended February 3, 2018. And now, I would like to turn the call over to Sharon John.

Thanks, Allison. Good morning everyone. The second quarter was quite remarkable for Build-A-Bear, as we experienced a seismic shift in our sales trend towards the end of the period while further demonstrating the extraordinary power of our brand spurred by our mid-July Pay Your Age Day event. The surge of interest from the promotion helped to drive profitable double-digit sales increases throughout the balance of the quarter and we believe will have far-reaching implications across the number of friends and relationship, allowing us to continue to proactively leverage the overall potential of our brand and company into the future. Although we anticipated the July 12th event that was designed to introduce our new and ongoing Count Your Candles birthday program to be successful. The residual impact for the last few weeks of the quarter ultimately far-surpassed our traffic and sales expectation. In fact, the Pay Your Age Day event eclipsed the highest measured store traffic in the history of Build-A-Bear as we estimate well over 0.5 million people visited our largely mall-based brick and mortar retail stores to have the experience of creating their own furry friend during one of the slowest retail months of the year. While no reasonable interpretation of the planning data would have predicted the enormity of the turnout that resulted in lines that stretched beyond the calculated time it would take guests to physically go to our bear building process we were able to quickly pivot and provide vouchers to guests waiting in line beyond our calculated stuffing throughput. Importantly in the vast majority of our locations we serviced guests for the entirety of the business day, it did not deplete our supply of furry friends before closing any store enabling us to open the following morning to service our guests. And while we are never pleased when we disappoint a customer, the most recent guest survey indicates that we have received high satisfaction marks since the event. To truly understand the overall results of this quarter, it's important to note that up until the Pay Your Age day event which occurred when the quarter was nearly 75% complete, our retail stores continue to endure many of the headwinds that hindered our first quarter results at a level that was significantly more acute than expected including the negative impact from the protracted Toys "R" Us liquidation, which pressured revenue and contributed to the overall loss for the quarter. During the first nine weeks of the quarter, sales declined at double-digit rate. This negatively impacted profitability by deleveraging occupancy and other fixed expenses. Starting July 12th, comparable stores sales increased at triple than double-digit positive rates generating more than enough volume to cover the lower margin rate associated with the promotion and ultimately delivering meaningful profit for the balance of the quarter. So to be clear, the loss for the total quarter was due to the decreased revenue and profit in the first nine weeks of the period not because of the discount associated with the promotional activity of the final four weeks. In total for the second quarter, net revenues were $83.2 million a 5% increase from the prior year inclusive of the projected negative impact of nearly $3 million due to changes in revenue recognition and the closure of our previously most productive store in Anaheim, California. E-commerce grew at a double-digit rate in the quarter, partially aided by the traffic driven by our Pay Your Age event. As a reference, site traffic on the day of the event was more than 20 times higher the traffic than we had at last year's Cyber Monday even though neither the Pay Your Age offer including the follow-on vouchers nor the Count Your Candles program were valid online. Across geographies, sales in North America rose nearly $6 million compared to the same period last year, ultimately achieving a near double-digit growth rate. Although, the Pay Your Age events improved the UK sales trend, European revenue was down $1.9 million, largely due to the ongoing pressure on consumer confidence in spending power stemming from the uncertainty around Brexit. This was exacerbated by the importunate forfeiture of our ability to directly communicate to the material portion of guests in our email database starting on May 25th, when like many other UK retailers, we had to revise our privacy policy and communications plan as well as incur expenses to comply with a new law known as the General Data Protection Regulation or GDPR. Retail margin contracted 210 basis points and Vojin will provide more details on the contributing factors to the contraction. And on a consolidated basis, we experienced an operating loss in the quarter of $2.5 million with the positive performance in North America due to the benefits of the Pay Your Age event, offset by losses in Europe, which were impacted by a greater than expected exchange rate unfavorability for the British pound Sterling as well as the aforementioned challenges concerning Brexit and GDPR. Of note, third quarter to date, we have a consolidated positive sales trend driven by North American stores and e-commerce with the UK continuing to show softness. While the outlook for the UK is expected to continue to be bumpy as preparations are made for the official separation of the country from the European Union early next year we continue to believe in the long term viability of the market. As such, we've been taking actions to improve operations including expense in real estate rationalization. We're also enhancing efforts to rebuild our guest database in the post-GDPR era, which includes leveraging the potential of recent loyalty club members that have joined the program many as a result of the Pay Your Age and Count Your Candles program. As a reminder, increasing and monetizing the power of the Build-A-Bear brand inclusive of leveraging our direct access to new and highly engaged guests has been a consistently stated goal for our company. In fact as noted, the impetus for the Pay Your Age promotion was to introduce a new birthday platform, which as you may recall from first quarter remarks was planned to launch in the first second quarter. Specifically, the macro objective that we have outlined was to expand the membership and increase the lifetime value of loyalty club members by re-launching and reinvigorating our birthday program. Because birthdays and birthday parties are the number one stated occasion for visit to Build-A-Bear, generate up to one third of our store revenues throughout the year and provide a significant opportunity for trial and acquisition of new guests. Separately as up to 70% of Toys "R" Us sales per MPD were associated with the trip driven by special occasion such as a birthday or holiday, we felt the timing was right to introduce and revitalize Build-A-Bear as the ideal birthday destination of choice for a broad demographic of children given that a visit to our stores already considered a rite of passage to childhood based on our research. Using this insight, we conceived the Count Your Candles campaign, in which any child could come to Build-A-Bear during their birthday month and literally pay their age for a special birthday treat bear, including a re-imagined birthday and party celebration service model, a benefit only for members of our enhanced Bonus Club loyalty program. This concept delivered on all of our objectives as we believe that the broadened price accessibility and hook of paying your age would drive trial by engaging an expanded consumer base of kids and family to come to our stores during the child's birthday month. The improved experience of our birthday rite of passage moments including photo props will be a sharable marketing tool in social media to endorse Build-A-Bear and drive additional awareness and trial. The Bonus Club signup requirement to participate in the Count Your Candle Pay Your Age offer would increase the rate of acquisition of new loyalty club members and while the Pay Your Age mechanism would lower the average bear cost to the consumer and therefore be a greater discount to Build-A-Bear the expense would be offset by the value of the new Bonus Club member acquisition, the value created via social media sharing and the increased potential lifetime value of the guest. Remembering that as the discount increases, the younger the child the potential lifetime value also subsequently increases. In early July, we kicked off this new Count Your Candle birthday program with a mostly social media marketing effort that went viral in the form of our Pay Your Age Day event. As a result in addition to the increase in sales velocity, we now have residual asset including over a 1 million accounts that are newly enrolled in our loyalty program over a 100,000 new social followers and increased top of mind awareness created by an estimated 3 billion media impressions that were generated in the two weeks surrounding the event. And since the launch, the Birthday Treat Bear that was designed specifically for this program has been a top-selling furry friend across the chain, representing our highest number of transaction about half of which have generated trial and new bonus club membership. Now I would like to provide you with a few updates on the execution of our longer range strategy which includes the following goals, evolving the real estate footprint through diversification of our portfolio while transforming the Company to be able to profitably monetize the power of the brand through the creation of new revenue stream and the diversification of our business model. First, let me start by sharing a few updates on the diversification of our real estate. Beginning in mid October, we expect to open half dozen full service Build-A-Bear stores which will be situated inside a national retailer. We feel confident that the combination of our unique retail experience with this retailer at a time when billions of dollars of toy sales are expected to transfer provides an opportunity to leverage a broader consumer base. The inaugural sites were selected using comprehensive data analytics such as toy sales and consumer demographic overlaid with markets where Build-A-Bear is currently underpenetrated. Second, we are also continued to expand in tourist location from mall based to stand alone sites in a variety of formats. In addition to the previously announced store openings at Pier 39 in San Francisco and Inner Harbor in Baltimore, we've also recently reopened at Navy Pier in Chicago in a new location and now have new sites in Los Angeles including Santa Anita Mall and King Island Amusement Park in Cincinnati and fashion outlets in Niagara Falls with financing finalized for a new store in Las Vegas at the fashion show. We're also completing details with Great Wolf resort America's largest operator of family focused indoor water park lodges with expectations to open our first three locations later this year. Additionally, we are excited to announce plans for new permanent shop in shop at Rockefeller Center in New York City as we resurrect our previously successful relationship with FAO Schwarz just in time for the holiday season, and thinking of the holidays, we're happy to share that we plan to continue our seasonal shop-in-shop relationship with Gaylord Hotels in conjunction with their 2019 holiday ICE event and that we expect to expand our presence at specific Winter Wonderland location and Bass Pro shop in Napa Valley. Third, on a separate note, we also believe there's an opportunity to expand the overall retail presence and sale potentials for the Build-A-Bear brand and select malls where we already operate a Build-A-Bear workshop by diversifying our offering with Build-A-Bear bakeshop. As you may recall, last year, we opened our first bakeshop in St. Louis followed by a recent expansion into Mall of America. We are currently finalizing plans to be in up to three additional tourist type locations including Florida Mall in Orlando before the end of the year with a new bakeshop format fashioned after our standalone concourse shop. These locations are planned to be in close proximity of higher volume preexisting Build-A-Bear workshop location with the goal of generating reciprocal and incremental total business while potentially enhancing our valued birthday business. Fourth as noted, our consolidated e-commerce business once again delivered double-digit growth driven by both increased traffic and orders. We continue to make strategic investments to enhance our capabilities including improving predictive and suggested selling, enhancing the mobile interface, and updating CRM capability. On the hill of successfully soft launching a section of our site dedicated to a broaden often older consumer demographic of gift givers, we expect to expand our gifting effort in marketing in advance of the holiday season. Separately, in mid-September we're planning to introduce a direct response television campaign specifically designed to drive consumers to our website for an Exclusive Promise Pets online offer. And finally, on the international front, I'm pleased to share the recent addition of a new franchise in India, which represents a country with the second largest population in the world and the sixth largest and one of the fastest growing global economies. Our partners affiliated with the highly regarded multibillion dollar LuLu group and currently plans to open up to eight locations before the end of the year. We also remain pleased with our franchisees progress in China, which is now operating three stores, including its first concourse shop. Plans are in place to have up to 10 locations by the end of the year. With these additions and growth in existing territory, we expect our franchise footprint to expand to approximately 120 locations in 11 countries by year-end further supporting our belief that a bear hug is understood in any language. In regard to our second stated objectives of transforming the Company to be able to profitably monetize the power of the brand. I'd like to share that our royalty-based outbound brand licensing business continues to expand with new partners in a wide array of categories including footwear and slippers, kids apparel and accessories, beauty and cosmetics, stationary and craft kits, costumes and baby apparel, sleepwear and gifts, as well as select toy category through an agreement with Just Play. And on the entertainment front, we are finalizing plans to launch a new radio station. Build-A-Bear radio in October in conjunction with Dash radio, a multi station streaming platform with over 5 million subscribers in an agreement to be a standard offering in a variety of new GMB growth in the U.S. Build-A-Bear radio will be the exclusive kids targeted channel on Dash and we expect to introduce the station concurrent with the completion of a sound studio for hosting live events and performances, which we located in the front window of our New York store on 34 Street next to the Empire State building. As we look forward to the balance of the year, I would like to share a few merchandising and marketing highlights. In September, we are celebrating National Teddy Bear Day for the third consecutive year. During the event, Bonus Club members will have the opportunity to acquire a collectible commemorative teddy bear and we are partnering with Southwest Airlines to take teddy bear hugs to new heights with fun, PR moment and a product donation. In November in conjunction with the launch of our historically successful Merry Mission product line updated with a new candy cane theme, we plan to introduce the new Christmas marketing campaign called holiday wishes made here. The campaigning will be supported by a comprehensive effort including in-store, TV, social, email, direct-mail and radio inviting guests to be sure to visit a store to both make a furry friend and sign the nice list as a part of their holiday tradition, which we expect to enhance with the sweepstakes offer to sign the nice list and win a wish list. And once again, we're scheduled to usher in the beginning of the holiday shopping season with an estimated 55 million viewers watching the Macy's Thanksgiving Day parade featuring a Build-A-Bear float for the 16th consecutive year. In summary, I think it's worth reiterating four important points. One, the first nine weeks of the period were worse than expected, posting double-digit declines that significantly pressured profitability. While as noted, in sharp contrast, the last four weeks were better than expected with the Pay Your Age events leading to both positive sales and profit. However the profit generated was not enough to offset the challenges from the beginning of the quarter. Two, the Pay Your Age Day event, the follow on voucher redemption and the ongoing Count Your Candles program significantly shifted the momentum of our business. The increase in traffic and transactions resulted in triple and double-digit sales increases across the chain. The event also fueled the acquisition of new loyalty club members and contributing to the now nearly 6 million total Bonus Club accounts, added social followers that now totaled to over 3 million, and delivered billions of media impression that have elevated Build-A-Bear's top of line brand awareness. Three, North America and the U.S. performed significantly better than Europe and the UK in the quarter. And while the UK sales trend improved after July 12th, on balance it remained negative. In fact North America posted near double-digit positive sales, while Europe posted a double-digit sales decline for the quarter. The resulting loss in Europe more than negated the entirety of the positive performance in North America. Four, we continue to make notable progress towards transforming our company with the many examples shared to-date that demonstrate the advancement of our strategy to diversify our real estate footprint and retail portfolio, expand our geographic presence and involve our business model as we create new revenue streams that leverage the power of the Build-A-Bear brand. In closing, we believe that we are in a position to take advantage of the recent momentum shift for the remainder of the year by executing the plans I just shared. As such, we are reiterating our profit and sales guidance while projecting a loss in our fiscal August-September-October third quarter due to this historically comparative smaller volume. Finally, although our brands enjoys high awareness and affinity marks. We expect to leverage the broad and top-of-mind awareness in Build-A-Bear and believe that in the end, the Pay Your Age day experience challenges us all was an extraordinary proof point for the exceptional power and potential of the Build-A-Bear Brand. In addition, I would like to note that we believe the last five years of dedication and investment towards upgrading our infrastructure, processes, organizational structure, talent and IT were instrumental in our ability to execute in event of the magnitude of the Pay Your Age Day promotion. The team work in professionalism required to both manage and recognize the future opportunity of the situation in the moment speaks volumes about this company's vision and capacity to harness the momentum that was generated to scale the power of the brand. As we move forward, it is our goal to strategically capture the synergy to achieve our desired future state of delivering long-term sustainable profitable growth. Now, I would like to turn the call over to Vojin.

Thanks, Sharon, and good morning everyone. Before I begin, I want to note that given our previously announced fiscal year end change, all references to prior year second quarter results are based on the recast 13 weeks ended July 29, 2017. As Sharon mentioned, we are pleased with the trajectory of our business as we exited the quarter with the final four weeks of the second quarter reflecting strong sales and operating performance. In total, the quarter saw total revenue rise 5% led by North America despite a double-digit decline in Europe and the timing shift in commercial revenue for the quarter. The second quarter operating loss of $2.5 million was driven by a tough environment in Europe as North America had a positive performance. Now let me turn to discussion on the income statement specific to the second quarter. Total revenues were $83.2 million an increase of 5% compared to the second quarter of fiscal 2017. This reflects an approximately $2.8 million combined negative impact from the adoption of the new revenue recognition standard and the January closure of one of our most productive stores at Disney Anaheim which historically enjoyed its highest sales during the summer months. In addition, sales during the first two months of the second quarter continue to be impacted by Toys "R" Us liquidation that is now behind us. During and after the Pay Your Age event, we experienced significant increases in traffic and conversion, positively impacting the overall number of transactions. The redemption of vouchers naturally lowered our dollars per transaction metric during this period but more transactions generated an increase in total revenue. By geography, total revenue in North America rose 8.7% for the quarter while Europe declined 14.9%. I mentioned a negative impact in Europe stemming from a tough retail environment and unfavorable currency exchange rate and the implementation of GDPR which had a meaningful negative impact on our direct marketing capabilities. The Pay Your Age event did improve the sales trend helped us begin to rebuild the loyalty program member base in the UK. While net retail sales rose 6.1%, we saw a decline in commercial revenue driven by the timing of wholesale customer orders versus last year. We expect commercial revenue to grow in the third quarter and back half of the year driven by new initiative, including outbound brand licensing program. Retail gross margin dollars increased $400,000 to 34.4 million from the prior year quarter while the rate declined 210 basis points to 42.5%. This rate decline was driven by a contraction in merchandise margin that was directly associated with high promotional activity through the Pay Your Age event. As we discussed, the events led to a significant increase in transaction as a lower average unit retail, which deleveraged the cost of supplies such as stuffing and packaging. Also gross margin included a 50 basis point reduction due to the adoption of the new revenue recognition standard as expected. These negative impacts to retail gross margins were partially offset by lower average store occupancy cost. SG&A was 37.9 million or 45.6% of total revenues compared to 45.2% in the prior year. The $2.1 million increase as compared to last year reflects higher store labor costs and additional supply expenses, all directly related to increase in July's sales volume as well as the impact of unfavorable currency in Europe due to balance sheet re-measurement. On a year-to-date basis, our SG&A dollars were lower than during the same period last year. Turning to the balance sheet. At quarter end, cash and cash equivalents were $20.4 million and there were no borrowings under our revolving credit facility. The cash balance increased compared to last year, mainly due to a temporary decline in inventory and timing of accounts payable reflecting the impact of the fiscal year calendar change, partially offset by share repurchases. We ended the quarter with 47.8 million of consolidated inventories representing a 19.4% decrease compared to the prior year second quarter. July's higher than anticipated sales demand reduced overall inventory levels. As a result, we have been proactively replenishing products and supplies to ensure that we are well-positioned particularly for the key holiday selling season. Capital expenditures totaled $4.1 million for the second quarter of fiscal 2018 and depreciation and amortization was $4 million. Turning to guidance for fiscal 2018, covering the 52 weeks ended February 2, 2019 compared to 53 weeks ended February 3, 2018. We continue to expect total revenue to be in the range of $345 to $355 million. For the remainder of the fiscal year, we expect total revenue to be flat to a slight increase compared to the same unaudited recast period in the fiscal year ended February 3, 2018 excluding the 2.6 million balance of the negative impact of the previously mentioned accounting changes and the revenue from the one extra week included in the recast 2017 fiscal year. Our revenue guidance reflects the expectation that our growth initiatives contribute towards the rest of the year including, a full year double-digit increase in e-commerce as we continue to better leverage our upgraded web platform. Growth in revenue generated from our diversification initiatives including international franchising and commercial sales, inclusive of outbound brand licensing and experiential wholesale. These channels are still expected to have combined growth of approximately 10% on the full-year basis. And on the retail store front, we expect to benefit from additional seasonal and new locations Sharon mentioned earlier. Adjusted for revenue recognition and the impact of one extra week from recast 2017 results, we expect gross margin dollars to increase in the back half of the year with third quarter down and fourth quarter up. In addition, we expect to have a smaller pretax loss in the third quarter compared to the 2017 recast third quarter. We continue to expect GAAP pretax income to be in the range of 8 million to $11.5 million and diluted earnings per share to be in the range of $0.40 to $0.57. As a reminder, 2018 results are reflecting and estimated 3.9 million impact negative impacts due to adoption of the new revenue recognition standard on both total revenue and pretax income. Capital expenditures to be in the range of $15 million to 18 million with depreciation and amortization in the range of $16 million to $17 million. Finally, we expect fiscal 2018 year-end cash balances to be in the range of $25 million to $30 million compared to 21.5 million as of the end of the transition period. This concludes our prepared remarks and we'll now turn the call back over to the operator for questions. Operator?

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

We have a few questions, but Sharon, I'd like to start with the Pay Your Age single day event. Can you just walk us through the logic of how that came to fruition? Was that something that was preplanned and it just happened to be a pretty significant pivot in your business in terms of trend line? Or was that something that was in response to the way the quarter was playing out, knowing that you have this birthday initiative in place to really kind of stimulate the market with single day activation event?

Okay. So as I sort of captured in the remarks, the Count Your Candles program that we envisioned and sort of in fact discussed in the prior earnings release, earnings call about us wanting to reinvigorate our birthday business, there is a big opportunity for us on an ongoing basis drove the idea of a Pay Your Age concept. And the Pay Your Age Day was already had been predetermined as a mechanism to introduce and launch and drive interest and curiosity about the Count Your Candles program that will be ongoing. I think that there is some media that had it flipped the other way that Pay Your Age created Count Your Candles -- but Count Your Candles created Pay your Age. So, we had always had the idea of announcing and introducing and launching what we believe to be a water level changing ongoing promotion of Count Your Candle that put Build-A-Bear back in the top of mind awareness of consumers for high value choice to go to for your birthday, that had always the Pay Your Age deal was to launch that concept. So the -- and the Count Your Candle program is planned for over six months at that point. We've created products for it, specific bears for it, the birthday treat bear was already in store ready to go all the events were around it. So, it really was just a much larger event than we expected. And we used the social media to get a lot of interest in it. There was something about the hook. And we still haven't figured it all out to tell the truth about why this was so appealing to people. But it really did generate a tremendous amount of interest and now has ultimately resulted in as we’ve noted millions of additional people in our Bonus Club membership, which had always been part of the Count Your Candles program if you recall. One of the objectives as building that birthday program was to build our Bonus Club membership after we re-launched it just late last year with in conjunction with the re-launch of the new e-commerce site. Interestingly, of the million plus people that have now come to Build-A-Bear or joined the Bonus Club, there is still 75% of them that has not yet shopped yet or engaging with us in other ways, so we can see a lot of forward-looking potential with this bonus for membership, it's not all about just people trying to get that Pay Your Age deal. We have really reinvigorated an entirely new I could argue generation of consumers in Build-a-Bear.

And Sharon, can you give us a little perspective on roughly over 1 million added to that program, how does that scale relative to your existing database?

Well, our existing database inclusive of the million plus is over 6 million people now.

Okay so it’s pretty sizeable in terms of a contribution of newness, and if we start extrapolating that out is it reasonable to assume -- and maybe this is a question for Vojin, is it reasonable to assume that it is a relative equilateral stratification across the year? We look at 6 million people you can push that across 12 months of the year or is there any reason to believe that there would be some sort of unique seasonality to the activation of the birthday event specifically?

Well, there is a couple of different fronts you know like we have people that join clubs everyday of the year and we do have a lot of historical data that we're analyzing to understand what's the repeat business and how frequently these guests are coming to visit our stores and how frequently they shop. But definitely having information in the larger database helps us in tailoring communications with those specific new members to really drive additional business. And we already ran some numbers and we are pretty optimistic about the potential that this can bring in future months and really over the lifetime value of these new guests that we acquired.

Additionally to that point, the Count Your Candles program again by definition being a program that focuses on the birthday month of the child should -- if it continues at this level will raise the water level because it's equally seasonal. Just saying the number of kids on average born in every single month and that was a part of the beauty of the total program from the beginning.

Yes, I think spot on with what we're thinking in terms of the raises of baseline level of residual traffic.

And again as we noted on the remarks currently the birthday treat bear is the number one bear and it is not the promotion, the promotion cannot be used in conjunction with the voucher.

Okay, that is very helpful. The second question is with respect to the back half. I think Vojin you gave some really good color in terms of the expectations Q3 versus Q4. I just want to make sure we're using the right comparison numbers versus the adjusted to the last year. Can you give us the comparable numbers for Q3 and Q4 that you're referencing when you're talking about gross margins down Q3, up Q4 versus the prior year? And then also on the pretax loss, just give us the comparisons for the prior year, [indiscernible] using that's the right numbers?

So, really, we provided the recast information in the last call by quarter and really the adjustment that we're talking is from the changes in revenue recognition standards. And we anticipate that impact for Q3 to be about $0.5 million for that's the adjustment for Q3 revenue as well as the margin. When we think about Q4, we have a much more sizable impact little bit over $2 million, 2.1 for the revenue recognition impact of the new accounting standard changes as well as the one week from the additional from the transition period. And we are just using one week, one average week during that transition period that we have provided in the past releases. So, I think the revenue impacts about $6 million and you can just look through the other components of the P&L at the same ratio once that will take out.

And final question is just on your full-year guidance, if we assume e-com up double-digits some of the complementary growth initiatives growing from 10% and some of the success you had with your discovery format, new locations, some of the concourse shop now across two different format franchises. How should we think about where you are Sharon in your multiyear plan to really orient the business towards dense areas where families gather, and striking strategic partnerships that really elongates and extend the value of the brand and to new channels? Or do you feel like you are on your broad kind of recasting of the overall business portfolio?

I think on the diversification of the real estate front as it relates to markets where we already operate wherein I think further along with early conversations and in some cases completed deal, but are in the early stages of actually rolling out across the -- maximizing the opportunity with those relationship. As I believe, we have some more few more tourist locations that we can look at and were still transitioning in our mall space as well. As you recall a couple years ago, two years ago we started highlighting the fact that a good portion of our leases were going to be up for renewal over the next few years, and we've been tackling those leases one, one deal at a time getting favorable rent reduction but in some of these malls as our leases keep churning because we are renewing them on short-term two and three years, we may not stay in those locations over the long haul. What they're doing is allowing us to continue to have generate revenue and allows us to leverage while we are reinventing where we believe the biggest opportunities lie on the real estate front. I think we're still in the early stages of being able to optimize from a geographic perspective with international franchising, that's been ongoing as you know long-term process because we needed to rebuild our entire infrastructure and process internally to be able to really take advantage of the fact that as I mentioned on the call that a hug is understood in every language. We're really excited to go out in these two different markets China and India and so to prove our point on that particular aspect very different from the typical Western market, but at least in China we saw it very embrace us from a concept perspective with the very excited franchise to continue to build that and the largest market in the world right now are the largest population in the world and one of the fastest growing market as is India. And then on diversification front, we're still in the early stages of that and so excited about the radio station. I want to make sure that our partners, our investors understand that that is not just about Build-A-Bear having radio station. That is again a part of a vertical process divesting being able to control and managing our communication directly with our consumers, create relationships with other entertainment businesses and companies and personalities and market directly to the moms who will tune in and subscribe to the Build-A-Bear radio on the Dash channel. Great partners -- very excited to be able to do that, but it just gives you a little bit of hint of the kinds of things that we expect to do and the licensing. That takes a long time to build. We've been in a building mode for two years on that. And then all of these categories that I just mentioned to you very few of them are actually sitting on the shelves anywhere right now. So when Vojin talks about the shift in commercial revenue that's because the many of those are not going to hit the shelves until later in '18 and even in '19 for some of those that were mentioned.

Okay last one really quickly. Sharon, if you could just talk about your content strategy. So, we've watched you introduced owned and proprietary brands over the course of the last couple of years even very recently another new brands kind of incubating. Maybe help us think about how large could those brands be? How important are those to your commercial and licensing strategies? And then, how should we think about wrapping those in content maybe as does include the radio station as well to build the storytelling capabilities of the brand?

Well, it does involve the radio station. You're right to link those two together particularly in Honey Girl which is more of a music-based intellectual property. But the combination of Promise Pets, Honey Girls and that Merry Mission which is going to launch in the fall, very excited about that. And now Kabu which has -- frankly we just didn't have time to go into a lot of things that are exciting and happening right now. Our very important tent pole for where we're headed and some of the discussions that we're having from a broader based perspective on the future of the entertainment play with Build-A-Bear. When you think about that Build-A-Bear is really a vertical retailer that has opportunity to partner on the entertainment side in a fresh way, that we can reach directly reach for example 6 million loyalty members with one email. And that's more and more of a fraction -- a fractured in bifurcated media environment that becomes more and more important that you have that ability to reach the consumer the way we want when you want. I mean that's frankly the way they want to be discussed. We have that discussion and engagement and relationships with the brands they love today. So, we're building those venues to be able to communicate and building the entertainment and intellectual platform that they want to engage with. The Kabu for example brand that's the first brand that we've launched not just only in Build-A-Bear with a make your own plush, but in conjunction with an app at the same time a graphic novel at the same time and toys at the same time. So, I mean we're starting to build the capability to build to launch multiple assets simultaneously to breakthrough with the brand. And right now, Kabu doing well, we're very excited that the notes that Kabu we launched it in the middle of the Pay Your Age and voucher the extended vouchers. And it's excluded from the voucher offering, but it's still doing incredibly well, we're very pleased.

[Operator Instructions] As there are no further questions in the queue, I would like to turn the call back to Sharon John for closing remarks. Please go ahead.

Thank you for joining the call this morning. We look forward to meeting with many of you at the upcoming investor conferences including the Goldman Sachs and the CL King conferences that we held in New York in September. Enjoy the Labor Day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.