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…

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…

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…

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.