Greetings and welcome to the Build-A-Bear Workshop First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 first quarter 2020 performance as well as our positioning and actions in response to the COVID-19 pandemic. After, Voin will review the financials in more detail. We will then open the call to take your questions. [Operator Instructions] Members of the media who may be on our call today should contact us after this conference call with their 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. A replay of both our call and webcast will be available later today on the IR site. The COVID-19 pandemic continues to have a significant impact on our operations, cash flow and financial position. The uncertain and dynamic nature of current conditions and its ongoing impact could materially alter our outlook. I will remind everyone that forward-looking statements are inherently subject to risks 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. And now I would like to turn the call over to Sharon.

Good morning. Thanks for joining us today. I would like to update you on the current status of our business and our plans for the coming months. As you are well aware, globally, COVID-19 has disrupted the way families, friends and colleagues interact with each other, including how they shop and what they do for entertainment. This has significantly impacted not only our business, but the global economy overall. However, we believe that Build-a-Bear is well positioned to both manage through this crisis and to emerge for future growth as we work to accelerate strategic changes that have been previously initiated. In fact, as we've consistently shared, we've been executing a strategy to build on our brand strength and diversify our retail channel, expand digitally and add incremental profitable revenue streams. Our goal has been to leverage the synergy between retail and intellectual property initiatives to profitably grow the entire business. We have been methodically upgrading systems, adding talent and aggressively managing change within the organization given the backdrop of a rapidly evolving retail, consumer and geopolitical environment. That fluidity and flexibility has never been more relevant than in the circumstances that we currently face. In addition to a sound strategy, upgraded foundation and enhanced infrastructure, on the onset of the pandemic, we were in a positive cash position with no borrowings on our credit facility. We believe that our strategic repositioning that has been underway will be vital to surviving and ultimately thriving in the new world normal. Our advantages include our powerful brand with high-consumer awareness and affinity; a passionate and engaged consumer base with over 8 million accounts opted in for marketing communications; high optionality on our retail store portfolio with over 70% of leases up for renewal in the next 3 years; a rapidly growing e-commerce…

Thanks, Sharon, and good morning, everyone. I would also like to start by thanking our team and their dedication to our company throughout this challenging period. Not only have they dealt with the store closures, our headquarter associates transitioned to a full work-from-home model and our warehouse employees have worked feverishly to modify processes and fulfill our web orders at record levels. With the reopening of approximately 35 locations, we have begun to welcome back some store employees who were furloughed. I'm proud of how our team has managed thus far through this time. As Sharon mentioned, the first quarter ended very differently than it began. At the start of the year, we expected to report profitability above 2019. And at the time of our last earnings call, we were aligned with that goal. That said, with the spread of the coronavirus, we made the difficult decision to temporarily close all of our stores starting on March 18. At the same time, we implemented several initiatives to provide financial flexibility to manage through this crisis while evolving our business to further capitalize on and expand our omnichannel capabilities to meet the needs of our guests. As it relates to containing costs and as previously announced during the first quarter, we took several actions, including furloughing over 90% of our employees and reducing compensation by 20% for all employees not on temporary leave, including our executive officers. We also eliminated the annual cash retainers for all nonemployee directors serving on the Board of the first -- for the first quarter. In addition, we delayed full payment of bonuses earned by executive officers for fiscal 2019 and 80% of such bonuses for associates as well as delayed the payment of our contribution to our 401(k) plan, as we shared in 8-K filed…

[Operator Instructions] Our first question comes from the line of Eric Beder with SCC Research.

When you look at -- so the online business has been really strong, higher margin. When you look at it going forward, I know it's been under 10%, where do you think it needs to go longer term? And how do you look at the potential for savings by doing buy online, ship from store in terms of allowing you to be more productive?

Yes. Great question, Eric. I hope you're doing well. I'll start with a little bit of -- set the stage and then Voin may have some additional comments on this. Of course, this year, we'll probably have our largest e-commerce share in our history, and it is likely to be a much larger percentage as a total percent of revenue. But that's obviously an unusual circumstance on a lower base. So with that being said, I just want to be cautious of how much we overstate the future sales -- e-com sales as a percent of total business for this year. But what -- if there's a silver lining in this, I think that, as I noted in my remarks, it had identified and shine the light on a much broader opportunity, even though we sort of innately knew that we had an e-commerce -- we had some e-commerce runway. It's much greater than, I believe, that we had anticipated. And this has accelerated our advancement of a lot of things that has been in the queue for us to do from a digital transformation perspective. And in this odd way, because the stores were closed, we shifted all of our IT focus, our creative focus on driving those e-commerce sales and unlocked a lot of potential there as we look forward. And yes, the buy online, ship from store could be a key component of that when you -- we've talked about this before, the creation of 200, 300 tiny warehouses scattered all over the country, and that's ultimately what our stores could become and services thus in many ways. One, from a labor perspective, labor utilization perspective, even if traffic might go down a little bit, we can shoot those orders out and have our Bear Builders work on fulfillment. Additionally, with the next phase of technology, we will be able to shift the product to the stores with the right approximation to the delivery space. So it could even decrease our delivery dates and stretch out certain gift-giving time periods to adding 2, 3, 4 more days on to time periods that we would otherwise have to cut off deliveries, which could be significant volume for us, particularly during Christmas. So Voin?

I mean I think you cover it really well. And we continue to make investments, as we said, in our partnership with Salesforce to really continue to make strong investments and continuous investments in this channel as there is a big opportunity. We do have really strong margins in this particular channel. As I mentioned earlier, we do have a business model where our web business really has a low return rate as well as we are not very promotional. So we continue to drive some of those initiatives because we believe this is going to be the future as we continue to work with Salesforce suite of services and different clouds that have been implemented really to help drive some of these things that Sharon has been talking about to really make the omnichannel experience and that our guests are going to be able to really shop both online and in stores. And some of those capabilities are still being in early stages and some of them are going to be coming on as we continue to open most of our fleet.

Great. And just for a follow-up, do all the stores work in this new world of spacing and different types of formats, other pieces? Do all these stores still make sense in terms of -- I'm not a store, but in terms of like can they physically work in terms of providing a healthy experience for a grandson and a grandfather going out to get a bear per se?

Also a great question, Eric. We started this process within days of the shutdown recognizing that the new world would be very different and that we have, unlike a lot of retailers, which generally is a competitive advantage for us, a very interactive engaging experience. So we started building and testing processes to assure that we were meeting CDC and governmental standards early on. And of course, we went through the wide variety of formats that we had to be able to do that. And the key, Eric, is one, of course, in each location, there -- we will be following the recommendations on sanitation and enhancing all that sanitation. So that is going to happen no matter what the footprint and format is. Secondly, all of the distancing processes that you talk about and of course the use of masks where it's -- our associates will always wear masks, but they are expected to always wear masks. And we will be following the individual municipality guidelines for guests in those areas or malls or whatever the recommendations may be. But the key is it's going to be managing and minimizing how many people go into a location. That's how you maintain the social distancing. So we've made it as Build-A-Bear friendly as possible so our -- the masks for our associates actually is a bear muzzle, who's always smiling. And we have our social distancing signage is very friendly, but also the 6-foot differentiation that people need to maintain is marked on the floor by bear paws. So it's easier for us to guide children through this process. And even some of these high-touch experiences like how you go through the Stuffing Station process. We have a place where the consumer can place the bear, step away, the Bear Builder steps up and gets the bear, stuff the bear. And they go through the same process, but over 6 feet apart. And most of our -- which we were very happy to know and I wouldn't have been able to tell you this beforehand, the cords on our stuffing pedal are 6 feet long. So we actually have pulled them far away from the Stuffing Station. And in most of our locations, the child or the child at heart can still step on that stuffing pedal and stuff the bear 6 feet away from the Stuffing Station.

[Operator Instructions] Our next question comes from the line of Steph Wissink with Jefferies.

Voin, I have just a few housekeeping questions and then, Sharon, a couple bigger picture questions for you. So Voin, if we could just start. You mentioned in your prepared remarks that you had occupancy costs essentially carried in your P&L for 13 weeks, although you didn't necessarily pay cash rent in April. So can you just remind us you're expensing a full quarter of rent costs that didn't actually pay. So just help us tie together those comments. And then I think you also mentioned that with respect to your furloughed employees, you had some expenses related to personnel that will be reimbursed. And I'm just curious if that is a reimbursement effect that will come in the second quarter or if you take an accrual for that reimbursement in Q1.

Steph, thanks for the question. First, as we talk about the occupancy expense, yes, from the P&L perspective, we recognized 13 weeks of expense in the quarter. We did fully paid February and March rent in the quarter. We did not pay the April rent as of the end of the Q1. We are in discussions with our landlords, as I mentioned, as we are working on a variety of different solutions from both abatement, deferral and also extending or changing some of the terms on the existing leases, and we will continue to work with them really to navigate through this challenging time and really have the occupancy structure that does make sense for our business on a long-term basis. In addition to that, when we think about the government programs and some of the reimbursements that we have, we did pay our furloughed employees in different jurisdictions, some of that's outside of the North America. And the local governments are reimbursing us for some of those costs as a result of COVID-19 situation. We also have applied for the employee retention credit program with the U.S. government, and some of those monies are expected to come in second quarter or later in the year. But we did recognize some of the receivables as we expect to get that cash, and some of that has already come after the second quarter.

Okay. That's very helpful. And then, Sharon, my two questions for you. One is just related to a prior question. If you think about the post-COVID or new normal experience in your stores with distancing and other measures of safety, how do you think about the throughput of your stores into the future? If we're operating in a more constrained volume basis over the next couple of years, does that change the way you think arithmetically about your store performance and overall fleet? Does it change the mathematics of the number of stores that you need? How should we be thinking about the fleet performance separate from e-commerce?

Yes. Stephanie, that's a multimillion-dollar question. But the challenge right now is -- as we both closed our prepared remarks is just incredible amount of uncertainty on what will the traffic be, how will -- how can we manage this throughput, how long will these procedures and recommended changes last? In its current form, clearly, our throughput is likely to be less even if the demand was there simply because of how long it takes people to go through the process and the fact that in some of our stores, we may have one [ cash rep ] closed down or a Name Me station closed down because of social distancing guidelines. I think we're going to have to watch all of that very closely and at the same time, drive and build the capabilities on our e-commerce business and understand the value of taking our CRM to the next level, particularly with a lot of these -- with this relationship that we've created with Salesforce that we announced at the end of the year because that customer relationship management and the 360 consumer approach provides us with both additional ways to engage with the consumer, but it gives us a venue to remind that consumer of additional reasons to think of Build-A-Bear, particularly from affinity products and gift-giving products. So while the stores will, we believe, remain an important part of why you create the affinity and the love for the brand and -- from the beginning, once you've created that relationship with our brand by going through the process, you -- at least in our recent experience, the online engagement and the approach that we have online is apparently incredibly satisfying for people as well when they want their Build-A-Bear and they want a new furry friend or…

Okay. That's helpful. And then my last question is just with respect to the success you've had not once but twice now with The Mandalorian and the Child. Does that also reshaped the types of brands and properties and events and that affinity audience that you think about in terms of expanding the TAM? Are there other opportunities like that in the pipeline, whether it's through licensing or through your own brand creation that you could create a much more robust offering online only for big key milestone or tent-pole events in entertainment or other areas that you've learned now through this experience that there is an affinity customer and an audience for your brand in that form factor?

Well, we already knew there was an affinity customer and audience. And that affinity customer was very robust and growing and willing to buy our products online. We significantly over index with our adult consumer and our gift-giving consumer on e-commerce in the -- as we -- in the past, and now it would be even more so if we'd ran those -- that specific data, I'm sure. And we learned that through a number of Star Wars products, our Pokémon line where on any given quarter, over 60%, 70% of those, sometimes those particular items are going to be in the 12-plus age range. And when I say 12 plus, I don't mean 13. I mean 20-something, 30-something that are engaged in the brand. You might -- I mean it's hard sometimes to continue to remember that Build-A-Bear now has been around over 20 years, and we mean something to that consumer base that grew up with both those brands and our brand. So the mash-up of those 2 beloved characters, whether it's the affinity for certain Pokémon -- a Pikachu, let's say, but in the Build-A-Bear form takes a special meaning for people that's beyond what a Pikachu in a different form. And so yes, the child is a perfect example of a lot of different elements coming together at the same time that proves this point in a really powerful way. The demand of the child would not have been -- we would not have been able to predict the significant demand of this. I think we've noted on the last call, even, we had well over 0.25 million people sign up for notification when the child was going to be available. So just that type of raw sheer volume, much of which was not a part of our Build-A-Bear family, is of great benefit, as you might imagine, now and moving forward. Additionally, during this time frame, we had Scooby Doo launch, which was also -- had significant success. As well as the Stitch launch, also another Disney property, a Warner Brothers' property with Scooby Doo and then Stitch, a Disney property. And so it was -- we definitely unlocked something here that is of significant potential. I want to give the IT team and the marketing team and warehouse guys a little bit of credit here. They -- within weeks, they put in the virtual waiting room, so we could manage this demand. And we also put -- like you might get -- when you're buying a concert ticket because there was so much of a crush -- of request to purchase these products. And we were also able to put in a chat bot to help our guest services team manage the enormous volume of questions and comments and requests on the timing of their order and delivery. So those 2 assets now will allow us to drive a lot of I guess, what we call, concentrated volume in these types of items.

We have no further questions at this time. Ms. John, I would now like to turn the floor back over to you for closing comments.

Thank you so much and thanks, everybody, for joining us today. We look forward to providing further updates on our next call following second quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.