Build-A-Bear Workshop, Inc. (BBW) Earnings Call Transcript

Greetings, and welcome to the Build-A-Bear Workshop Investor Presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Glen Akselrod, President of Bristol Capital. Thank you. You may begin.

Thank you, Camilla, and thank you, everyone, for joining our webcast today with Build-A-Bear. The purpose of today's presentation is to give our audience a better understanding of the business through a presentation and then questions with management. Just as a reminder, this is not a quarterly earnings call and our purpose today is to give a high-level broad overview of the business. Today's discussion is going to be led by CEO, Sharon John. who is also joined on the call by Voin Todorovic, CFO; and Gary Schnierow, who recently joined the company for Investor Relations of Corporate Finance. Before joining Build-A-Bear, Gary was Director of Research and Senior Analyst for RiverPark Funds. And like many of you followed the company as an investor, Gary is happy to hold any follow-up calls from investors. You should see the presentation and the webcast. If you'd like a copy simply e-mail me at glen@bristolir.com, we'll break for questions at the end of the formal presentation. When we do break, we do encourage those questions. As a reminder, we're only taking questions through the web portal. If you're listening over the phone, please access the web link that we sent earlier today to ask a question. You could submit a question using the text box within the portal at any time. I'll ask the questions on the air for everyone to hear and then Sharon or Voin will answer. I'm not going to reference any names, but simply read the questions asked. As we have a fairly large audience today, if I get to your questions online in time and has not yet been addressed during the call and can be, I'll come back to you by e-mail. I'm not going to read the forward-looking statements, but I do state they do apply, please read them when you have time, and I reference them on Page 2 of this PowerPoint. With that said, once again, thank you for joining us. Remember, this is fairly informal, and we do encourage questions to help you better understand the business and its growth path. And now I'll turn the call over to Sharon to start her part of the discussion and presentation.

Thank you, Glen. Appreciate it. Thanks for everybody being here today. We wanted to provide you with some updates on Build-A-Bear and where we are, and give you a little bit background for those that are new to the story and maybe some news for those that are fairly familiar. First of all, I think that if you look at Page 4, that's where we're starting. We have been around for a while since 1997. We just celebrated our 25th anniversary. And for some of you who may have kids at the time or maybe were kids at the time, we were widely considered to be a pioneer and experiential retail for kids. At that time, we were mostly mall-based, that's where a lot of retail was, that's where the growth area was. And we are a vertical retailer that what we've been doing over the past decade, since Voin and I joined the company, is pivoting to become a branded intellectual property company that monetizes the strong equity that we built through that one-to-one experience through multiple channels in multiple categories against an expanded consumer base, even extending into content. Because we mean so much to people that broader ways than the way you might initially consider, which is just in the form of a fuzzy teddy bear. We evoke memories and have tremendous relationships with our guests over time. Our recent results have been a reflection of some of the changes, the fundamental changes that we've been making in the company. Whether those changes are, again, that evolution of the brand, recognizing that the workshop, as we call it, is just one extension of who we are as a company, but that we can create value in other revenue streams. And we also accelerated a lot of those activities during the COVID time period in 2020, although that was a very difficult time for a lot of other people for us as well. But it served as a catalyst for us to actually prepare ourselves and be a little more assertive in areas of opportunity, particularly e-com. And that had helped us from an enabling perspective to post in 2021 and 2022 our most profitable years in the history of the company. This would have mean that those 2 consecutive years of record-breaking profitability there. And then in the first quarter of '23, which we just announced [ last month ], represents 9 consecutive quarters of year-over-year growth. And at that first quarter call, we also reiterated our guidance that we provided at the end of the fiscal year in 2021 and reiterating it here today. Still feel very confident about the 5% to 7% on the top line growth and a 10% to 15% pretax expansion. From Snapshot, just a little bit by the numbers because it's just a fun way to get to know a company or a brand. But we're surpassed now $225 million Furry Friends sold since we started. That's a big number when you compare it to almost anything else that you might consider big, whether that's publishing or music or anything like that, what's considered meaningful, what's considered breakthrough from an iconic perspective. We're in that space. And thus we get to the aided brand awareness of over 90%. It has tremendous amounts of first-party data through our loyalty memberships, our data contacts, our social media followers, over $20 million. And in fact, our loyalty membership is -- has about an 85%, 86% capture rates when they come into our stores. And those stores generate over 15 million people crossing that lease line every single year. Now those are not all individual parties. Those would be -- since we have often parties of 3 and 4 that come in at once because this is often a family experience but that access -- direct access to our consumers to share information with them, provide them with update to -- provide them with offers and send them on journeys associated with our much more advanced sales force and enabled e-commerce has been really a great opportunity for us to grow this business. We now have about 500 what we call experience locations around the world with multiple business models. And we have evolved our footprint of those locations to now have 35% of those outside of traditional malls. We are proud to say of the -- of the stores that we operate, 100%, virtually 100% of those are profitable. We've shifted that consumer base to 40% being to teens and adults. It's remarkable that over 80% or around 80% of our visits are planned in advance to those stores. So to put that into kind of easy to remember terms, people are going to Build-A-Bear and sometimes they end up in a mall. They're not necessarily going to the mall and they end up in Build-A-Bear. So we're -- that puts us in a very strong position when you think about the relationship with our landlords because we create that traffic. We've had a lot of growth in our digital demand given some of these efforts that I mentioned. And we're very proud of our associates who create that experience for people every single day. Some key considerations then. Based on that data and based on our current business trajectory and expectations is this brand power that I'm speaking of and that access to those consumers really does represent significant monetizable opportunities. We are trusted. We're iconic. We are all about personalization and shareable experiences. That shareability piece is important because in today's -- today's market of social media, where the type of brand and experience that people want to photograph and then amplify. So we have people in our brand that love Build-A-Bear that are enthusiast collectors want to provide Build-A-Bear as a gift. And what you may not know is you can also record your voice. So this one-to-one experience for multiple generations spanning a lot of age base and demographics, lots of socioeconomic strata gives us a wide net on whom we are able to appeal -- to whom we are able to appeal. We believe now, again, given our consistency of delivering results at this point that this is a proven strategy and that this dynamic and diversified business model is -- has prepared us for a bright future. And we are now not in the process of seeking out that strategy. We're in the process of continuing to drive towards the execution and advancement of that strategy. We're multichannel, we're vertical from that experience location perspective with a variety of formats that can go into numerous types of locations with a lot of different business models that are profitable to us. Those opportunities are important because they create that one-to-one relationship, but it doesn't mean that our e-commerce that's not, of course, physical in its experience is not a critical piece of that circle of value that we're creating for our guests -- in fact, our older consumers over-index on that e-commerce side. But the advancement of our digital capabilities has been a key unlock for us in that area. Number 3, that strength and momentum is enabling us to make the right kinds of investments to support those initiatives and continue that growth objective. And we do believe that Build-A-Bear is in a unique competitive position. There's really not another Build-A-Bear. There's nothing quite like us. And particularly in the North American market with that kind of brand awareness and the affinity as well as the U.K. where we believe that we've been comparatively unrecognized from a market perspective in -- from a stock market perspective. So the data behind the thought process that we believe Build-A-Bear is beloved is across consumers, brands and [ interim ] data. This is a nice snapshot of some of the types of words that crop up in our proprietary research, the brand awareness that we have, the purchase consideration, another data point that's not on this page that we've mentioned in the past. 90% of moms believe that Build-A-Bear is fun for their child. And interestingly, because up to 1/3 of our business is associated with birthday. We have a remarkably balanced seasonality. I know it's easy to believe that, oh, Build-A-Bear is a toy company. Oh, they're mall-based kid's toy company. Of course, we're going to have this super high price in the fourth quarter. But although we do see an increase there, that birthday party business and the birth date of 1 associated with our Count Your Candles program, which is our #1 program to bring in new guests, has been incredibly important to us, and it does balance out our business model. These consumers, for the most part, are also highly coveted and quite stable. So there, we have a cross -- as I noticed, cross generation, which provides some information on that on how we break down. These households tend to not only have children, but they're stable from an economic perspective, they can have a little higher education than the average. And now as I mentioned, we're really building that relationship with teens and adults in a way that we hadn't before. And because of Build-A-Bear's popularity, we end up in pop culture all the time, and we call it this iconic status that we have. We have generated billions of impressions, and we do that every single year. In fact, last year, we generated over $3 billion median PR impressions. And most of that is basically pass along or us being engaged in top culture television programming or movies Build-A-Bear is often mentioned. And that power that we have stretched into the relationships that we create with a lot of leading brands. We do a lot of collaborations is what we call them and co-brands. And this piece of the strategy has been important to us in the kids area for a long time, particularly when the film business was such an important part of driving the Build-A-Bear business each year. But now that's the big unlock for us as it relates to some of the older consumers, the collectible business, things like, Ted Lasso Bear or The FRIENDS collection in one of our micro sites, for example, called the Beary Fairy, helps us drive incremental sales beyond the type of sales that we may have had in the traditional format. So that proven business strategy, to give you just a snapshot of how that works from sort of a value creation circle is, we do put the consumer in the middle. We believe that those experiences, which are at the core and the heart of what we are, still, in many ways, is that first relationship. That first relationship, though, what we're doing at that point, again, is gathering that consumer data, and we're often expressing to the consumer, what might be their next engagement with Build-A-Bear, those next engagements are in a growing manner coming through, again, different categories, outbound licensing from bike to pet toys, our content creation, which then puts the brand back top of mind and once it encourages the consumer to come back and have the experience. The second time it could be in story could be online, but it's still that experience. And underneath is that foundation that we've been building for the past few years for us that be strong and nimble and diversified to be able to continue to grow. On Page 15, you see a little bit about how that dynamic business model gives us both consumer access and more business control -- more ability to manage our business to manage and deliver that profitability. And it also gives us that ability to speak directly to the consumer and have that one-to-one relationship, not just in the stores but post the store purchase. As we move into the future, we expect to continue to diversify those experiences and business models. We also believe that the transformed digital capabilities that we've executed over the past few years that we're still in the early stages of optimizing a lot of those opportunities. And we also believe that we're still in some early stages of optimizing a lot of consumer and category expansion, namely gifting. Although we've done a lot of research, and we know that gifting is highly regarded from Build-A-Bear by a consumer base for us. From the experience location perspective, to give you a sense of where we believe we can continue to grow and diversify is, we do have award-winning concepts with a 25% 4-wall average contribution margin. And those are -- as I noted, we're more and more in places that you wouldn't have considered us to be in 25 years ago. So yes, we still have a footprint in traditional malls, but we have expanded beyond that. And I noticed the 50 million guests that come through and all of the different flexibility that we have to take advantage of and be in places like Great Wolf Lodge or Carnival Cruise lines are not very farm or a recent expansion to the Six Flags or the NFL Hall of Fame. So many places where consumers want to create memories and go for fun and entertainment, all the way to airports where we're now available in customs or in vending machines, what we call Automatic Teddy Machines or ATM. We now have such a variety of toolboxes of ways to get in trust consumers in different ways for different reasons. It gives us a lot of expansion opportunity. And that fits part and parcel with the e-commerce growth because e-commerce tends to be for different consumers to older consumers for different reasons. So that makes our e-commerce business additive, incremental for the most part, even though those consumers -- the value and the lifetime value of that consumer goes up when they go to both the e-comm and online. But you get a sense of the primary and secondary approach and why we're -- how we're building this out from an incrementality perspective, on Page 19. And on Page 20, the different microsites and the diversification even of our website on how we're building out different channels with different products, for different reasons, for different consumers, which, again, can drive toward an incremental strategy instead of a cannibalistic strategy for our future. The next unlock, and I alluded to this earlier, is the optimization of many of the tools that we've put in place to drive that digital business. And to continue to expand mine and build on our loyalty program using our first-party data, which is so valuable to us. And with that, we've seen significant growth there, but we do believe the more journeys that we build out for specific occasions that are meeting the needs of specific consumers for specific regions, which we're now capable of doing, much of which is due to a lot of our investments, our recent investment is still in its infancy stage. So across the board, we feel like we have continued opportunity with the expanded consumer base, so our broader addressable market, continued opportunity with an expanded category base, for example, expansion into gifting and collectibles and continued opportunity even in our core business, which would have been better for retail by having all of the different models and understanding how to operate them profitably, which we've proven, I think, with a pretty broad success. With that, I'll turn it over to Voin to go through the financial snapshot.

Thanks, Sharon. And as we pointed out throughout the presentation, all of our strategic initiatives and execution has resulted in the -- for 2022 to be the most profitable year in the Build-A-Bear Workshop's history. And that's on top of previous record high in 2021. So we reported about $468 million in revenue, about 14% growth versus 2021. About $62 million in pretax income, again, $11 million more than what we did in '21. Strong gross profit margins of 52.5%, and we finished the year with a healthy balance sheet and solid cash position. And again, that's not the end. We continued the strong momentum in fiscal '23. In Q1 of '23, we delivered the highest revenue, pretax income and EBITDA in company's history for Q1. Thus we guided and reaffirmed our guidance on our Q1 call that we expect our total revenue to grow on a full year basis of 5% to 7%. This year reflects a benefit of an extra week that we called out of about $7 million. We expect to see growth in all of our operating segments. We expect to continue to improve our profitability and drive pretax income growth 10% to 15% compared to previous record high 2022. And the way we are going to do that, we are expecting to open additional locations, 20 to 30 experienced locations, combination of third-party retail locations and company-managed locations. Our CapEx guidance is about $15 million to $20 million. We expect our $13 million to $14 million in D&A. And we are assuming about 25% tax rate, excluding discrete items. So if you just do the math, like we still expect to generate significant free cash flow in 2023. One thing just to point out, as you know, some of the investors on the call may be new to the story, but I think this slide shows really the successful turnaround that we have achieved as the organization over the last decade or so. Some of these strong results in revenue. Again, you can see it's almost $100 million more in revenue versus a decade ago on a full fiscal year basis. About $100 million swing in EBITDA profitability over that same time frame. As Sharon pointed out on digital transformation, we grew significantly our best demand, our digital demand as a percentage of total retail sales from about 4% to 15% as our retail businesses continue to grow. So we are proud of some of those achievements. The improved profitability of our stores and basically now 100% of our stores in North America are profitable compared to about 80% in 2012. And what's even more remarkable contribution margin, this is formal contribution in these locations was less than 10% in 2012, and it was over 25% on average in 2022. As a company, we have done a great job, diversifying our real estate portfolio. And we have now more than 1/3 of our locations in nontraditional malls compared to -- that was only about 12% a decade ago. And as people continue to come and experience Build-A-Bear, we have been able to drive the overall ticket value from just north of $35 to over $50 in 2022. The experienced management team was able to drive these results. Most of us came from multibillion-dollar organizations, and we are happy to be on this journey and continue to look forward to what Build-A-Bear has to do ahead of us. And in addition to just really managing things that from the business side, we have continued focus on shareholder returns. Over the last couple of years, we returned over $80 million to our shareholders in the form of special dividends and share repurchases. We continue to stay focused on this initiative. And as of last week we had about $36 million available under the current $50 million stock repurchase program that our Board authorized in August of 2022. And with that, I'll pass it on to Sharon for some closing comments.

Yes. So just in closing, to reiterate, we have a proven, well-known beloved brand, and we believe that it is tasked with value and equity that is just now where we're in a position to really start to monetize that equity. It appeals to a broad range of consumers. It translates across multiple categories, and it is right for expansion and even from -- both in a physical and a digital environment. And that expansion not only includes new formats, new locations, but also globally. We believe that the business strategy that we identified a few years ago has now proven itself with enough data points and enough consistency that there is a belief structure beyond -- behind what we're doing and believe that we can continue to invest in that model. And not only does it provide us a runway for potential growth, it also is a much more relevant and diversified model in today's environment with a lot more opportunity on the digital side, which participation in that digital economy, clearly critical. The business strength and momentum also gives us a lot of confidence in that position. And we also have completed some proprietary research that gives us confidence in the continued investment in a lot of those highlighted objectives that we've outlined. And we still do truly believe in Build-A-Bear's unique competitive positioning and believe that, that does provide us an opportunity to continue to build this business and drive the Build-A-Bear brand into new and fresh way. Glen?

Perfect. Thank you very much for that, Sharon and Voin. [Operator Instructions] We do have quite a few questions in the queue, guys, already. Some of them touch on some of the points that you already covered, but maybe we'll expand on those points, and I'll just get going. So the first question is, has the in-store experience been elevated or improved over time? And can it be made even more engaging in fun in the future?

We have involved the in-store experience to some degree from the -- over the last 10 years, we've actually changed it fairly. I wouldn't call it significantly, but definitely have evolved it. When we launched the new store format some years ago, we actually went through a time in -- like a time and action research to understand where consumers are spending time, how long they spend in each of the areas, what can we do to engage them further and drive some of the dollars per transaction results that you saw. Also from an in-store perspective, that -- some of that research changed the way we marketed products and showed products because showing them in an entire story also evolve the units per transaction as a part of the purchase. So there's a lot of things that we've done, not only in -- for the experiences directly to the consumer and how our Build-A-Bear builders interact, but how we could improve the DPT, the UPT as a result of that. We also launched and created a brand-new stuffers to get super detailed that allow us to push through the consumers in a little more rapid pace. We're still in a situation have been and remain to be particularly on weekends where we have lines out the door. I don't know if you guys have been to a Build-A-Bear lately. But improving our throughput, if you will, at the store level is actually a really important part of how we've been able to drive some of the business as well. On a really sort of softer side of all of that, I'll add that as we've changed some of our strategy with our licenses and we've launched some of our own intellectual property, we have created some latitude on the heart ceremony and often we make them very brand-specific. So they're even that much more memorable and sometimes a little bit different for the consumer based on what character that they're buying, and we get a lot of positive feedback from that.

Super. Thank you for that. Next question. You mentioned that you've sold approximately $225 million in Furry Friends since inception. Could you please share what that number was last year and what the trend has been lately?

So we haven't provided specific numbers around how many bears we sell every year, but people can back into those numbers $225 million over the last 25 years. Clearly, some of our record revenue results, we are selling more of the bears than we had in the past. And based on the guidance that we are providing, we are expecting to sell more units than what we had in the previous year, and the goal is really to continue to create those great experiences in our stores on a global basis.

Yes. We wanted to -- that was a moment in time on our 25th anniversary, we wanted to provide a data point of how many Furry Friends we've provided to guests around the world since inception.

Our franchise is about 17% of your total locations, and would you consider ramping up that percentage to increased locations without minimal capacity outlay?

I mean, we believe that we are not oversaturated from the store count perspective, both domestically or internationally. And we are looking at ways to expand locations. As I mentioned, we are -- we guided that we are adding 20 to 30 new locations, combinations of third-party retail locations that are assets like for us, this is a relationship with our partners that they buy from us on a wholesale basis, they invest capital, they get the retail revenue, we report wholesale revenue that goes through our commercial segment. We train their resources. That's the model that we like. And like in a lot of cases, that makes sense, that's probably the perfect model when you think about Carnival Cruise Line because we probably would never have bear builders on the shifts 24/7. But those are kind of things that we continue to look at different opportunities. We just signed a month or so ago a new deal with Kalahari Resorts, and we opened 4 locations there. So definitely there's a growth opportunity for us. But again, we want to be in more locations. We are agnostic as it's going to be [ hired, owned ] or third-party retail locations, but definitely from the capital perspective, this has benefited if we open more of these asset-light type of locations.

Yes. I would also just add that I mentioned this proprietary research that we've recently fielded on testing some hypotheses and some of our current strategy. In fact, one of the top reasons why of those that want to go to Build-A-Bear, reasons why they haven't gone or haven't returned is because we're more than 30 minutes away. In fact, some of the data that we've calculated, more than 40% of U.S. households are still greater than 30 minutes away from a Build-A-Bear. And so we do feel like based on the raw data as well as the research results that, that does support the idea that we -- we still want to be a special experience in a special location. We won't expect to be on every corner. But we do have some growth opportunity still in the U.S., again, and not to mention the international expansion. We, for example, do not have a location on Continental Europe.

I think that in your last series of answers, you may have already answered this question, but I'm going to ask it in case there's anything else you want to add to it. So aside from opening more outlets and more licenses, what are the best opportunities for growth?

I mean what we talked about like we expect our e-comm business to grow and especially the gifting in the gifting arena. We've been working on some of different initiatives like what you can find on our website, a hard box where you can get curated. Product for different occasions. We are looking at maybe even expanding some categories. We've been testing some pajamas and some apparel like on our website, that just the natural extensions of the brand really to engage and drive value and monetize the first-party data that we collect from our guests. And really expand that engagement with them beyond just plush. So we believe gifting and e-commerce is a big business for us. But again, we still said that the growth from the retail perspective is important. And when we also -- one of the things that we are making some investments and we shared it in the past is from the entertainment perspective and really getting some content that should help us to really elevate the brand and continue to raise more brand awareness, more marketing and elevate some of those properties that being a vertical retailer -- sold for our retail locations, but that doesn't mean that they could be sold in other retail locations around the country and around the world.

When you think about the size of the gifting category, and depends on what source you look at, but often multi-hundred billion dollar type of category. And just a massive category, again, depending on what you're putting in there. And Build-A-Bear, again, in this research that we feel it was considered to be a really great gift option not just for -- from adults to kids, not just the kids to kids, but adults to adults because of that trend in personalization and [ kidolsing ]. And we believe that we are well positioned to take advantage of even the garnering of a small segment of the gifting category, which is very robust and would be a great benefit for the brand and the business.

Next question. Your average dollar per transaction seems key. How much of this is mix driven versus price increases? And how does the team view elasticity of demand?

What we have done, driving that from $35 to over $50 over the last decade or so is the combination of a few things. Some of that's pricing the other piece of that unit per transaction. So what we have been able to do as people come to our stores, they are buying more at higher prices, which is a win in both ways. And the way we do that is by selling more integrated marketing stories and like with some of this intellectual property like, for example, Honey Girls. Honey Girls, then you know, it's -- we had a movie that's still showing on Netflix that premiere, I think, last year. Still, the dollar per transaction, those products is over $100. So we continue to drive the engagement with our guests when they come, and so that we can continue to drive that pace. At the same time, we want to make sure that when people come to Build-A-Bear that it can be affordable. We still have pay rates program through our counter P&Ls, bear, birthday bear. So it's one bear that you can buy if the child is celebrating their third birthday for $3. And so definitely from the mix perspective as this is like one of our biggest acquisition tool of new guests like that's hurting that dollar per transaction. But like from the lifetime value of that guest, we are definitely pleased to -- these guests into the brand as early as possible. So when you think about price elasticity on the lower end, we still -- we want to ensure that we have the right entry-level price point but we have much more flexibility as we are servicing our affinity and collector guests. And so when we have some of the products that is [ sharing ] on a payout scale or some of the affinity products, they go for much higher price points because there is less price sensitivity over there.

A couple of questions on technology. So first one is, what is your strategy around technology as it relates to developing an app for customers? Also what have been the most successful initiatives that helped the brand bring back repeat customers?

So I mean, there is a lot in there. The technology is one of the key aspects of our turnaround. And we've been talking about digital transformation for the last several years, and like I'll start like with a few things and then probably miss some and maybe Sharon can add a couple more. But one of the things that's really helped was our partnership with Salesforce and really focusing our engagement to our website. And that's like we grew from about 4% to nearly 20% of our business that was generated through online channels. And that's been very important for us, especially during COVID years. As we engage with our guests and really using data to drive our business decisions and product mix and assortment being invested in a new loyalty platform over the last couple of years really to drive that engagement to drive customer journeys to really service those guests in a way that they want to be serviced and really to cater into the product and incentives that appeal to them in the most lucrative way. Same thing like we continue to make investments in our infrastructure, both from the corporate perspective, investing in back-office systems to really drive and help drive some of the margin expansions and things that we have been able to achieve over the last decade. But at the same time, we are just in the midst of updating our POS systems in stores. And because, again, that's critical for us to continue to engage with our guests in stores and to collect as much data because that first-party data that we are able to collect through our registers and our store teams, it is incredible value for us. And like this, we are continuing to find ways to monetize. Over time, we made some changes to our warehouse management system and being more efficient from fulfillment, especially as that online businesses quadrupled over the last several years. So again, this technology keeps changing. We continue to find ways to stay relevant and like every so often you -- I mean, even after you are done with all the upgrades that before you know you have to upgrade things again and technology is changing. But we tend to stay focused on those things because we believe in those investments, that's definitely reflected in the results that we were able to achieve. And we are also very cognizant of our SG&A management and all the software as a service and our capital that we are spending. So definitely we are trying to find the right balance by staying relevant from the technology perspective, but at the same time, making sure that we can maximize opportunities. Anything, Sharon, you would like to add?