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Greetings, and welcome to the Build-a-Bear Workshop First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Gary Schnierow, Build-A-Bear, Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Build-a-Bear's First Quarter 2024 Earnings Conference Call. With us today are Build-a-Bear's CEO Sharon Price John; and CFO, Voin Todorovic. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the Risk Factors section. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website. And now, I'll turn the call over to Sharon.

Thank you, Gary. Good morning, and thanks for joining us for Build-A-Bear first quarter fiscal 2024 earnings call. For the past few years, you've heard us reaffirm our strategy, which is focused on the evolution of our business model to profitably leverage the power of the Build-A-Bear brand. Although first quarter results were slightly more challenging than anticipated, we are reiterating guidance, given our expectation of the successful execution of our strategic plans for the balance of the year. We believe that the diversified business model we have created and the systematic digital integration we've been working towards over the past few years has shown numerous proof points of our growth strategy. We have broadened Build-A-Bear's brand reach through consumer, geographic and category expansion with a mantra we like to refer to as more people, more places and more products. As an example of product expansion, we leverage the brand's popularity and diverse consumer appeal with continuous launches of new make-your-own furry friends, including key licenses such as Pokemon or TikTok trend animals such as our Capybara and new plush form-factors like the recent successful introduction of our Mini Beans collectibles. The systematic execution of these strategic business initiatives has resulted in our ability to maintain a higher level of profitability, while continuing to invest in the future of the company and returning capital to shareholders. In fact, over the past 3-plus years, Build-A-Bear has enjoyed record-breaking sales and an unprecedented period of profitability compared to any other time in its quarter century history as we have driven the business model evolution to deliver record profits and shareholder payouts. Even in this challenging environment, first quarter results remain at a much higher level of profitability when compared to any pre-COVID first quarter since the company's IPO in 2004. With this higher level of profitability, we remain committed to returning capital, distributing over $12 million to shareholders in the first quarter through a combination of share repurchases and our own recently announced quarterly dividend. Now to recap first quarter. We delivered almost $115 million in revenue, which is a decrease of 4.4% versus the same period last year, and pre-tax income of more than $15 million for a 13.1% pretax margin. Although as we had shared on the fourth quarter call, we recognized that the potential of some economic uncertainty and business volatility from our ongoing marketing and web transition could affect the first quarter, the impacts were somewhat greater than expected, with web demand being a significant contributor to our overall revenue decline. Now, I would like to turn the page to a brief update on our 3-pronged strategy to deliver long-term profitable growth. As you may recall, the strategy is grounded in what we believe is our most valuable asset, the power of the Build-A-Bear brand, and is based on the following initiatives. First is the global expansion of our unique experience locations, which includes the continued strategic evolution of a variety of store types and footprints, as well as our 3 retail business models; corporately operated, partner operated and franchised. As a part of our partner-operated business model, we opened 5 new locations in the first quarter. 2 stores were an expansion of a relationship with our Italian partner, Giochi Preziosi, with shop-in-shops in Rome and Vercelli. In the U.S., we opened another 2 locations with the Girl Scouts and we expanded our South American footprint beyond our franchise relationship in Chile, with our first partner-operated shop-in-shop opened in with [ Boeing ] Global in Bogota, Colombia. We are delighted to share that early in the second quarter, we opened our first partner operated location in France at the iconic Paris Department Store Galeries Lafayette on Champs-Elysees. In conjunction with long-time partner, FAO Schwarz, with whom we operate the recently expanded and very successful Rockefeller Plaza shop-in-shop in New York City. This past Saturday, we opened another location with Giochi Preziosi in Napoli. Including the locations in Rome and Vercelli, plus Milan and Bergamo, which were opened towards the end of last year, this brings the total number of partner-operated stores in Italy to 5. Separately, in conjunction with existing relationships, one new franchise location opened in China and 2 new franchise stores opened in South Africa, plus we opened 1 corporately-operated store in England near the popular tourist destination of Windsor Castle. We remain on track to open at least 50 net new experience locations through these 3 models this year. The second initiative is the acceleration of a comprehensive digital transformation for the company, ranging from systems upgrades to website integration to content creation. Given the undeniable reality of the rapid advancement of the digital economy and the needed long-range upgrades to our infrastructure, we began the journey to unlock the value from improved processes to new systems across the entire enterprise about a decade ago. With best-in-class partners from Microsoft to Salesforce to Deloitte Digital, we have made step-by-step investments to unlock the power of an integrated ecosystem that leverages and unites the digital side of our business with our physical retail side. The goal is to create a true omnichannel entity by seamlessly merging our online presence with Build-A-Bear's unique in-store experience to provide more personalization for consumers and what is referred to as the phygital economy. With that in mind, we are currently focused on driving synergy, elevation and integration across the entirety of our consumer-facing communications and direct transaction efforts. While it is not uncommon for a transition like this to be disruptive, including impacts to web demand, we expect these steps in our digital transformation journey to unlock the combined power of e-commerce, e-mail, social media, loyalty and traditional marketing through a unified vision. Third is the continuation of investment and initiatives to leverage Build-A-Bear's powerful multigenerational brand awareness to drive incremental profitable growth. The meaningful improvement in the company's cash flow has allowed us to make longer-term strategic decisions across the company, touching product, brand, partnership, content, talent and infrastructure, while continuing to return capital to shareholders. A recent example of a new initiative was on the May 16 launch, introducing the exclusive multifaceted collaboration with the movie, IF, that included a make-your-own version of the lead imaginary friend from the recent theatrical release named Blue, along with a specially curated in-store heart ceremony created by the film's Creator, Writer, Director and Star, John Krasinski. This integrated effort with a multimillion-dollar Hollywood endeavor represents more than just the release of a new furry friend. It's yet another example of the pop culture nature of the Build-A-Bear brand. Separately, as I mentioned briefly on the last call, we were anticipating the launch of one of our most exciting initiatives, a comprehensive new brand campaign called The Stuff You Love. Since then, we have rolled out the new creative, which is designed to further expand the appeal of Build-A-Bear, while simultaneously connecting multiple generations to a universal message designed to continue to place our beloved brand right in the middle of the collective conversation. Notably, we are executing all of this, while continuing to return capital to shareholders totaling over $100 million through the last 10 quarters. In closing, although first quarter was challenging, as we continue to execute on the strategic initiatives to leverage the power of the Build-A-Bear brand that I just reviewed, we expect to see positive momentum as the year progresses across a number of fronts. And with that in mind, we are reiterating our outlook for 2024. I would like to thank all of the Build-A-Bear associates, guests and partners for their efforts, as we continue to work toward our mission of adding a little more heart to life. And now, I'd like to turn the call over to Voin.

Thank you, Sharon, and good morning, everyone. It's good to speak with you again today to share our first quarter 2024 results. Before I touch on the financials from the past quarter, I want to recap a few highlights. Even with its softness, it was one of the most profitable first quarter in the history of the company. This reflects the work from our strategic initiatives over the past several years and that we are now operating at a sustainably higher level of profitability. Also, as the result of solid business performance and more consistent strong cash flow generation, we continue to be committed in returning capital to shareholders. We paid our first quarterly dividend, and during the quarter, spent $9.2 million to repurchase over 343,000 shares. Additionally, since the end of the first quarter, we have spent $2 million and repurchased more than 66,000 additional shares. Now moving to first quarter results, starting with a more detailed review that reflects a shift in weeks compared to the prior year. Specifically, when compared to the 13 weeks of first quarter 2023, first quarter 2024 does not include the week ended February third, a strong week for us in the lead up to Valentine's Day, our second largest holiday. It was replaced by a more typical week at the end of the quarter for an estimated negative impact of about $2 million. This shift also affected the timing of some expenses. For the quarter, total revenues were $114.7 million, down 4.4% year-over-year. Net retail sales decreased 3.8%. An 11.3% decline in web demand was a significant contributor to the decrease. And web demand continues to be down quarter-to-date. Additionally, the expected negative timing due to the calendar shift and small declines in both traffic and dollars per transaction also impacted sales. Note that repeat customer growth was solid, while new customer acquisition, particularly online was more of a challenge. Commercial revenue, which primarily represents wholesale sales to partner operators, international franchise revenue were down 13.7% versus the prior year, as expected, due to the timing of product shipments. We noted on the fourth quarter call that commercial revenue had a particularly difficult first quarter comparison. We still expect strong growth for the segment on a full-year basis. Gross margin was 54.2%, an increase of 10 basis points compared to last year due to commercial margin improvement. Although retail gross margins saw expansion in merchandise margin, that was more than offset by the leverage of fixed occupancy costs and higher depreciation expense related to last year's rollout of the new point-of-sale system. SG&A expenses were $47.6 million, or 41.5% of total revenues compared to 38% of total revenues in the 2023 first quarter. The 350 basis point increase in SG&A was primarily driven by higher wages, expense timing and general inflationary pressures. For the full year, we expect SG&A as a percent of total revenue to be at or below 2023's level. Even with the higher SG&A expense, we delivered $15 million of pre-tax income. Earnings per share was $0.82, down 16.3%, reflecting the decline in pre-tax income, partially offset by a lower tax rate, along with the reduction in share count. With respect to the balance sheet, at first quarter end, our cash balance was $38.2 million, representing a $5.4 million, or 16.5% increase. This was after returning nearly $30 million to shareholders over the past year. Inventory at quarter end was $64 million, declining $2.4 million, or 3.7% compared to the same period last year. We remain comfortable with the level and composition of our inventory. Turning to the outlook. We are reiterating our guidance. The full details of guidance are included in the press release, but I will highlight a few key metrics compared to fiscal 2023, excluding the impact of the 53rd week. We continue to expect total revenue to grow on a mid-single-digit basis. This growth is partially driven by the addition of at least 50 net new experience locations, with the majority coming through partner-operated expansion, both internationally and domestically. Revenue growth will be back half weighted as we add more experience locations and expect a more favorable fourth quarter comparison on a 13-week basis. Pre-tax income to grow in the mid-single-digit range on a full-year basis. The outlook also reflects ongoing wage and inflationary pressures, increased depreciation expense and freight costs. In closing, I would like to thank all of our store and warehouse associates, as well as corporate team members and partners for their ongoing dedication to the execution of our strategy to evolve the company by leveraging the power of the Build-A-Bear brand. This concludes our prepared remarks. And we will now turn the call back over to the operator for questions. Operator?

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

Congrats on a lot of the positives here. When you look at your own store expansion, what are your focus on in terms of those stores? I know that you're doing 15 in total. But when you look at outside of the commercial and the franchisee, what is kind of the focus for your own stores here in 2024 and beyond?

When you say our own stores, Eric, just for clarification, you're talking about corporately-operated versus partner-operated?

Yes.

Yes. We do have some expansion plans for corporately-operated. But as we noted on the call and as we've said in many of our previous calls, we're focused more on our partner-operated expansion because that's an asset-light model. As you know, an example of that is our Great Wolf Lodge location. It's a really great one where those partners purchase the fixtures and we train their employees to be bear-builders and to have a seamless -- from a consumer perspective, operation that looks and feels just like a Build-A-Bear, but then we sell on a wholesale level, the product to them, our Build-A-Bear product and then they benefit from our marketing, et cetera. So, those are very good financials. I think it's a very good financial model for us, and that it does take less capital for us to expand the Build-A-Bear footprint. And the important piece of that, besides the obvious expansion of the brand and the potential for sales is that, that store experience is such a critical part of our ecosystem. That's how we build this power of the brand that we keep referring to, that you get to come in and choose your own stuff down, we'll go through the heart ceremony, and then you're a fan for a long time, in some cases, for life, as that memory is so indelible for consumers.

Yes. Actually, let's expand a little bit on that. In terms of the non-corporate locations, the franchisees and the international expansion, I know there's an initial ramp where they get the product and the inventory. Historically, how quickly do those stores start to really start to grow and roll out as you add in new areas like Italy, Colombia and I'm sure there are other international territories that you're looking at right now?

Yes. We are looking at other international territories. We've had a mantra inside the company for many years that a fuzzy hug is understood in every language and kids seem to understand Build-A-Bear as well as adults interestingly. But we do believe there is extended opportunity. This is interesting, though, your question in that these are partners. So, we have to work hand in hand. Those aren't unilateral decisions. Some of these are shop-in-shops with other -- relationships with Giochi Preziosi. That relationship is actually in conjunction with our relationship with Hamleys. So, some of those stores are shop-in-shops inside of Hamleys' toy stores as an example. So when there's a pre-existing infrastructure, we can roll a lot faster. The example in Colombia is actually with a relationship that's in many other countries inside of South America. We have a Chile franchise. But beyond that, this is just a stake in the ground in an entire continent, and that was just the first store. So, that's not just a Colombia relationship. So specifically, it's sadly -- and it depends answer, but there are requirements and with -- from a partnership perspective for the relationship when we look at those contracts of what the expectations are. But a lot of it is in their hands as it is their capital.

Our next question comes from the line of Greg Gibas with Northland Securities.

Wondering if you could speak to the web demand challenges and whether you expect that to persist? And also just kind of follow-up on those. Voin, I think you mentioned at a high level that the trends that you saw with total transactions versus average transaction size, if you could cover that again?

Sure. So definitely, our web traffic has been challenging during the quarter. And some of those trends continue to persist in so far on a quarter-to-date basis. But again, even within the quarter, some of those challenges that we saw from the web traffic perspective, especially in February, we saw very strong conversion related to our Valentine's Day product, and we saw growth in dollar per transaction. For the rest of the quarter, still we had challenging traffic. Even though we improved our dollar per transaction on a smaller level, our conversion was lower and not enough to offset some of the challenges from the traffic perspective. We continue to work on different initiatives to improve our traffic opportunities and drive more visits to the website. But again, we may have some choppiness throughout the year as we continue to focus on this particularly challenging piece of our business at this point. As we think about some of the dollar per transaction that we are seeing and the traffic across the board, our DPT was slightly lower than last year. Some of that could be related to the overall economic environment. There may be also some trade-offs as we continue to see very strong DPT in our locations, but there may be some shifting where people are more focused on the entry price points and some lower priced product compared to what was done in the past, again, speaking from the overall economic situation. But we feel good about the engagement we are seeing with our guests and the overall things that we have in the line for the rest of the year.

Yes. A couple of things just a little color on that is that, of course, we're -- when we see traffic softness, we kick into gear to understand what's going on the best we can from a research perspective. With the consumers, it's not uncommon, as I mentioned in my remarks, that when you are doing a comprehensive integration across your entire ecosystem to try to raise the water level, there can be some hiccups in the process, particularly as it relates to web. But that external traffic piece, that's also related to the rollout of a new brand campaign. It takes you a minute to kind of get some traction on that. But separately, an interesting piece is that we've -- been brought to our attention is that from an organic -- we're down from an organic search perspective. We've gone into a lot of data to try to understand what's going on with that. Because of the brand's success over the past 2 years to 3 years, this is the only assumption that we have is that we're being conquested at a much higher rate on search from a search engine perspective. And so we're going to have to work through what we do and how we manage, assuring that our brand pops up when people are actually searching our brand, just sort of an indicator of the new economy.

Right. Yes, that's very helpful. I appreciate the color there. And I guess as a follow-up, if you could just touch on what drove that elevated or unfavorable expense timing in Q1 and maybe how we should expect expenses to trend in the coming quarters? Would we expect to kind of return to normalcy?

Yes. So timing of SG&A expenses, as we called out, in Q1, it's a little bit more elevated as we had some incremental expenses related to signage and marketing supplies related to the start of the new campaign, 'The Stuff You Love'. We also had some timing of certain payroll expenses Q1 to Q2. And as I mentioned in the call, we expect SG&A on a full-year basis to be at or below last year rate. So, we feel good about the overall SG&A on a full-year basis. Just there is noise created with a calendar shift and a couple of these things that I highlighted that's creating timing between quarters.

Our next question comes from the line of Steve Silver with Argus Research.

Congratulations on the international expansion in the markets. I guess my question is, over the course of the year, should we expect that the new international markets that are being penetrated will largely focus on building density in fewer markets or the goal is to really increase on a geographic level more broadly?

Well, the short answer is both. And our goal is really to increase penetration in the existing market. And just as a reminder, our first store in Italy opened late September of last year. So just to be -- again, now late May with 6 locations in 6 different cities in Italy. It's an accomplishment and testament to the brand in the new market. But we are also engaged and in discussions with different partners around the globe, and we continue to work on expanding not just in the existing markets, but expanding in new markets and more to come as those deals are being worked on, but we are definitely excited about the opportunity and that we are going to be adding at least 15 net new locations for the rest of the year.

Great. That's helpful. And one more if I can. So the recent press release announcing the collaboration around the new movie, IF, I know over the holidays last year, you guys mentioned some strategic initiatives in terms of tying in the Merry Mission movies with the theater chains showing them. Just curious as to whether there's anything going on around this movie launch just to work together to just drive traffic from the theater to the store where those tie-ins are possible?

Yes. Good question, Steve. We have been doing that for many, many years. We often talk about the co-location of Build-A-Bear Workshop in malls with theaters and that that's often part of a traditional trip on maybe a weekend to see the opening of a kids film as you swing by Build-A-Bear, you get yourself down there before or after. And we've even partnered with theaters in the past and there are different circumstances as well as with Cinemark last year with the launch of our own Merry Mission film for the holidays. This IF collaboration, it's a little more integrated than a type of -- some of the collaborations that we've had in the past, which used to be a real staple of our business in the pre-COVID world. Just the clear opportunity to connect that concept of going to the theater, buying the lead character at Build-A-Bear and really leveraging much of this usually hundreds of millions of dollars of marketing that goes behind the theatrical releases. The IF collaboration is in -- we have the Blue, the lead character in all of the stores. Of course, we're doing marketing that is in conjunction with the theatrical marketing. But we've also taken it to a place where in certain locations, Mall of America. There's one in New York, where it is a real next level type of experience. And we've tricked out the store where you get an opportunity to have a feeling as if you're making your own imaginary friends in an entirely different way, utilizing this heart ceremony that John helped us to create. And they've been extremely, I think, excited about this. I mean, John has been personally a part of the marketing for this, what has been a major release for Paramount. And we -- they're great partners for us. So again, the net of this question, I think where you're going is this idea between theatrical content, the creation of emotional connections, memories, all of that goes together, which also leads to not only why we partner with key entertainment companies, but why we create our own entertainment.

[Operator Instructions] Our next question comes from the line of Keegan Cox with D.A. Davidson.

I just wanted to ask a little bit. It kind of seems like you guys are seeing a trade down to the lower end and like you said, struggle or some issues on the dollar per transaction. But what gives you confidence in the spending environment to maintain your full-year guidance for the back half? Is it like demand picking up, or just executing on your initiatives?

Thanks for the question. And as we shared on the last call, we expected this year to grow on a full-year basis and it was back half weighted. We also talked about the expansion from the store count perspective as we are adding net 50 locations, both between partner-operated as well as some of the domestic locations. Again, it's going to be in the second half of the year. So, we feel that that's going to help drive some of that growth. In addition, we had some softness in Q4 last year. So, we believe that later in the year, we have some easier comparison. Now as we think about some of the choppiness and softness from the overall economic environment, we are definitely cognizant of those. But we also believe in the brand and things that we are able to achieve. We are seeing some strength. And again, we continue to deliver from the both dollar per transaction basis, continue to drive strong performance. Now, we also had last couple of years of record results and some elevated numbers. So, some of the traffic and some comparison as we think, especially earlier in the year, we are anniversarying some of the product launches and some of the timing when things were introduced or how the inventory was coming in after COVID, that creates some timing. But we feel good about the numbers that we are projecting on a full-year basis. And like with the expectations that we are going to be able to recover some of the losses and improve on our web demand has been a challenge for us so far this year.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. John for any final comments.

All right. Thank you so much for joining us today, and we look forward to speaking with you next quarter.