Allison Malkin - ICR, IR Sharon Price John - Chief Executive Officer Tina Klocke - Chief Operating Officer and CFO.

Steph Wissink - Piper Jaffray James Fronda - Sidoti & Company Gerrick Johnson - BMO Capital Alex Fuhrman - Craig-Hallum Clay Kirkland - Intrepid Capital.

Greetings. And welcome to the Build-A-Bear Workshop Second Quarter 2014 Results Conference Call. At this time all participants are in a listen-only mode. A brief 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, Ms. Allison Malkin of ICR. Thank you, Ms. Malkin. You may now begin..

Good morning. Thank you for joining us. With me today are Sharon Price John, CEO; and Tina Klocke, Chief Operating Officer and Chief Financial Officer. On today’s call we will begin Ms. Sharon discussion of second quarter results and the progress the company continued to make on its strategic initiative.

Tina will follow with the more detailed review of the financials and then we will take your question. Before I turn the call over to management, I want to remind members of the media, who may be on our call today to contact us after this conference call with 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. 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.

And a replay of both our call and webcast will be available later today on the IR site. Before we get started, I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties.

Our 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 annual report on Form 10-K and we undertake no obligation to revise any forward-looking statements. And now, I would like to turn the call over to Sharon John..

The Winter Soldier, as well as Dreamworks, How to Train your Dragon. Inspired by the popular Marvel property, we created a proprietary line, a theme, Superhero Bears, which extended our historical costume-only offering for the first time.

We integrated the expanded product launch into broader marketing campaign associated with our 11th Annual Huggable Heroes program, which recognizes charitable-minded kids. Additionally, we partnered with the USO in their Every Moment Counts campaign.

This broadened marketing approach moved us beyond the concept of traditional heroes and enabled us to celebrate Superheroes, Everyday Heroes and Military Service Heroes.

The campaign resonated emotionally with our guests and generated over $80 media impression, created awareness and drove high product demand, particularly with boys and adult affinity consumers, which contributed to the product selling out in advance as a movie release date.

The Spider-Man Bear is already back in stores, with strong ongoing demand and the replenishment of the Captain American Bear will be in stores this fall times strategically to take advantage of the September DVD release. Late in the second quarter, we launched Toothless dragon from How to Train Your Dragon 2.

Product demand was high as consumer re-thought was broader than expected, reaching across key demographics, including girls, boys and adult affinity guest.

Because of the rapid sell-through, we immediately put an action plan in place leveraging our robust social media network to communicate directly with consumers and for the first time at Build-A-Bear we are providing an opportunity for guests to sign-up to be personally notified when Toothless is reintroduced in October prior to the DVD release.

In addition to fulfilling the growing late list, we are projecting continued demand for the balance of the year. Clearly, we're starting to demonstrate the key high-impact product launches combined with our ability to execute elevated marketing program gives us an opportunity to drive consumer awareness and product demand.

Looking forward to the balance of the third quarter and back half of the year. We are well-positioned with a powerful line-up of hot licenses, proprietary concepts and holiday offerings, introduced in a strategic cadence supported by our new integrated marketing approach.

In fact, for the month of July, our comparable store sales are on a positive trend across geographies, driven by a balanced offering of Build-A-Bear core products and new license launches, further validating that we have the right strategies in place to continue to improve profitability and grow comp.

Specifically, in early July, we added freshness to our offering of Hasbro’s MY LITTLE PONY line with new characters which has sold well, including a collector targeted web exclusive pony retailing for $35, a new pricing threshold for Build-a-Bear animal.

We continue to gain momentum in July with the introduction of the full line-up of Nickelodeon’s Teenage Mutant Ninja Turtles.

The launch is having a major effect on our overall business with a very strong response from boys, girls and adult affinity consumers and it’s continue to build as we approach the move release date in North America on August 8th.

Notably, the enhanced partnership that we have received from both Hasbro and Nickelodeon, including excusive digital content available only on our website further demonstrates our evolution from traditional license arrangement to elevated marketing relationships. We expect both of these properties to continue to fuel sale throughout the year.

As mentioned in September, we then have the return of Captain America Bear and in October, we bring back Toothless the dragon times with both of their DVD releases.

I’m also excited to announce that in November we will be expanding our ongoing Disney partnership with the addition of a new collection featuring excusive flash tied to the movie Frozen, which continue to be extremely popular.

And of course, we will have a full line-up of proprietary Build-A-Bear products and license properties specifically for the holiday season. In conclusion, this quarter's results reflect our commitment to our stated strategy and the progresses that we are making toward our goal of sustained profitability.

As we evolve our business model to leverage the strength of the Build-A-Bear brand and drive future growth. I'm confident that we have the right strategies in place and that we are building the processes, tools and the team to continue to drive improvement and further increase shareholder value.

Now I’ll turn the call over to Tina to review our financials in more detail..

Thanks, Sharon, and good morning, everyone. Our second quarter pre-tax results were in line with both internal and external expectations. As noted, for the first six months of the year, we generated pre-tax income of $1.3 million, an increase of over $7 million from last year.

This is the first time in six years that we have had a pre-tax profit to the first half of the year. Net retail sales were $75 million, with 10 fewer stores in operation at quarter’s end compared to $80 million in the prior year.

On average, approximately 16% of sales from closed stores transferred to other remaining stores consistent with past closures. Consolidated comparable store sales declined 4.9%. A decline in store traffic contributed to an 8.3% decrease in transactions, partially offset by an increase in average transaction value.

We improved the key operational metrics that are more in our control including dollars per transaction, units per transaction, average unit selling price and consumer conversion. By geography, comparable store sales declined 4% in North America and 8.1% in Europe.

Excluding the impact of foreign exchange, e-commerce sales decreased by 4.3%, with a continued improvement in profitability. Retail gross margin increased by 220 basis points to 39%.

This was a result of a 360 basis point improvement from expansion in merchandise margin and reduction in distribution costs, partially offset by deleverage of fixed occupancy expenses. SG&A was $34 million or 44.6% of total revenues, compared to $37 million or 45.1% of net revenues.

Management transition and store closing expenses were $900,000 in the second quarter last year. Excluding these costs in 2013, SG&A as a percent of sales was 44%. While sales declined, expansion in gross margin and lower expenses drove a $2 million improvement in pre-tax loss compared to the same period a year ago.

Net loss was $4 million or $0.25 per share, compared to a net loss of $6 million or $0.38 per share in the second quarter last year. Adjusted net loss was $0.25 per share, an improvement from $0.33 loss per share in the second quarter last year.

For the first six months, total revenues were $174 million, a decrease of 8.6%, excluding the impact of foreign exchange. Consolidated comparable store sales declined 3.4%, and included a decrease of 2.8% in North America and 5.5% decrease in Europe.

E-commerce sales declined 7.2%, excluding the impact of foreign exchange with continued improvement in profitability. Retail gross margin was 41.6%, an improvement of 220 basis points compared to last year. This increase was driven by 300 basis point improvement in merchandised margin, partially offset by deleverage of fixed occupancy expenses.

SG&A was $72 million or 41.2% of total revenues, including $400,000 in management transition and store-closing expenses. This compares to $81 million or 43.3% of total revenues, including $3 million in management transition and store closing expenses in the first half of fiscal 2013.

Excluding these cost in both periods, SG&A improved 60 basis points to 41% of total revenues in the first half of fiscal 2014. Pretax income was $1.3 million compared to pretax loss of $6 million in the first six months of fiscal 2013. Adjusted net income improved to $0.06 per diluted share from an adjusted net loss of $0.19 per share last year.

Turning to the balance sheet at quarter end, consolidated cash was $42 million, up $14 million from last year. This is primarily attributable to our improved profit performance in the first half of 2014, decreased capital spend and the timing of payments for inventory and rent. We had no borrowings on our credit facility.

Consolidated inventories totaled $43 million, compared to $48 million last year. Inventory per square foot decreased 6.7% reflecting the timing of transit inventory. Capital Expenditures were $3 million primarily for store-related capital and IT infrastructure. Depreciation and amortization was $9 million.

For fiscal 2014, we continue to expect capital expenditures to be in the range of $12 million to $15 million to support selected store updates and opportunistic openings, as well as the ongoing investment in IT infrastructure. This includes the opening of six to eight popup stores in advance of the holiday season.

We continue to expect depreciation and amortization to be approximately $18 million. As a reminder of fiscal 2014 and January 3, 2015 and includes the 53rd week versus last year’s 52-week year.

In summary, by staying true to our strategy and focusing on brand-building programs, we delivered solid improvement in gross margin, operating performance and our bottom line, leading to our sixth consecutive quarter of improved results.

We believe our initiative position us to continue our progress towards the same profitability in the second half of the year and longer term. And now, I would like to turn the call over to the operator to begin the question-and-answer portion of the call..

Thank you. (Operator Instructions) Our first question comes from Steph Wissink with Piper Jaffray. Please proceed with your question..

Thank you. Good morning everyone. Tina, I wonder if I could just draw out a couple housekeeping questions and then, Sharon, a question for you.

Curious on the comp for leverage point in the model now that you've extracted some of the cost and lowered the overall store base? And then if you could help us to navigate the tax rate for the year that seem like below the line items for where we were off of it on the loss per share estimate that you could help us just reconcile as we think about the back half, how we should be modeling the tax.

And then Sharon for you, really intrigued by this notion around kind of social media and leveraging your follower relationship base as well as some of the affiliate marketing and partnerships.

Could you talk a little bit about the margin potential as you see building into some of those leverage points as well as some of the anticipated traffic improvements from some of the licensed partnerships into the back half? How we should be thinking about the next couple of quarters? Thank you..

Okay. Thanks. I’ll take the question first and then hand it over to Tina. Okay, Steph, thanks for the question. Yeah, affiliate marketing partnerships and social media, one of the things that we feel that we have an opportunity with, is that social media impact.

I believe that we’ve noted a few times that we have a very robust loyalty program that includes 4.4 million active loyal team members. And consumers given our high emotional brand are very involved and engaged in our brand on a number of different front from Facebook, Pinterest et cetera.

So being able to activate against that as a part of a more integrated marketing program can be a key for us particularly as our consumer base shifts to more than Millennial mom and move who as you know and have heard from many marketers, I’m sure, at this point, are really native to that entire environment.

So it is that piece of the puzzle, it’s actually much more efficient wide market. It is cost effective. It’s very clean. It’s in the moment.

It keeps your marketing dollars pretty liquid up until you need to spin them versus other types of media from direct mail to television where often you have to make commitments far out and you might be uncertain of your actual need to push the media given the sales of the product.

And so we can really activate that in a very efficient manner that can actually be [aid in our 8F] (ph). I think on the affiliate marketing partnership, it’s really -- it's kind of this concept of when a number of different entities are saying the same thing you get more leverage. It is a classic one plus one equals 10 kind of approach.

And when you elevate the partnership that -- really what it means is there is a give and take. Our partner see us a value as well as we see them as a value. That value lies not only in but certainly partly in.

The fact that we do have this very loyal consumer that we can reach directly and speak to them in a very unique way, particularly given that the products that we offer that represent their brand that we offer them in a way that it’s the only place that you can experience it.

You could come in and make a very special Spider-Man Bear and it’s the only place that you can do that. He has the Spider webs all over him and he is very high affinity to that young boy and an experience that they look forward to having.

So we feel like that that approach that we just now started to activate against as you saw and as I sort of explained in the second quarter against Spider-Man, Captain America (indiscernible) gives us a lot more latitude in a much more efficient way to drive consumer demand.

And frankly in this quarter, it drove consumer demand beyond what our supply was. And I am -- what we have to do is learn where those levers are and what the opportunity, the untapped opportunity still is when we hit all of those levers at the same time.

Does that make sense?.

Yes. It is very helpful. Thank you..

Okay. Tina..

Good morning. Traditionally, we’ve just needed a slightly positive comp to leverage our SG&A and leverage our fixed occupancy expenses. So as -- and you can see that in past quarters that we have enabled the leverage when we do have that slightly positive comp. Related to the tax, just a reminder that we are in a full valuation allowance on our U.S.

taxes, and so any tax expense during the quarter is related to taxes that are paid in jurisdictions other than the U.S. when we don’t have an offsetting benefit. And we at this point expect our full year tax rate to be somewhere in the range of 15% to 20%..

Okay. Thank you. I will jump back in queue..

Thanks..

Our next question comes from James Fronda with Sidoti & Company. Please proceed with your questions..

Hi, guys, how are you?.

Hi, James..

Just on the I guess the Disney and the Nickelodeon products, are there any significant license fees, licensing fees associated with those without her margins at all?.

There is a royalty associated with the license products..

And what is that that comes out of sales or is that part of cost of goods?.

Yes. It’s a part of cost of goods and what we tend to do, because in traditional terms the payment of a royalty should be expressing added value in a brand awareness of the property that you’re paying the royalty for. So comparatively, it’s built into our margin and we are able to generally charge a slightly higher price for licensed properties..

Okay. All right.

So it wouldn’t affect the margins either way, I guess, if you are able -- still at the higher price, correct?.

We have -- it’s into our overall objective of what our margin strategy is..

Okay. And the continuation of….

Degrading is that, it’s not margin degrading..

All right, okay.

And I guess just in terms of the franchise closures, I mean the previous strategy I thought was to expand those, but are those going to continue to close I guess for 2014 into 2015?.

Yes, the margin -- the franchise expansion strategy which we spoken about is not only the right -- part of that is the rightsizing first of our franchises that we currently have but also the expansion of franchise partnership into new countries and territories..

Okay..

So for example the announcement of Turkey would be a franchise expansion that we announced last quarter. But in the meantime, some of our franchises are going through not at a similar situation that we in North America went through in the last two years of a need to do similar state optimization..

Okay..

So you are going to see some puts and takes in our longer-term franchises, but at the same time as we write it, started to write the ship in the North American side, we are getting a lot of interested parties on potential expansion into new international countries and territories..

Okay. All right. Thank you, guys..

Thank you..

Our next question comes from Gerrick Johnson with BMO Capital. Please proceed with your question..

Hey, good morning.

I understood the impact on store traffic from the vacation schedules being shifted, but e-commerce is down a little bit, does that impact by vacation schedules as well and what explains that decline?.

No, Gerrick, that would not be impacted by vacation schedules. The comps on our e-com specifically are compared to period from first half of last year where we were still in a highly promotive mode on e-com.

So that midyear last year somewhere in the back half, around the back half so shortly after arrived, we looked at our e-commerce business and put a strategy around it, that was inclusive of it not just being a clearinghouse but being more of a brand building consumer facing entity.

So we are taking out a lot of the promotions on the e-com front that has negatively affected the comps, but we now have been significantly increasing profitability over the past few quarters..

Good.

And then third quarter looks like that’s a pretty tough comp, what are we comping against there, marketing campaign, changes, more Pony what else is in there?.

We had some good proprietary products through that time period as well as My Little Pony continue to do quite well through that period. You are correct..

Okay. Thank you..

Our next question comes from Alex Fuhrman with Craig-Hallum. Please proceed with your questions..

Great. Thanks, guys. I really amazed to see the phenomenal gross margin here and in spite of the continued traffic weakness.

And I am wondering as you think about the merchandise assortment and specifically the licensing goods here, I mean it seems like a lot of retailers, and including some of the vertically integrated retailers are having a lot of success with top brand licensing partners.

And the hard part of that’s obviously getting the partnerships and you’ve got partnerships with all of the top brands, I mean Spider-Man, Teenage Mutant Ninja Turtles, these are top brand and the demand for a lot of these products seems like it’s been more than you would have anticipated.

I mean, is this a big kind of focus that changes some of the merchandising direction? I mean, is this the catalyst that can get comps actually back into growth mode? And then I’m wondering maybe more broadly if you think about distribution, I mean, ecommerce, obviously, that’s not a huge channel for you and like you said that they’ve been very promotional in the past.

I mean, just having the inherent brand awareness and tapping into the brand awareness of the Spiderman fan and the Teenage Mutant Ninja Turtles fan. I mean, is that change the thought of ecommerce.

Does that get more people coming into that channel? And then similarly, internationally, I would think having partnerships with a lot of those top brands would also cause you to have more awareness right off the bat as you think about international market.

So with all that cash on the balance sheet provided that held out of the country, I mean, is there any thought and maybe taking an approach out of the country, especially now with a more broad licensed assortment of top brands.

I mean, is there any thoughts maybe going with more of an in-house capital approach there?.

That’s interesting. First, I want to just make some comments on some of the early pieces of what you said. Yes, we are excited about some of these partnerships. And what we’ve done and the partnerships that we’re creating and the value-add that’s being created on both side of that relationship. The interesting piece is that you are correct.

Ecom does have a broader and more significant role when you think about some of these licenses, particularly, as it relates to a consumer segment that I mentioned a lot in the script, which is the adult affinity consumer, who often time bids and as excited about the making of the product. They just want the product.

And we are seeing some interesting off take, I mentioned one particularly, which was exclusive, a web excusive My Little Pony where we’ve been actually been able to break what has been a historical animal price point of $35. And there seems to be absolutely no pushback on that. So, we had opened up an entirely new space for us.

On that front so I just want to be a little cautionary that we’re not in the business of just becoming a licensed staff, placed for only licenses.

But I did -- because we had just incredible opportunity for not only the creation of our own proprietary concepts and lines that we need to learn how to market and drive ourselves, but also just our classic bears are still a big driver.

And most of our top three -- top five products are still just a classic and in some cases entry-level price point core product line.

So I don’t want to misconstrue that the licenses are just everything about what we’re doing, but it has been what we’ve been able to create some of the early successes, if you can think about driving business to the point of driving -- selling out a success, but driving successes with this integrated approach.

On the international side, you have a terrific point that it gives us a foray into new market that may not be as aware of Build-A-Bear out of the gate to put some of these license property that do have high awareness, in our windows, in the upfront area, use it in our advertising to drive trial.

And on the capital side, we’re still going to stick with our franchise approach for now. But that’s interesting to think about the insight that you have there..

Great. Well, thanks for the answers there and looking forward to seeing the new products as it rolls out in the stores..

Thank you, Alex..

(Operator Instructions) Our next question comes from Clay Kirkland with Intrepid Capital. Please proceed with your question..

Good morning. Actually, you just answered a couple of my questions. But while I have you here, can you give any more color on what's driving the deposit comps so for in July, whether it’s traffic or pricing, some of the new launches you have out? Just any color on that would be great..

Absolutely. So we mentioned in the script that the key new product launches are creating a lot of buzz for us and a lot of opportunity with My Little Pony and Teenage Mutant Ninja Turtles.

But interestingly, we believe that some of the positive comps out is starting and almost kick started, almost on the first day of July, is the fact that kids finally got out of school. So what’s interesting is well as when we look at our four level model right now, traffic, conversion, UPTs and DPTs, we’re positive on all fronts through July.

So we've been able to not only maintain those improvements in key metrics that I mentioned that we've increased through the first half of UPTs, DPTs and conversion in AUR But now with that ability of traffic, it’s really starting to show up in our comp..

Okay. Make sense. All right. That’s all I have. Thank you very much..

We have a follow-up question from Steph Wissink from Piper Jaffray. Please proceed with your question..

Thank you. Just a quick follow-up Tina, on the transference of sales when you do close some of your stores. Can you talk a little bit about, I think you said 16% that has been tracking pretty consistently.

Any efforts around building awareness in those markets where you’re online only or where you maybe exiting a lease and still trying to retain some business in your ecom channel?.

Yes. I think that’s just part of the overall integrated marketing plan and as we identify where the consumers are shopping, their shopping patterns are. Also keeping in touch with them and leveraging our database to communicate with them to make sure that they're still aware of all the promotions in the products that are coming out.

That 16% has been fairly consistent throughout since we started closing stores..

Okay. Thank you..

(Operator Instructions) There are no further questions in queue at this time. I would like to turn the call back over to management for closings comments..

Thank you for joining us today and we look forward to updating you again on third quarter..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day..