Allison Malkin - ICR, IR Sharon Price John - CEO Tina Klocke - COO Voin Todorovic - CFO.

Maria Vizuete - Piper Jaffray Alex Fuhrman - Craig-Hallum James Fronda - Sidoti & Company.

Greetings, and welcome to the Build-A-Bear Workshop Third 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.

It is now pleasure to turn the conference over to your host, Ms. Allison Malkin of ICR. Thank you. You may begin..

Good morning. Thank you for joining us. With me today are Build-A-Bear’s CEO, Sharon Price John; Tina Klocke, Chief Operating Officer; and Voin Todorovic, who joined Build-A-Bear on September 15 as Chief Financial Officer. For today’s call, Sharon will begin with a discussion of the third quarter results and fourth quarter outlook.

Tina will follow with a more detailed review of our financials. Then, Voin will provide some introductory remarks, and then we will take your questions. We ask that you limit your questions to one question and one follow-up. This way, we can get to everyone's questions during this one hour call. Feel free to re-queue if you have further questions.

Members of the media who maybe on our call today should contact us after this conference call with your questions. Please note that this call is being recorded and broadcast live via the Internet.

The earnings release is available on the Investor Relations portion of our website, and a replay of both our call and webcast will be available later today on the IR site. Before I turn the call over to management, I will remind everyone that forward-looking statements are inherently subject to 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 will turn the call over to Sharon John..

Thanks, Allison. Good morning, everyone. Thank you for joining us today. I’m pleased to report that the continued disciplined execution of our stated strategies resulted in our seventh consecutive quarter of improved operating performance with a $2.1 million in pre-tax income, an improvement of over $3 million versus last year.

Additionally, on a year-to-date basis for the first three quarters, we have delivered pre-tax income of $3.4 million, an improvement of over $10.5 million versus last year, marking the first time since 2007 that we’ve been profitable at this point in the year.

These results demonstrate our progress toward our stated goal of sustained profitability as we evolve our business model to leverage the strength of the Build-A-Bear brand to drive future growth.

During the quarter, our company achieved net retail sales of $85.6 million with seven fewer stores in operation at quarter end, a $2 million increase over the prior year; increased consolidated comparable store sales by 0.8%, which followed last year’s 6.4% increase; improved key operational levers, including dollars per transaction, units per transaction, and average unit selling price; drove comparable e-commerce sales by 14.5% over the prior year at a significantly improved profitability; and expanded retail gross margins by 360 basis points.

Importantly, these positive results give us momentum for our key holiday selling period as we remain focused on driving the business by executing our stated strategies, including the delivery of sustained profitability and improving sales through the evolution of our consumer value equation.

Looking at the third quarter in more detail, we continued to demonstrate that high-impact product launches, supported by well-executed elevated marketing programs, can drive broad consumer awareness and demand.

The most impactful introduction for the period was the full line-up of Nickelodeon's Teenage Mutant Ninja Turtles in anticipation of the release of the new film. The July launch was supported by a dynamic marketing program, which drove strong sales from all key consumer segments, including boys, girls, and adult affinity guests.

Because of the multi-segment, multi-generational appeal of the turtles, which were purchased two, three and four at time, we were unable to keep up with the early product demand, resulting in spotty inventory by the time the movie released.

As you may recall, we had previously experienced similar results with other key licensed launches earlier in the year. Given the recent history, we have prepared a consumer-centric action plan to bridge the inventory gaps while expediting additional shipments to meet the strong demand.

First, given that the interim shipments would not be able to appropriately resupply our brick-and-mortar locations based on the self velocities, we strategically redirected these shipments to our webstore to create a go-to in-stock distribution channel.

Secondly, adjusted our in-store service model and signage to inform consumers that the turtles were, quote-unquote, temporarily fighting crime in a sewer and enable guests to purchase the product from buildabear.com with a free shipping incentive during their visit to the store.

Third, for the consumers that did not want to purchase the products online, we took their information to directly inform them when we would be back in stock at the store level.

With this action plan, we were able to manage consumer expectations in a brand right manner, protect a portion of overall sales, and ultimately drive e-commerce despite the inventory challenges. We are now in-stock in all stores and online with continued strong sales.

On a similar note, as we mentioned on the last call, Toothless, the dragon from DreamWorks How to Train Your Dragon movie franchise sold through the initial shipment late in the second quarter prior to the movie release. At that time, we provided our guests an opportunity to be notified when the product returned.

In late September, we notified over 30,000 guests on the waiting list of the return of Toothless, which helped fuel strong traffic, contributing to our positive comp, although the ideal objective is to more accurately forecast product demand.

In these particular cases, we executed a proactive approach to manage consumer expectations and elevate guest engagement. As a result, we maintained high interest and demand for these products through the out-of-stock time frame that resulted in immediate sales when the product returned.

Overall, the positive consolidated comparable store sales for the third quarter were driven by a combination of robust sales by these key licensed products, continued strength in our core collection and a successful early launch of our proprietary Halloween program.

As we move forward into the fourth quarter, we remain focused on the disciplined execution of our stated strategies, and while early, our sales trend continues to be positive.

Our planned cadence of high-impact licensed and proprietary launches, supported by elevated marketing programs throughout the remainder of the year, is designed to continue to evolve the consumer value equation toward more brand-building initiatives versus discounting.

And because of our recent inventory challenges associated with high impact launches, we have made the strategic decision to significantly increase purchase quantities for select fourth-quarter introductions, including Build-A-Bear’s eagerly awaited product line based on Disney’s popular Frozen franchise, which includes a make-your-own Olaf the snowman and our exclusive Elsa and Anna Bears.

Our guests will be able to complement their frozen selection by also purchasing signature costumes and sound chips with songs from the film, including the chart-topping Let It Go. While the comprehensive global PR marketing effort will officially begin in early November, we pre-launched Olaf last weekend to drive excitement for the entire line.

The outstanding results have provided further confidence and the potential of this offering for the holiday season and beyond. Next, we’re celebrating one of our favorite holiday offerings with the 50th anniversary launch of Rudolph The Red-Nosed Reindeer in mid-November.

Collectible versions of Rudolph with its signature Light-Up Nose and its twin Clarice will be available. Our licensed partner, Classic Media will be actively promoting the milestone, and we expect a heightened attention to this multi-generational perennial to elevate demand for the collection.

Also launching in November will be our key story for the holiday season based on a new proprietary concept for Build-A-Bear. When planning for the fourth quarter, we had an objective to be a place where families come as a part of a holiday tradition, not unlike or perhaps in conjunction with their annual visit to see Santa.

Although we still expect Build-A-Bear Workshop products and gift cards to be under the tree on Christmas morning, we also want guests to have a reason to make furry friends with their children before Christmas as well. With this insight, we are launching a new holiday collection of adorable make-your-own reindeer.

To bring the collection to life, we have created an engaging story called Santa’s Merry Mission where the nice list is so long that our Build-A-Bear Reindeer must go in a mission to help Santa make enough toys to ensure everyone on the list has a Merry Christmas.

Of course, when Santa’s workshop is overwhelmed with the task, where else would the reindeer go to make the extra toys but Build-A-Bear Workshop? This multi-faceted concept features a proprietary storyline with instantly recognizable holiday theming, a broad consumer appeal for boys, girls and affinity adult guests, an interactive component to drive awareness, sales and encourage continued play beyond the plush and a proven cross-marketing tie-in appropriate for the season.

We are kicking off the Merry Mission concept with a completely integrated marketing plan, including TV, direct mail, PR, email and social media the first week of November, which will highlight key components of the program, including our free Merry Mission app that is available now through iTunes and Android, which amplifies the storyline, establishes the individual personalities of each of our eight reindeer and includes interactive reindeer games.

A choice of a boy or girl Build-A-Bear reindeer that can be customized with one of our festive collars featuring classic reindeer names such as Comet or Cupid. A code on the collar unlocks additional content in the app and will virtually bring the individual reindeer to life to extend the play beyond the plush.

A refreshed holiday service model and store look that includes literally changing Build-A-Beer Workshop into Santa’s workshop with the seasonal modification of our store-front signage and opportunity for consumers to personally participate in the overall Merry Mission storyline via our cross-marketing partnership with the Toys for Tots annual gift drive.

The Merry Mission concept represents the first time that Build-A-Bear Workshop has developed a comprehensive holiday campaign supported by an app designed to both sell and enhance a specific product line and create play beyond the plush.

Because of the positive response to the app and storyline during testing, we expect to not only drive reindeer sales, but increase overall brand interest. We also believe this launch begins to demonstrate the potential our brand has to extend into broader product concepts and repeatable entertainment platforms.

Also reinforcing our objective to be part of holiday tradition, this morning we announced an expansion of our strategic partnership with Macy’s, including the opening of five shop-in-shop locations for the Christmas season.

The shop locations include Macy’s Herald Square flagship store in New York City, and the State Street store in Chicago where Build-A-Bear will also be showcased in their highly popular Santaland attractions.

This is an extension of our existing relationship, which includes the Build-A-Bear float in the annual Macy’s Thanksgiving Day Parade and we are excited to share that Santa’s Merry Mission and our reindeer will be the theme of the float this year.

Separately, on the international front, we have expanded our franchise agreement with a new partner in Germany which adds two new countries; Switzerland and Austria. This is another solid step forward on our strategy to proactively build the global presence of our brand and follows our recent expansion into Turkey.

On a final note, as we enter the holiday season, we have a new leadership team in place. When I joined the company in June 2013, I believed that the strength of our band provided us with an opportunity to leverage the equity into incremental revenue and profit strength.

To achieve this goal, we shared our clear strategy that included; first, returning to sustained profitability, primarily through the rationalization of expenses in real estate, and also the resetting of the value equation for our consumers.

Now, to further enable us to drive future incremental sales and profit, we are evolving our infrastructure and skill set.

This evolution is inclusive of the new organizational structure that we recently announced internally, which will allow us to be a more consumer-centric brand driven organization with streamlined processes that allow better integration of the product creation team and the marketing team.

Key talent that has been added to lead this change includes; Gina Collins, who joined our company earlier this year as Chief Marketing Officer.

Gina’s strong background in brand building most recently with the Coca-Cola Company has been instrumental in the elevation and integration of the marketing programs that is currently driving our consumer awareness and demand for key products; Jennifer Kretchmar who was named our Chief Product and Innovation Officer in August.

Jen has 20 years of product development experience most recently at Stride Rite Children’s Group, a division of Wolverine Worldwide and is leading our product development, merchandising, sourcing, planning and wholesale teams; and Voin Todorovic who joined our company as Chief financial Officer in September.

Voin was most recently the Head of Finance and Operations for the Billion-Dollar Lifestyle division of Wolverine Worldwide, which includes global brands such as Sperry, Hush Puppies and Keds.

The addition of these individuals to my senior leadership team is an important advancement in positioning our company to continue to drive towards the delivery of our strategic plans and achieve our goal of sustained profitable growth in 2015 and beyond.

Separately, as previously announced, Tina Klocke, who has been serving as Chief financial Officer and Chief Operating Officer will be leaving the company after the transition period. Until then, Tina will retain her role as COO.

Now let me turn the call over to Tina who was CFO during the vast majority of the third quarter to reveal our financial results in more detail..

Thanks, Sharon, and good morning, everyone. We’re pleased to report our third quarter pre-tax income of $2.1 million, which represents an improvement of $3.2 million over last year.

Through the first nine months of 2014, we have generated pre-tax income of $3.4 million, marking the first time since 2007 that we have been profitable at this point in the year. For the third quarter, net retail sales were $85.6 million with seven fewer stores in operation compared to $83.6 million in the prior year.

Consolidated comparable store sales increased 0.8%, driven by an 8% increase in average transaction value, partially offset by a decrease in transaction. By geography, comparable store sales increased 1% in North America, and were flat in Europe. E-commerce comparables sales increased by 14.5% with a continued improvement in profitability.

Retail gross margin increased by 360 basis points to 43.7%. This was a result of approximately 300 basis point improvement from expansion in merchandise margin with the remainder coming primarily from improvements in packaging costs and leverage on fixed occupancy expenses. SG&A was $36.2 million, up slightly from last year.

As a percent of total revenues, SG&A improved by 40 basis points to 41.8%. Management transition and store closing expenses were $800,000 in the quarter, compared to $600,000 last year. Excluding these costs to both periods, SG&A, as a percent of total revenue, improved 70 basis points to 40.9%.

Pre-tax income was $2.1 million, compared to a pre-tax loss of $1.1 million in the 2013 third quarter. Net income improved to $1.8 million or $0.10 per diluted share, compared to a net loss of $1.4 million or $0.08 per share in the third quarter last year.

Adjusted net income was $0.15 per diluted share, a $0.20 improvement from an adjusted net loss of $0.05 per share last year. Now moving to our year-to-date results, for the first nine months, total revenues were $260.9 million.

Consolidated comparable store sales declined 2% and included a decrease of 1.6% in North America and a 3.6% decrease in Europe. Comparable e-commerce sales declined 0.9% with continued improvement in profitability. Retail gross margin was 42.3%, an improvement of 270 basis points compared to last year.

This increase was driven by a 300 basis point improvement in merchandise margin and reduction in distribution costs, partially offset by a deleverage of fixed occupancy expenses. SG&A was $108.1 million or 41.4% of total revenues, including $1.2 million in management transition and store closing expenses.

This compares to $116.5 million or 43% of total revenues, including $3.8 million in management transition and store closing expenses in the first nine months of fiscal 2013. Excluding these costs in both periods, SG&A improved 60 basis points in 2014 to 41%.

The deleverage of fixed overhead expenses was partially offset by decreases in store payroll and supply costs. Year-to-date pre-tax income was $3.4 million, compared to a pre-tax loss of $7.1 million last year.

Net income improved to $2.5 million or $0.14 per diluted share, compared to a net loss of $7.6 million or $0.46 per share in the third quarter last year. Adjusted net income was $0.21 per diluted share, a $0.44 improvement from an adjusted net loss of $0.23 per share last year.

Moving to the balance sheet, at quarter-end, consolidated cash was $40.5 million, up $26.7 million from last year. This is primarily attributable to our decreased capital spend, improved operating performance, and the timing of payments for inventory and rent. We had no borrowings on our credit facility.

During the quarter, we repurchased approximately 225,000 shares of our stock for $2.5 million. Consolidated inventories totaled $45.7 million, compared to $56.7 million last year. Inventory per square foot decreased 17.3%.

This decrease was primarily driven by a reduction in units due to later receipts of holiday products compared to last year and decreased costs of the units on hand. On a two-year basis, inventory per square foot decreased 5.3%. Year-to-date capital expenditures were $5.7 million, primarily for IT infrastructure and store-related capital.

Depreciation and amortization was $13.4 million. For fiscal 2014, we continue to expect capital expenditures to be in the range of $12 million to $14 million to support selected store updates and opportunistic openings, as well as the ongoing investment in IT infrastructure.

This includes the opening of six pop-up stores in advance of the holiday season, including a location in Times Square in New York City which opens next week, and as mentioned, we will also open five seasonal shop-in-shop locations with select Macy’s stores.

We continue to expect depreciation and amortization to be approximately $18 million for the 2014 fiscal year. As a reminder, our fiscal 2014 ends January 3, 2015 and includes a 53rd week versus last year’s 52 week a 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 seventh consecutive quarter of improved results.

We believe our initiatives position us to continue our progress towards sustained profitability for 2014 and longer term. And now, I would like to introduce our new CFO, Voin Todorovic..

Good morning, everyone. I’m pleased to speak with you on my first earnings call at Build-A-Bear Workshop.

For those of you not familiar with my background, throughout the last 15 years I had many financial and operational positions with increasing responsibility across a number of multi-billion dollar global companies that well prepared me to be a great addition to the Build-A-Bear Workshop senior leadership team.

My experience in working with global consumer brands operating across both retail and wholesale channels and with owned, licensed, distributor and international franchise operations will assist Build-A-Bear Workshop in achieving our strategic objectives and profit expectations.

In addition, I also had critical leadership roles in corporate finance, real estate, asset management and accounting at both divisional and corporate levels within Payless Shoe Source, Collective Brands, Stride Rite Children’s Group, and most recently, Wolverine Worldwide.

I have spent my first six weeks at Build-A-Bear Workshop getting to know many aspects of the company and working with the finance and operations teams with Tina’s support during the transition.

I’m excited to apply my finance, operational and capital allocation knowledge at Build-A-Bear Workshop to assist the company to achieve its long-term goal of sustained profitability and growth. I’m also looking forward to getting to know you, our investors and analysts, in upcoming meetings and investor conferences.

Now, I would like to turn the call over to the operator to take any questions if you have.

Operator?.

Thank you. (Operator Instructions) Our first question comes from the line of Stephanie Wissink with Piper Jaffray. Please proceed with your question..

Great, thanks so much for taking our question. This is actually Maria Vizuete on for Stephanie. We just had a couple of quick questions. We’re wondering if you can talk a little bit more about mall traffic trends maybe by region in Q3 and maybe what you're seeing today? Thank you. .

Our mall traffic trends, well, I mentioned a lot of operational levers that we have improved, but I did not mention traffic.

If you recall, we have improved in dollars per transaction, units per transaction and average unit selling price, but our traffic has been a little bit off, and it's not really been significantly by region in this particular quarter, but if there was a region that had some challenges is probably the Northeast..

And then, any color on Q4 today?.

Other than what we mentioned, we’re positive, we have a positive comp to-date in third quarter - I mean fourth quarter rather..

And then, if I can just add one quick one and just from a longer-term perspective, we’re just wondering what Macy’s partnership could imply for the future distribution model? Are there any plans or considerations to launch some more in multi-format stores beyond that? Thank you..

One of the things that we’ve talked about in the past from a strategic perspective is looking at our fleet in a portfolio manner, and if you think about the different types of retail environments in which we currently exist, we have malls, we have, what we call, tourist locations, we have shop-in-shops, we have pop-up stores and we’re looking at that a lot more strategically.

And as a part of that solution, shop-in-shops in more non-traditional approaches like a Macy’s relationship, we do think, bode well for us in the future, particularly if you want to have a diversified portfolio if indeed mall traffic continues to be somewhat challenged.

We found particularly with these tourist locations, which I had mentioned in the past, they tend to over perform on all key metrics. We do look at this Macy’s shop-in-shop opportunity, particularly the Herald Square and State Street location, as clearly being opportunistic from a tourist opportunity.

These are places that new consumers go that would also be inclusive of our Time Square pop-up store which will open next week..

Thank you. Our next question comes from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your question..

Congratulations on a really good third quarter.

We’d love to talk about specifically the gross margin, I mean that just keeps beating quarter after quarter and it seems like there's a lot of things benefiting that, a lot of things in the supply chain that I feel like we're kind of starting to lap now and yet the growth in gross margin is really not abating at all.

Can you maybe talk about where that's coming from and then maybe what the most important drivers are, whether it's initial pricing or markdown control or maybe just some extra legs of what you've been doing in the supply chain and really where could that keep going, if you just flow through obviously the traffic has been down and you put up those margins regardless, when are we going to start to run into the natural ceilings of the initiatives that are driving gross margin higher today?.

Mostly what you're seeing that's contributing to the gross margin expansion to-date is a combination of strategic pricing, and when I say strategic pricing, I'm not talking about that we're just randomly increasing pricing or creating price banding advantageous for us.

And I had mentioned this, I think, last time on the call as an example of price banding. We actually did increase our entry-level price point, for example, on our core product line from $10 to $12. We did that late in the second quarter - or in second quarter last year. So we haven't actually lapped that yet, this year rather.

And the other piece is what we've talked about, to some extent, which is value engineering, the reduction of the cost of the goods that are coming in. This is really the first quarter that we have enjoyed true value engineering from the bottom up versus value reengineering, if you will, of products that had already been somewhat designed.

It takes about six, eight months to get through - to loop through the whole product development cycle. So the third and fourth quarter are representatives of product lines that were completely engineered from the bottom up with the value construct in mind.

And is there any -- yes and on your question about upside, just and you can look back in our information. The highest retail gross margin we've ever had is 49% in 2005. So we're not at our height yet. I'm not saying that we can get to that. We had clearly a lot more volume and those were different days, but we still feel like we have some plays..

Great, that’s really helpful. And then, if I could just take you back on Maria’s second question here for a second. I mean it seems like this license stuff is really taking off giving you opportunities in different channels, I mean the Macy’s partnership could be great for the holiday season.

Do the terms of your license agreements, do you have the freedom to put that product wherever you want in any channel and any market and did you have to get special approval from your licensors to be able to do that that Macy’s partnership or do you really have that latitude to put the product where you feel it’s appropriate?.

For the most part, we have latitude. Our deals are based on being a vertical retailer. But we partner with our licensed -- we have great license relationships, so there is quite an open conversation. We’re running those stores..

You're owning all the economics of that?.

Yes. Just for clarity, are you asking if we have - you are referring to our Disney products and Marvel products.

You’re not referring to that we have a Macy’s --?.

Not referring to your own..

Okay. All right, so then that's the right answer. Yes, thank you..

(Operator Instructions) Our next question comes from the line of James Fronda with Sidoti & Company. Please proceed with our question..

Just on the Halloween items, do you think that could have as a significant impact as the Nickelodeon items had?.

We launched our proprietary Halloween products, as I mentioned, in late September. They really did quite well. We had a nice response to them. We had two specific Halloween products; a Werewolf and a Kitty. The Werewolf sold out very quickly. Once again, you can go on - he is actually upon eBay right now for more than we’ve sold in for.

And our Kitty is just -- we’re pretty scattered on her. So we sold totally clean on our Halloween products, but they are nowhere near the volume of Nickelodeon Teenage Mutant Ninja Turtles mostly because they have a really tight window of opportunity and they don’t have a national film.

But our Halloween offering isn’t just about those products, kids dress up like all sorts of characters during Halloween and what we do is push the approach of everything from our superheroes to our princess suits products, those are the number one costumes for kids, and we have those in our products.

So although we lead with things like a werewolf or a purple kitty, the Halloween story that will be really pick up next week isn’t reliant on these specific products. .

Are you forecasting or expecting any shipment issues for the fourth quarter similar to what you had in the third quarter?.

Shipment issues, you mean from a quantities perspective or a flow perspective? I'll try to answer..

I thought you said that the Ninja Turtle product could have been even better but there were some short-term shipment issues..

Well, they weren’t shipment issues. We didn’t order enough of initial quantities to meet the demand. So there is always going to be possibly a little chase.

We are being a lot more, as I mentioned in the call, aggressive on a strategic basis with key stories based on our last few quarters of experience of being able to drive velocities at a higher rate than was expected.

I think we're better prepared for this quarter for some of the opportunities, particularly given that the key licenses like Frozen, we certainly have some idea about the potential success of Frozen given that it's been out for quite some time in other channels. Shipment, yeah, so we feel that we're fairly well prepared for the fourth quarter..

(Operator Instructions) We’ll pause for just a moment to allow for any other questions. Ms. John, there are no further questions. I would like to turn the floor back to you for any closing and final remarks..

Yes. So thank you for joining us today. And in closing, I just want to acknowledge that this is the last earnings call for Tina as CFO and thank her for 17 years of service in that role at Build-A-Bear Workshop. Voin and I look forward to updating you when we report the fourth quarter results in February..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..