Allison Malkin - Investor Relations, Senior Managing Director of ICR Sharon Price John - Chief Executive Officer Voin Todorovic - Chief Financial Officer.

Alex Fuhrman - Craig-Hallum Capital Group Jeremy Hamblin - Dougherty & Company Gerrick Johnson - BMO Capital Markets.

Greetings and welcome to the Build-A-Bear First Quarter 2017 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 my pleasure to introduce your host, Ms.

Allison Malkin of ICR. Thank you, ma'am. You may begin..

Good morning. Thank you for joining us. With me today are Sharon Price John, CEO; and Voin Todorovic, CFO. For today's call Sharon will begin with a discussion of our 2017 first quarter performance and review the progress made on the key priorities we shared with you at the start of the year.

Voin will review the financials and guidance, 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 requeue if you have further questions.

Members of the media who may be on our call today should contact us after this conference call with your questions. Please note the call is being recorded and broadcast live via the Internet. The earnings release is available on the Investor Relations portion of our corporate website.

A replay of both the 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.

Actual results could differ materially from those currently anticipated, due to a number of factors including those set forth in the Risk Factors section in the company’s Annual Report on Form 10-K. We undertake no obligation to revise any forward-looking statements.

Finally, as previously announced, the company continues its exploration of a range of strategic alternatives. As you are aware, this could take many directions. And there is no assurance that this exploration will result in any strategic alternatives being announced or executed.

We continue to be limited as to any additional comments on this topic and as the process unfolds, unless and until our Board of Directors determines that further disclosure is appropriate. And now, I would like to turn the call over to Sharon..

Thanks, Allison, and good morning, everyone. On the last call, we noted that we intend to evolve and accelerate the execution of our retail diversification strategy given the ongoing shift in consumer shopping trends, while continuing to leverage and build on the actions we've taken over the last few years to expand our revenue streams.

Thus far, having made significant changes across the entire organization, we have delivered on our first objective of returning to sustained profitability, while simultaneously laying this critical groundwork to achieve the stated long-term goal of sustained profitable growth.

Today, I will review first quarter results, discuss some of the business initiatives taken during the period and provide some insights on our plans for the balance of the year.

Specifically in the quarter, consolidated comparable sales results were in line with previously stated expectations, declining 8.1%, reflecting the impact of the shift in timing of both Valentine's Day from a weekend to a weekday and Easter from our first quarter into this year's second quarter, which also reflects the impact of school spring break shifts as they generally follow Easter timing.

As previously reported, to address some of the challenges that arose in last year's fourth quarter, we made aggressive changes to our overall marketing plan to better connect with both moms and kids, which included a tactical media shift and the return to traditional tools, such as direct mail and in-store events.

The impact of the changes were initially apparent in late February and carried into March, when our overall trends began to improve.

Accordingly, for the 9-week period from February 19 through April 22, which includes Easter in both years, we saw an increase in consolidated comparable sales in the mid-single-digit range and a positive shift in traffic patterns, with a year-over-year increase of 1.4% in our North American stores.

This is in stark contrast to the reported retail industry traffic decline of 7% and the negative trends that we had seen at Build-A-Bear as late as mid-February.

Additionally, as expected, redemption of gift cards improved in the first quarter compared to the prior year, and we believe that the actions we have taken in conjunction with disciplined expense management contributed to the quarter's pretax earnings of $4.6 million, including the impact of foreign exchange, which is also consistent with our stated expectations and positions Build-A-Bear to achieve the previously stated goal of delivering increased pretax profit in 2017 as compared to adjusted 2016 results.

The positive momentum in trends and the shift in Easter timing have fueled positive sales thus far in the second quarter.

To continue this trend and deliver on our business goals through the remainder of the quarter and throughout the balance of the year, we intend to execute against four key strategies; channel evolution, product expansion, brand and experience amplification, profitability improvement.

With that in mind, I would like to highlight some of our specific 2017 initiatives and provide some key milestones for each platform. First, the channel evolution strategy continues to have a positive impact on our business opportunities.

Since introduction of the successful Discovery format in 2015, we have been actively upgrading and diversifying our real estate portfolio. At the forefront of this diversification effort is the expansion of the new concourse shop model.

Concourse shops are self-contained retail units that can be positioned in a variety of venues, including high-traffic A level malls with rates that have historically been prohibitive for one of our traditional in-line stores; opportunistic high traffic in tourist sites; and mid-tier markets that exclusively service a smaller region.

We opened the first three concourse locations in last year's fourth quarter, and given the early results are planning to have between 20 to 25 locations by the end of the year in the US and the UK.

Versus our traditional stores, concourse shops require substantially less capital, have a smaller footprint of approximately 200 square feet and provide high flexibility given the portability of the fixtures and shorter-term leases.

They also tend to have rent terms that are a percentage of revenue versus a fixed rate, which typically benefits the store's overall P&L.

Recognizing the changing retail dynamics, since 2013 we have been proactively creating options like the concourse shop and other smaller footprints designed to strategically evolve our fleet and advantageously leverage the significant number of leases that will expire over the next few years.

Our goal is to transform the portfolio to better reflect how consumers are shopping today and manage capital requirements in order to optimize the profitability of each location.

Accordingly, in 2017, we intend to update key stores into a Discovery design, often with smaller square footage and reduced occupancy costs; shift other stores from traditional mall formats to more nontraditional solutions; close select stores that do not meet our objectives; and extend favorable leases of stores that are profitable, but likely do not warrant a long-term capital investment to upgrade.

With that in mind, by the end of the year, we expect to make the following adjustments within our real estate portfolio; change approximately 20 more stores into a Discovery format, either in their existing location or, as noted, to a new smaller footprint located in the same shopping area; close 10 to 15 stores; execute short-term lease extensions on 50 to 55 stores with favorable rent provisions; and add 15 to 20 completely new Discovery locations.

The cumulative effect of all of these actions puts our end-of-year store count between 356 and 366 stores with over 25% in a Discovery format.

One of our goals has been to value-engineer the Discovery design and improve fixture sourcing in order to reduce the capital investment to make the necessary changes to evolve an aging fleet and transform the portfolio to a more diversified footprint.

The [investments] that have been made have been instrumental to our profitable expansion into multiple nontraditional locations, where families gather for entertainment and shopping, including Carnival Cruise Lines, AMC Theaters, select beaches, resorts and seasonal locations with Gaylord Hotels.

The diversification and update of store models also benefits our international franchise operators. Over the past few years, we have restructured franchise operations, while enhancing support, expanding infrastructure and driving down operational costs.

These changes are translating to growth in existing franchisees and are projected – who are projected to open 10 locations in the year. And expansion is also expected into additional countries later in 2017. As a result, we anticipate ending the year with the highest number of franchise stores in our history.

Finally, as it relates to a critical aspect of our channel evolution, we plan to launch a new e-commerce site and web platform prior to the important fourth quarter sales season.

As we have previously noted, Build-A-Bear has historically under indexed in e-commerce sales as a percent of total revenue and as compared to reported growth rates for online retail overall.

As the trend for both online and mobile shopping is expected to continue to grow, we are investing in a new website platform and upgraded system, with the intention of capturing a larger share of the projected business potential by increasing traffic levels, basket size and conversion rates.

This comprehensive reboot is being designed to deliver more of what a guest should expect from an experienced retailer like Build-A-Bear, such as more intuitive navigation, enhanced search features and an online shopping configurator that takes the guests through a multistep shopping process similar to our store, and, therefore, enables a customized journey that is both more comprehensive and, importantly, more fun.

Moving onto product expansion. In fiscal 2017, we plan to offer a balanced assortment of core owned intellectual property and licensed properties. Specifically, on licensed products, we are teaming up with several highly anticipated films during the year from partners such as Disney, Universal DreamWorks and Hasbro.

These include a robust collection of superhero products that primarily target boys and affinity consumers.

The timing of the movies provides ongoing excitement leading into the summer with Guardians of the Galaxy opening in May, Transformers opening in June, with feature-driven products that the consumer can change from bear to bot, and the perennial favorite, Spider-Man, opening in July.

Also in the summer, specifically in June, a new collection of Minions will return to Build-A-Bear as Despicable Me 3 opens.

For younger girls, excitement is building around two of our historical top-selling assortments; My Little Pony is scheduled to have the brand's first major theatrical release opening in October, and we are anticipating a Frozen animated holiday TV special to air in the fall.

And finally, in advance of the annual Star Wars Day on May 4 and the release of the next Star Wars movie late in the fourth quarter, we recently updated our product offering with a choose-your-side bear. Also, largely appealing to the teen-plus segment, we have regular updates planned for the popular Pokémon franchise.

In this quarter, we are featuring Pikachu and other key characters at varying times, and there is an in-store event planned for later in the year. Initiatives in outbound brand licensing continued to move forward.

For example, as recently announced, Esquire will distribute a unique new line of interactive branded slippers called Build-A-Slipper, which is expected to be carried in a range of retailers this fall.

Separately, Spin Master toys was pleased with our brand's performance during the holiday time frame, and we expect them to expand the Build-A-Bear Stuffing Station program in 2017 with new international distribution. Moving onto brand and experience amplification.

We are continuing to leverage the power of the Build-A-Bear brands in order to drive top-of-mind awareness, affinity, advocacy and sales. This strategic initiative covers expansion into content creation as well as ongoing efforts to elevate and integrate marketing across channels.

This effort is inclusive of the aforementioned recent changes that were made to rebalance our overall marketing and media planning.

Additionally, we have continued to improve the collaboration between product and marketing to tell comprehensive stories for both our owned intellectual property and design and licensed collections to drive traffic, units per transaction and dollars per transaction.

We are focused on leveraging the competitive advantage of our physical locations and their innate entertainment value, inclusive of adding regular in-store guest activities such as story time, tea parties, pictures with our costumed characters and movie premiere events.

And we started monthly parties on the 20th, promotional events in honor of this year's 20th anniversary, which will lead up to an exciting birthday celebration that is planned for this October.

The strategies in the three areas that I just discussed are designed to drive revenue growth, which combined with disciplined expense management and ongoing improvements in systems and processes, should lead to achieving our fourth objective of higher profitability compared to 2016.

In summary, we continue to aggressively address the shift in consumer shopping patterns through the evolution and disciplined execution of our strategic platforms. Progress has been made and further improvements are expected throughout the year.

Ultimately, by the end of 2017, we expect to deliver higher profit levels than 2016, reflective of the progress toward our stated goal of long-term sustained profitable growth as the company evolves into a multidimensional branded entertainment and retail operator.

Now I would like to turn the call over to Voin, who will give more details on the first quarter financials as well as expectations for the balance of the year, including the current second quarter..

Thanks, Sharon, and good morning, everyone. Going into the quarter, we knew that sales performance would be challenged by the significant negative impact of the calendar shifts surrounding both Valentine's Day and the Easter holiday.

In addition, we were also impacted by the overhang of changes to our marketing approach from last year's fourth quarter and negative margin pressure from the British pound devaluation caused by the Brexit vote in the prior year.

Facing these known challenges, we maintained our disciplined management of expenses, merchandise margin and inventory to deliver solid earnings per share performance in line with expectations. This morning's press release includes details of our first quarter financial performance that I will now review.

For the quarter, net retail sales were $88.6 million, representing a 3.8% decrease, excluding the impact of foreign exchange. This performance reflects a consolidated comparable sales decrease of 8.1%, which follows a 2.2% increase in the first quarter last year.

Traffic declines and the shift of major holidays were partially offset by increases in dollars per transaction and positive conversion in the quarter. We also remain pleased with our Discovery format store performance.

Discovery format stores in their first year of operation continued to achieve a double-digit increase over heritage locations, and stores in their second year are performing in line with the chain average.

As Sharon mentioned, comp momentum improved in the latter part of the quarter as we move past the holiday shift and benefited from the return to traditional marketing. In fact, looking specifically at the 9 weeks ended April 22, which includes Easter in both periods, our consolidated comparable sales rose mid-single digits.

This improvement reflects increased traffic in North America, increased conversion from improved service model and increased dollars per transaction, all of which gave us nice momentum as we began Q2.

Commercial revenue rose 234% from the first quarter last year driven by progress to diversify revenue streams beyond stores, led by wholesale revenues and, in particular, the relationship with Carnival Cruise Line.

The retail gross margin decreased 130 basis points to 47.1% as over 80 basis point expansion in merchandise margin was more than offset by the deleverage of fixed occupancy cost given negative comparable sales. Retail gross margin was also negatively impacted by currency.

The increase in merchandise margin reflected a disciplined management of the business and, specifically, the ability to reduce discounts and promotional activity versus the prior year while we were returning to a more traditional marketing approach.

In addition, we continue to see further efficiencies from supply chain and operational improvements enabled by technology investments. SG&A was $37.6 million or 41.5% of total revenues compared to $39.7 million or 41.8% of total revenues last year.

The decrease in SG&A was driven by a reduction in marketing spend given the shift of Easter versus the first quarter last year and also lower variable expense given the decline in total revenues, partially offset by costs related to the increase in store count. Preopening expenses were approximately half the first quarter last year.

The higher preopening expense in the first quarter of 2016 was associated with the opening of certain high-profile tourist locations inclusive of Myrtle Beach, South Carolina; Shanghai China; and Tivoli Gardens, Denmark.

As we look ahead, we expect preopening expenses to continue to trail prior year as we focus openings of our lower-cost concourse locations. First quarter pretax income was $4.6 million versus $5.3 million last year, a decrease of $700,000.

Tax expense of $1.8 million gave us a tax rate of 39.8% as compared to a tax rate of 33.3% in the first quarter of fiscal 2016. The 2017 first quarter tax rate was adversely impacted by approximately 400 basis points due to the implementation of the new accounting standard related to the tax treatment of equity compensation awards.

Net income per diluted share was $0.17 compared to $0.22 per diluted share in the first quarter of fiscal 2016. At quarter-end, cash and cash equivalents were $35.6 million, an increase of $4.8 million compared to the end of the first quarter last year.

We finished the period with $53.3 million of consolidated inventories, representing a 1.2% reduction compared to the prior year. For the first quarter of 2017, capital expenditures totaled $2.3 million, depreciation and amortization was $3.9 million.

For fiscal 2017, we continue to expect capital expenditures to be in the range of $20 million to $25 million, approximately two thirds of which is expected to be for store activity and the remainder related to IT infrastructure and financial system improvement and the upgrade of the web platform.

Depreciation and amortization continues to be estimated between $16 million and $18 million. Our objective for 2017 is to continue to build on our foundation for sustained profitable growth.

With this in mind, we continue to expect total revenue growth in the low to mid-single-digit range; each of the remaining quarters of the year to have positive consolidated comparable sales; pretax income growth versus adjusted 2016 pretax results; merchandise margin to expand on a full year basis through continued cost-improvement initiatives and a lower promotional activity, especially later in the year; and SG&A dollars to be higher than last year but leveraged as a percentage of total revenue.

As a reminder, we still have some headwinds in SG&A related to performance-based compensation; in particular, later in the year as well as timing shift of marketing expenses. We also expect to see increased expense related to our current financial and web systems upgrade as our older systems were fully depreciated.

Going forward, these costs will be reported as expense rather than depreciation given our decision to move to a more flexible cloud-based software solution. In addition, for fiscal 2017, we expect the annual tax rate to approximate 36% outside of the discrete items, assuming consistency in the current tax code.

We anticipate seeing volatility in future effective tax rates from the adoption of the recent changes in the equity-based compensation guidelines. And we anticipate ending the year with 356 to 366 stores, 90 to 100 of which are planned to be in the new Discovery format, with approximately 20 to 25 in the concourse shop format.

As it relates to the second quarter, we have had a solid start to the quarter and expect positive total revenues and positive low to mid-single-digit consolidated comp sales. As a reminder, historically, the second quarter is the smallest quarter of the year, even when it includes Easter and as such it is challenging to leverage fixed costs.

Gross margin will continue to be impacted by currency exchange rates as we continue to face headwinds caused by the Brexit vote last year. And SG&A will be impacted by higher marketing expenses given the timing of Easter, increased store payroll and operating costs, as we operate more stores versus the second quarter last year.

With that in mind, we expect to have a smaller loss in the second quarter this year compared to the same period last year. And for the first half of fiscal 2017, we expect modest positive pretax income. Thanks for your time this morning. We'll now turn the call back over to the operator to take some questions.

Operator?.

[Operator Instructions] Our first question comes from Alex Fuhrman with Craig-Hallum. Please proceed with your question..

Thank you very much for taking my question. It seems like things have definitely turned around a little bit the last few months. Curious what's really been driving that increase in traffic.

If I'm interpreting your comments correctly, it sounds like traffic in the centers that you're in hasn't necessarily gotten any better, but traffic to your stores has, is it basically just the types of advertising that you're doing, do you feel like getting more into TV and print had essentially fixed that issue or are you still pretty concerned about what mall traffic could bring for the remainder of the year?.

Hi, Alex. It is Sharon.

How are you?.

Good, thank you..

There's a lot of dynamics that are happening, and clearly it's hard to predict exactly what's going on and there is really some external forces we think that may have impacted the traffic as well.

I've heard on some other calls about some of the tax returns that may have impacted some of the early turnaround post-Valentine for us, but the things that are in our control, such as our media planning, our marketing, the use of our stores as more of a competitive advantage for us to create experiences for the consumer clearly has shifted some of our traffic versus the norm.

As I mentioned in the script that 9-week period, starting post-Valentine through last week, the last full week that was measurable, we've seen traffic up 1.4% versus a real negative trend overall.

So we have, historically, as Build-A-Bear, using some of these more traditional tactics, been able to get what we call our unfair share, outperforming traffic norm.

So I do believe that returning to some of these more direct mail, in-store experiences, reaching back out to moms in a more traditional way has impacted us, and we've certainly seen it in both sales and traffic numbers..

Great. That's really helpful, Sharon. And then just thinking about gross margin, it looks like that was better than most people would have thought here in the first quarter.

Can you talk about what's kind of been driving gross margin in the first quarter and, now that we're through the calendar shift, where we could expect to see that for the remainder of the year?.

Absolutely, Alex. Gross margin, especially, merchandise margin improvement has been one of those things that we've been talking for a while. Even last year, on a full year basis, we expanded our merchandise margin. Q4 last year, we had some hiccups related to our promotional activity.

As we called out on our fourth quarter call, we added some unplanned promotional events that weren't so successful in driving traffic. We pulled away from some of those things in Q1 and really didn't impact our performance. Actually, our dollars per transactions have gone up, our conversion has improved.

So all those things are very beneficial, and we expect to continue with the merchandise margin expansion on a full year basis.

In addition to that we continue to find operational efficiencies in our supply chain as we are able to leverage technology more, and we are implementing systems that continue to help us to have more insight and better focus on some of the controllable items that are going to help us to continue to expand margin going forward..

I would just like to add, Alex, on top of that traffic question that you had, that's not our only lever, and we have been focusing on driving the additional levers that improve sales over time. So we have gone through an entire, very robust comprehensive process of retraining our bear builders, our associates on conversion.

And so we're really making the most of the traffic. So we're working toward even – whatever traffic is, we're trying to get a higher comp, right, so that we convert more and more the guests that choose to cross our lease line.

And in addition, with a lot of this elevated and integrated marketing that coordinate both product and stories together, we are continuing to drive DPTs and UPTs, dollars per transaction and units per transaction, with our dollars per transaction still hovering near the highest they've ever been..

Great. That is really helpful. Thank you both Sharon and Voin..

Thanks Alex..

Our next question comes from Jeremy Hamblin with Dougherty & Company. Please proceed with your question..

Hi, good morning guys. Congratulations on the improved results. I wanted to first just ask about the guidance in the flow of same-store sales in the first quarter, because I'm little surprised by the commentary regarding the Easter period.

Obviously, same-store sales came in at your guidance, down high single-digit at minus 8%, but I'm a little surprised that the commentary is from the 9-week period, from February 19 to April 22, that it was up mid-single digits.

So I guess my question is, can you provide a little more detail behind the first half of the quarter in Q1 and what the comp was, and what it was in the post-Valentine's just in the first quarter because I'm having a hard time reconciling that you hit your guidance kind of right on the spot, yet it sounds like there was a pretty material improvement in results.

I'm just not sure how much of that material improvement was actually in April when Easter period hit versus what you were seeing in March and the very end of February?.

Okay. So yes, on the call last time, we certainly talked about the challenges that we've seen already in the first half of the first quarter. And they were fairly substantial, particularly as it relates to Valentines. And we had spoken about that. And even some of the significant double-digit traffic declines, and we had spoken about that as well.

And taking that, the 9-week post, there was – as we mentioned, we'd expect it to be able to shift some of our marketing plans, our media tactics, we were having some of the more traditional tools hit the marketplace such as some direct mail, starting to speak with moms again, and we expected to be able to start to impact that toward the end of February, early in March.

And we were able to see some shifts in that traffic. And then some of the conversion work that we've been doing just start to kick in, and we started to experience positive comps throughout the remainder of the quarter, except, of course, for the direct comparison to the prior year's Easter week, which would have been nearly impossible to comp.

So it's not just isolated to the April time period – direct April time period that would have been Easter this year versus the non-Easter time period last year, although, clearly that was a very positive time frame given the compare – the easy compares on the year. But it was a pretty stark shift in traffic that we were able to capitalize on.

Voin, do you want to add any color to that?.

I mean, I think Sharon covered well some of those things. Jeremy, clearly this was a tale of two halves within the quarter, and our performance, clearly, definitely improved. Like starting in February – late February, we continued to see some things. There were shifts from the Easter perspective, and it helped to start Q2 on a solid ground.

So this was – the month of March was – it came in line maybe slightly above our expectations, and that helped..

Yes, that is helpful. I guess, what I'm trying to get at is, there is a – it sounds like a pretty stark turnaround that you got to positive comps outside of the direct Easter comparison.

What gave you the confidence to guide to a down high single-digit comp when clearly the first half of the quarter, it must have been at least down low double digits? I'm glad that you hit that, but it makes me wonder what you saw, just because of the timing of when you reported in the middle of February, you had not really seen the benefit at that point of positive turnaround in trends.

I guess, what I'm trying to gauge is, how much hope there is in the guidance versus confidence of actually seeing the results transpire, because again, I'm pretty impressed by the turnaround, but it makes – it leaves me wondering why that improved turnaround didn't result in actually doing better than what your guidance was on comps..

Jeremy, I think that we were fairly clear in the prior call about our expectations of shifting marketing plans, marketing strategy, marketing tactics, inclusive of adding dollars to the plan, and that the only reason we were unable to make some of those actions in Valentine's is that we were – did not have complete clarity as to how some of the marketing tactics that had been changed during the fourth quarter were going to impact us in a negative way.

And we couldn't really catch the direct mail, some of the other changes, increase to media, shift the media plans to talk to moms again for Valentine's.

Now Valentine's was negatively impacted not only by some of the self-inflicted wounds that were – that we've been very crystal about on the marketing front, but it was also that shift from the weekend to the weekday that we knew was going to happen. So we were confident in the ability for those traditional tactics to kick in and work again.

We had a lot of history on those tactics working for us. We also had some pretty powerful product launches that we were planning during that time frame, inclusive of Beauty and the Beast film, which was very beneficial to us, and we got back in stock with Pokémon, and we knew we had those things coming..

Okay. That is helpful. And then in terms of just Q2, it sounded like you're running quarter-to-date, mid-single-digit.

Did I hear that right, and you're guiding to a low single-digit to mid-single-digit comp this quarter?.

We've only said that we're positive through quarter-to-date..

Yes, and we are guiding low to mid-single-digit, correct..

Okay. But you are positive, okay.

In terms of just the magnitude, this would just be one other helpful piece of information, on a relative scale, how important is Valentine's Day versus Easter? Is Valentine's Day like a kind of 3-to-1 in terms of magnitude of importance and sales associated with, can you give some relative scale on that?.

Well, they're actually a lot closer to the same scale as you – than you might think. Valentine's is often one of – the day itself, when it lands on a weekend, can be one of the biggest days of the year, if not....

It is the biggest..

The biggest day of the year. So when you have it leading up to a Sunday like last year, it can be really high impact. Easter has a lot of the spring break shift involved in it that can drive the month that it's around. But Easter itself often isn't as big of an impact as Valentine's. So they're a little more equal than you might think.

They're not that – it's not that much of a dramatic shift..

Okay, great. That's very helpful. And then I just had a couple of questions on the e-commerce, I was a little surprised to see e-commerce down for the quarter given that you didn't really have a good Q1 last year on e-commerce.

Is there – and obviously, you're making changes there, we're happy to hear the changes, but anything additional you could call out on e-commerce of why that was actually down year-over-year in Q1?.

Some of the overhang of the challenges that we had in fourth quarter were still there in the January time frame.

And even, of course, the marketing plans that we had for Valentine's, that also affects how many people come to the website, how many people are interested in the business, how many people are checking out the brand, how well do you convert.

So the website also, with the marketing changes, the shifts in our strategy to communicate with our consumers, actually saw a trend shift in the back half of the first quarter as well. In fact, it was slightly positive for the month of March, which is....

Big shift..

Really a big shift, I mean, and that's inclusive of March being – Easter being in March last year..

That's great to hear. And then just again, I'm really pleased.

I think the changes to e-commerce, long overdue, can you just give me a sense of the total cost of the investment as well as the timing of it? I think the one thing that I've seen over the last 20 years is e-commerce changes can oftentimes be painful because they never go that smoothly, when do you expect to have the change in the platform done?.

Yes. So a couple of questions in there, right? One is the cost. We usually don't share specific costs associated with individual IT or systems upgrades, but you can get a sense of all the multiple things that are going on, it's listed in our capital separated from the real estate to other things, and Voin can give you some color on that.

The second is, we're clearly shooting for and have been planning this e-commerce upgrade for a long time, like over a year, about 1.5 years at this point when we first started to investigate what type of partners we wanted to work with, who's best-in-class in certain areas because it's not just the facing portion of the e-commerce that needs to changes, it's not just the e-commerce side, it's that entire system and platform upgrade, because part of our challenge in the fourth quarter, for example, is we could not manage the traffic to the site, we couldn't turn the traffic on the site.

So we have – this is a full range, as I said, comprehensive reboot in the script of the way we do business on the Internet, inclusive of making it a lot more intuitive and pushing it all the way to what is the fastest-growing commerce platform right now across the United States and the globe is the mobile side.

So we are looking at – we have a whole cadence of betas and testing, but we do not want to miss the holiday time frame, Jeremy. And you're right, it is painful, but it is worth it.

And it is absolutely necessary for us to participate in this type of commerce, and we believe that we can create something that's worthy of Build-A-Bear in terms of this experiential side. All I can say is that we're on track right now, but being cautiously optimistic, you're absolutely right, there can be hiccups, but so far, so good..

Well, yes, I have to be more specific and push on that a little bit because I guess, in terms of the timing, I think the worst time to turn that on would be November, because there's inevitable hiccups, and oftentimes they can't be fixed quite that quickly.

So I guess, what I'm just trying to assess risk in doing this and thinking from the perspective of when you guys do business, if that's something that could be done in August or September, it probably is pretty good timing, I'm just wanting to be comfortable that your timing is not too close to the holiday period..

Jeremy, we've been doing this – we've been planning this year and a half. We understand that there are hiccups. And when I say we expect to be up and running before the holiday time period, that's inclusive of having testing and processes in place to do betas and have break fix completed before the holiday time period..

Got it. All right. Thank you for your patience. Good luck..

Thanks. .

[Operator Instructions] Our next question comes from Gerrick Johnson with BMO..

Hi, good morning.

So you plan to increase pretax earnings over adjusted 2016 results, but I noticed that, in the first quarter last year, you're readjusting some numbers, and wondering if there'll be additional readjustments in the second, third and fourth quarter? And because of that, what is the exact pretax – adjusted pretax earnings number we're trying to shoot for here?.

Good morning Gerrick. Thanks for the question. We are – we provided some guidance regarding the fiscal '17 on the last call, and we are staying on that guidance that we are expecting to exceed our adjusted pretax results from 2016. As a reminder, in Q4, we had some adjustments to the tune of about $5.7 million, close to $6 million.

And so when we – some of those – that was the only time when we made adjustments last year. So from the consistency perspective, we are going to be sharing some of those over every quarter, but the biggest impact is going to be in Q4.

Does that answer your question?.

Well, we know about that one. What we didn't know about was that add-backs that changed EPS from 1Q '16 to $0.19 from $0.22 cents. So I'm just curious as to whether or not there are going to be additional adjustments in 2Q and 3Q that would change the target that we're shooting for.

I understand our guidance for this year, but we have a moving target versus last year?.

Yes. Some of those adjustments, when you look at Q4 last year versus the full year, most of the adjustments that we had earlier in the year are going to be related to our China start-up costs, and we are going to be providing those on the subsequent calls..

Okay.

So should we assume that those start-up costs would be similar to the first quarter '16 or declining over time?.

I mean, they will fluctuate. We opened a store, a China store in Q2 last year. So like a lot of those costs are going to be in Q2, and they are going taper off in Q3 and later. And I think if I can just look it up versus last – in Q4 what we shared on the total, I can get you some of that information, it's in the numbers that we shared..

Okay, okay..

So I've been trying to look them up, but I'll try to get that back to you. So it's in the information that we have shared in the table in the back..

Okay, okay..

I think China start-up cost, yes, it's on a full year basis, it was close to – it is $1.1 million, and so like about $800,000 was first three quarters..

Okay, great. Thanks, and then one more, first quarter comps down 8%, and I think you said year-to-date up mid-single digits, meaning the first three weeks of April were up nicely, but your guidance for the quarter is up low to mid-single.

So is it correct to assume that you're expecting declines in the balance of the quarter in May and June?.

Gerrick, hi, the first quarter comps were down 8.1%, and the mid-single-digit increases for the 9-week period from February 19 through April 22. And then we shared that, quarter-to-date, we are positive..

Okay. So the difference is that's not a year-to-date number, that's a mid-February through mid-April number..

That's a given when our call is, that's our best capability to kind of capture this Marpril idea, the March/April, with the 9-week period, because we don't have a full week in the last week of April to put Easter in both years and kind of give you a good comparison..

It is good information. Thank you..

Thank you. At this time, I would like to turn the call back over to Sharon John for closing comments..

Thanks again for joining us today. And we look forward to speaking with you when we report second quarter results..

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