Greetings, and welcome to the Build-A-Bear Workshop Second Quarter 2019 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, [ Jessica Schmitt ] of ICR. Thank you. 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 2019 second quarter performance and review the progress made on our strategy. After, Voin will review the financials and share our guidance. We will then open the call to your questions. .

[Operator Instructions] 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 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. 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..

And now I would like to turn the call over to Sharon. .

Thank you, [ Jessica ], and good morning, everyone.

In the quarter, even with the anticipated decline in retail revenue given the comparisons to last year's remarkable traffic driving Pay Your Age events, we improved operating results with gross margin expansion and expense management versus the second quarter last year, even with the backdrop of global and economic uncertainties.

With the focus of our dedicated teams, the quarter also saw growth in new revenue streams as we continue to execute our business diversification initiatives, which we believe demonstrates the progression of our stated strategy.

We also continue to build necessary infrastructure and to solidify relationships with best-in-class partners, which we expect to further leverage the awareness and power of our brand across categories..

In short, our long-term goal remains to evolve the company beyond the traditional mall-based retail concept among which it was established over 20 years ago.

To that end, we recently completed the execution of the noteworthy agreements in the entertainment space, which I will outline shortly that are expected to build on our brand's strength and contribute to the investment of our overall evolved business model..

With U.S. aided brand awareness over 90% and comparative brand metrics that are for parental trust and kid love that rival other family brand [ BMS ]. We understand the potential value that is inherent in our company.

It is that same value that allows us to have a list of over 8 million opted in e-mail addresses for direct marketing and communication, 4 million active loyalty card members that represent an estimated 20 million household members and nearly 45 million guests each year that come into a Build-A-Bear workshop, a level that is comparable to attendance at global recognized theme parks..

On top of that, on a combined basis, there are over 110 million unique visitors to our website, YouTube channel and other social media platforms annually.

Not to mention the millions of brand interactions generated by digital posts, often featuring heartwarming stories that go viral that are shared directly by our guests through user-generated content.

With that in mind, we are focused on 4 key priorities this year that are intended to better leverage our brand assets and contribute to long-term success..

more efficiently taking advantage of growth in the digital economy; increasing acquisition, engagement and lifetime value of loyal program members; diversifying retail locations to broaden consumer accessibility to our brand and reduce our reliance on traditional malls; and finally, monetizing the awareness and trust that consumers have for our brand through incremental profitable revenue streams, such as outbound licensing, wholesale and entertainment..

As it relates to growing in the digital economy, we once again delivered double-digit e-commerce revenue growth, marking the seventh consecutive quarter of growth at those rates, a pace that has been consistent since the launch of our new web platform supported by sales force in fall of 2017.

Even with these results, we believe there is significant opportunity for further growth in e-commerce, when we benchmark our e-commerce as a percent of total revenue against other companies..

While we started as an experiential retailer, we believe this consistent online advancement proves that our brand power extends beyond hands-on retail experience. As a result, in addition to the core family segment, we have become multi-generational and diversified our consumer base.

We have seen teens and adults who prefer to shop online, move to our enhanced site to purchase affinity and gift products.

With nearly 50% of our e-commerce occurring historically in our fiscal fourth quarter, we've been laying the ground work and building capabilities to take advantage of the ongoing macro trend of online shopping, leveraging our progress to date in adding enhanced sites features, digital marketing programs and improve search efforts to drive growth in this critical period.

With over 85% of our site traffic on average originating from personal devices, we recently upgraded our mobile capabilities. We have seen reduced card abandonment and higher conversion rates since the mobile enhancement were released..

We've been refining both our paid and natural search with SEO-enhanced product descriptions, campaign optimization and branded search terms leading to higher traffic and improved conversion with a road map of planned future development. .

Closely tied to our digital priorities is a focus on integrating and expanding our Bonus Club loyalty program membership. As noted, we have over 8 million opted in e-mail addresses, with over 7 million of those associated with a Bonus Club account that now includes a more robust contactable database in the U.K.

that has been rebuilt in compliance with our recently enhanced GDPR regulation. .

We have advanced our capabilities to segment this database and personalize messages, which has helped to improve engagement levels with marketing communication, as evidenced by higher average open and click-through rates, which benefits both in-store and online channels..

We also continue to emphasize birthdays with Bonus Club members, recently adding an option that allows for the input of birthday data to receive additional benefits. We added the feature in conjunction with this year's Pay Your Age events, and we now have birthday data on approximately 2 million individuals associated with birthday club accounts.

This includes the data we have from the Birthday Treat Bear that was introduced last year, which allows the child to pay their age for a collectible bear anytime they visit a store during the month of their birthday.

This bear has been our #1 unit seller since it launched, and birthday continue to be the top reason for visits to our stores all year long.

By having this data, we can customize marketing messages and encourage store visits tied to an occasion, in which families are more likely to seek out our unique interactive experience and thereby add incremental lifetime visits..

Therefore, when turning to our next priority of broadening consumer accessibility at retail, our data ranging from guest satisfaction scores to generally increasingly robust dollars per transaction and conversion rates indicates that our current challenges are not about who we are but more about where we're located.

And it's important to understand that we are well on our way to pivoting the retail business to then use it more in line where today's families go for fun, entertainment and to make memories. .

We've understood the challenging dynamics of traditional mall-based retail for a number of years, and we continue to de-emphasize traditional mall occasions.

That is why we now, with purpose and planning, have optimality on nearly 70% of leases in the next 3 years, with additional leverage given due to Build-A-Bear's tendency to generate mall traffic because many of our visits are planned..

With our focus on growing brick-and-mortar retail locations that allow us to diversify access to more consumers in places where they prefer to shop, we are on track to have approximately 23 lease spaces within Walmart stores by the end of the year.

We believe that this relationship gives us the opportunity to expand the accessibility and convenience of our brand to a wider consumer base and reach incremental shoppers beyond those in traditional mall stores..

Beyond the store locations, Walmart is currently the top distributer of Build-A-Bear outbound licensed products from plush toys to flippers. We are also pleased that this year Walmart will be the exclusive partner for our annual National Teddy Bear Day celebration on a national basis. That means that nearly all U.S.

Walmart stores will offer the same collectible teddy bear that is featured in our stores with approximately 2,000 of those locations hosting local retail payment events over the weekend of September 7 through the 9.

Separately, in line with positioning Build-A-Bear Workshop stores where families go for fun and entertainment, tourist locations, such as the successful shop within FAO Schwarz in New York City or the location near the London Eye continue to be a focus..

We have completed the expansion into 17 Great Wolf Lodge resorts, which operate on a wholesale basis, like the model we have with Carnival Cruise lines. By this holiday, we expect to have nearly 150 nontraditional mall retail locations, including tourist venues through a combination of owned, seasonal and third-party wholesale agreements..

As it relates to monetization of our brand assets, we believe we made progress to leverage the awareness and trust that consumers have for our brand through incremental profitable revenue streams.

In the quarter, we had an increase in commercial revenue, and we executed multiple agreements tied to entertainment and content development, which is intended to be the foundation for a new branded production entity called Build-A-Bear Entertainment..

With that in mind, we are pleased to announce that we recently signed an agreement for a multidimensional relationship with Sony Pictures Worldwide Acquisitions that includes the creation of movie content based on some of Build-A-Bear's best-selling proprietary intellectual properties.

The first property in the pipeline is expected to be based on our popular music-oriented grow empowerment line, the Honey Girls..

This Sony contract comes on the heels of our recently announced music partnership with Warner Music Group to develop a Build-A-Bear record label under Arts Music as well as a publishing deal with Warner Chappell Music, both of which are synergistic with the continued expansion of listenership on Build-A-Bear Radio.

Other notable progress in this area includes the finalization of an agreement with RWS Entertainment Group, a full-service production company that creates award-winning custom entertainment, live events and branded experiences worldwide.

And we are currently in development for 2 holiday movies with the Hallmark Channel, the first of which is scheduled to air during the upcoming Christmas season..

We believe that many of these best-in-class entertainment partners recognize the value of the high awareness, trust and emotional connection that consumers have with our brand but also the unique asset that comes with our retail locations that allow for direct interaction and additional storytelling when consumers who have engaged with the entertainment content visit our stores.

We expect to start to realize some direct benefit from these new entertainment initiatives as revenue-generating channels in 2020.

However, we believe that the ultimate opportunity within this business model lies in the full circle of leveraging the branded entertainment content to also elevate and monetize our retail channel and experience, which should then drive additional brand engagement across diversified channels..

In regard to the recent second quarter, results included total revenue of $79.2 million, a decline of $4 million, with sales growth across geographies in the 2 -- first 2 months of the quarter, offset by a decline in the final month, reflecting the prior year's benefit of a significant traffic and transaction growth driven by our inaugural Pay Your Age Day events and the subsequent voucher redemption.

The retail sales growth in May and June was not enough to offset one of the biggest revenue weeks in the history of our company that occurred with the ground-breaking Pay Your Age promotion that was launched last July, even with the strong Lion King offering and a strategically plain repeat of the Pay Your Age event..

Because of our continued belief that the unprecedented response in the original Pay Your Age event last year demonstrated the passion that consumers have for our brand and help launch the aforementioned popular Birthday Treat Bear, we felt that the awareness and popularity of the promotion warranted the development of a plan that would allow us to repeat the offer in a format that, with appropriate constraints, would allow us to deliver a positive experience for participating consumers..

With a number of adjustments, we held our second Pay Your Age event in June of this year with strong consumer response, enhanced loyalty member data collection and overwhelmingly positive media coverage with nearly 2 billion impressions in the weeks leading into and immediately following this year's promotion.

Last year's prolonged activity included high levels of post promotion voucher redemptions, so we knew the comparisons will be challenging on the top line basis. Therefore, we focused on preserving profitability in the quarter, which is reflected in the improvement from the prior year's results.

Separately, as noted, we continue to advance in the digital economy, once again posting double-digit growth in e-commerce as well as an increase in commercial revenue that includes wholesale and outbound licensing fees..

Our quarterly results also included retail gross margin expansion of 160 basis points and a reduction of $2.2 million in SG&A expenses, all of which contributed to a $1.8 million improvement in second quarter pretax loss of $700,000 despite the unfavorable currency exchange rate..

From a balance sheet perspective, we ended the quarter with $15 million in cash and no debt, in contrast to a number of other more leveraged mall-based retailers. And for the first half of the year, Build-A-Bear Workshop is profitable, generating $1.7 million in pretax income, an improvement of $3.6 million from the first 6 months of fiscal 2018.

It is important to note that these results were achieved despite lower total revenues and included the currency headwind just mentioned..

As we look toward the balance of the current fiscal year, we expect to benefit from an enhanced celebration of National Teddy Bear Day in September, a favorable backdrop of family-centric films including the highly anticipated release of Disney's Frozen 2, with merchandise launching in October, and later in the year, the next installment of the Star Wars series.

Of note, the licensed product tied to the original Frozen film has generated the most sales of any license in our history.

Our popular Merry Mission holiday collection will feature updated characters and kickoff the Christmas season, which will offer an expanded gifting assortment both in stores and online helping to leverage the current e-commerce momentum..

Separately, as another proof point of consumer interest of Build-A-Bear in other categories, we are also pleased that our new Build-A-Bear Workshop Stuffing Station kit developed by our outbound license partner, Just Play, has been chosen to be a Walmart high-profile, top-rated toy list for holiday in 2019..

In conclusion, we remain energized about the long-term future of this brand and our business as we advance the monetization plans and new partnership opportunities that are now on hand to deliver stakeholder value..

I will now turn the call over to Voin to review additional financial details. .

Thanks, Sharon, and good morning, everyone. As Sharon mentioned, the second quarter followed a particularly strong top line performance from last year, driven by the success of our inaugural Pay Your Age Day event.

This year's second quarter results were also negatively impacted by unfavorable currency, driven by the volatility in the pound versus dollar during the period. Even with the headwinds faced, we improved profitability versus second quarter last year, driven by significant expansion in gross margin and disciplined expense management..

With that in mind, we believe the fiscal second quarter of 2017 represents a more accurate comparison as it removes the anomaly created by 2018's Pay Your Age Day event. Using this comparison, this year's second quarter saw increased sales and improved profitability on a constant currency basis.

Importantly, Build-A-Bear achieved solid pretax profitability during the first half of 2019, and we believe these results have us on track to achieve a profitable year..

commercial revenue growth of over 200% to $3.2 million as we continued our progression to grow new revenue streams. Notably, we saw sales growth the first 2 months of the quarter across geographies, inclusive of this year's successful Pay Your Age Day event. This also included our seventh consecutive quarter of double-digit e-commerce growth..

Now I'll review the second quarter financials in more detail. Total revenues were $79.2 million, a decrease of 4.8% compared to the second quarter of fiscal 2018. Retail gross margin expanded to 44.1%, increasing by 160 basis points, mainly driven by merchandise margin expansion.

We also saw leverage in occupancy expenses as we continue to control cost in number of ways, including managing our real estate portfolio to lower average store occupancy expense and reducing our supply chain costs..

SG&A decreased $2.2 million to $35.7 million as we continue to maintain disciplined expense management and remained focused on our controllable spend. Even with the revenue decline and unfavorable currency exchange rate, pretax results improved by $1.8 million from a pretax loss of $742,000 compared to $2.5 million the prior year..

Income tax expense was $482,000 compared to an income tax benefit of $745,000 in the prior year's second quarter. This year's income tax expense was driven by taxable income generated in North America at the statutory rate. This expense was not able to be offset by losses in various foreign jurisdictions due to full tax valuation allowances.

Importantly, we do not expect to pay any material cash taxes on a full year basis..

As it relates to the balance sheet. Again, we believe our second quarter results should be compared to second quarter fiscal '17, given the anomaly created by the Pay Your Age Day events that occurred late in last year's second quarter.

In fact, the transactions from Pay Your Age Day events last year led to higher cash balances and significantly lower levels of inventory at quarter end..

At quarter end this year, cash and cash equivalents were $15 million, which is $2.7 million increase compared to the ending cash position of the recast fiscal 2017 second quarter. Consolidated inventories were $62.1 million at quarter end, representing a $2.7 million increase compared to the end of the recast fiscal 2017 second quarter.

Both of these were impacted by the timing of inventory to support the product launch associated with the Frozen 2 movie combined with our decision to bring in inventory earlier in response to the anticipated increase in China tariffs.

We expect to finish the year at a similar level of inventory compared to fiscal 2018 and expect to have cash and cash equivalents in the range of $20 million to $25 million..

At quarter end, there were no borrowings under our revolving credit facility. However, based on our financial results for the 2019 second quarter, we will not be in compliance with the minimum EBITDA covenants under our revolving credit facility.

As noted, we ended the quarter with no borrowings, and we do not expect peak borrowing requirements to exceed $5 million for the remainder of the year to cover typical seasonal working capital needs.

It is important to note, we have reached an agreement in principle with our bank for a waiver of the covenant and an amendment of the revolving credit agreement terms..

Capital expenditures totaled $2.5 million for the second quarter of fiscal 2019. And for the full year, we currently expect capital expenditures in the range of $12 million to $14 million. The lower spend compared to our previous guidance is primarily due to the timing of Walmart openings.

We expect to end the year with 23 total Walmart locations with a number of additional locations planned for fiscal 2020..

Before sharing our updated full year guidance, I would like to provide additional information concerning some current macro trends and their potential impact on our financial results. First, we are assuming no changes in the rate in December 15 effective date of the recently modified fourth tranche of tariffs.

Should tariffs go into effect, we expect minimal impact this fiscal year, in part due to continued pull-forward of inventory receipts, and we are working to mitigate the impact into the next fiscal year. Actions include select retail price increases and shifting our sourcing structure..

Separately, we expect the exchange rate of the British pound sterling relative to the dollar -- to the U.S. dollar to stay similar to the level at the end of the fiscal second quarter, which will have a negative impact on revenue but minimal impact on profit for the remainder of the year.

We are balancing these actions with an expectation that business could be impacted with ongoing changes in shopping patterns and shift to consumer confidence that could impact discretionary spend..

Also as would be expected with the change in fiscal year that began in 2018, third quarter is anticipated to be our smallest and least profitable quarter. In addition, we have some tough comparisons in our retail stores in August caused by the tail end of the prior year's Pay Your Age Day voucher redemptions.

However, we have seen an improved trend that gives us more confidence that we will meet our profitability goals for the year. Our full year guidance includes a small improvement in third quarter results versus last year's $10 million pretax loss..

Finally, for the full year, we are adjusting our guidance for revenue and reiterating the previously shared pretax income guidance on a GAAP basis. We currently expect total revenues to increase in the low single-digit range versus our previous expectation for an increase in the mid- to high single-digit range.

This reflects our first half performance and the potential impact of macro issues offset by growth in e-commerce and the benefit of our diversification strategies to reach more consumers and add new revenue streams..

On the full year basis, we continue to expect pretax income to be slightly positive, reflecting increased revenue in the second half of the year, expansion in gross profit margin.

While we expect a reduction in SG&A for the full year, in the second half of the year, we expect SG&A to be higher than the prior year, driven by the expansion of Walmart locations and the more normalized incentive compensation expense versus fiscal 2018.

And as noted, we expect to finish the year with a healthy balance sheet, including $20 million to $25 million in cash and positive operating cash flow, less capital expenditures..

This concludes our prepared remarks, and we will now turn the call back over to the operator for questions.

Operator?.

[Operator Instructions] Our first question is coming from Eric Beder of SCC Research. .

Can you talk a little bit about U.K.

operations and what you're seeing there? And how some of the changes you're implementing are affecting that growth?.

Sure. We continue to see some challenging environment in U.K. that continues, even though over the last couple of months we have seen some improvements in trends as a result of some of the actions that we have taken earlier this year.

As a reminder, last year, we -- due to the impact of GDPR rules, we did have some challenges in opting in our consumers and talking to them. Some of those challenges have been resolved earlier in the year, and we have been seeing some really nice lift from those, especially on our web business..

The traffic in our stores, especially in the recent weeks, has been more favorable, but still there is a lot of uncertainty knowing what the geopolitical condition in that country and some of that everyday changes that we are seeing and uncertainty around Brexit. So we are cautiously optimistic.

As you know, some of those things are outside of our control, but we continue to be very aggressive in managing our real estate portfolio, managing expenses and things that are directly within our control. .

Great. And then just a quick follow-up. On Lion King, so that was a significant push into the stores at 6 new furry friends, backdrops, decals. When you look at -- first of all, you considered what you did there a success in helping driving traffic.

And when you're looking at Frozen and Star Wars, are we going to see that kind of push into the stores and online to drive business there?.

Yes. In fact, Lion King was very robust for us. It was -- we considered it to be very strong story. And we did have a multidimensional marketing campaign around it, and it was our #1 story for the quarter.

So we felt like that there were a lot of things that we did, then levers that we pulled that were very successful to create excitement and drive traffic into the retail locations using Lion King. And indeed, we do intend to use and repeat some of those efforts. We also have a lot of experience with Frozen..

As I noted, it was -- it is our historically best-selling license product of all time in Build-A-Bear. So that experience will bode well for us as we create interesting and traffic-driving opportunities for children to come in and get their new Frozen products. Star Wars as well that we will focus most likely in a greater way on Frozen.

We do see a lot of opportunity there and have a broad range of products to fulfill what we expect to be a good demand. .

[Operator Instructions] Our next question is coming from Steph Wissink of Jefferies. .

Our first question, and Sharon, this one may be for you. But as you think about the evolution of the brand and some of the commercial sales that you're doing, I think it mixes up loyalty-based payments with wholesale sales.

And I'm wondering if you'd step back and looked at the total brand sales trued up to retail value, if that's giving you any sense of the total size and scope and the potential of the business if we were to look at it from the consumers' lens versus from the way that you report?.

Yes. Thank you, Stephanie. Appreciate the question. We definitely do look at grossed up approach to try to value the brand at retail so that everything is equal.

You're right that a lot of these things that we're doing, and we mentioned it all the time, that many of these license opportunities are -- they're margin accretive to us because basically where we're getting royalty dollars, which are very rich with little overhead associated with them.

We have done some rough numbers on that, $400 million to $450 million. I think, Voin, if you like to add some color to that. But that's also inclusive of the grossing up of our franchise business.

Is that right?.

Yes. If you think from the enterprise, probably some place between $400 million, $450 million. As you know, a lot of these revenues are coming in variety of different streams. We do have, as Sharon talked about, some of the royalty income we are getting in our commercial channel through outbound licensing.

We are getting franchise income from our international stores as well as we have these experiences that we refer to as third-party wholesale with Carnival Cruise Lines and Great Wolf Lodges that also will be grossed up on the retail level as we sell to them on a wholesale basis. .

So when you add up some of those things, you are in that range, $400 million to $450 million, depending on the exchange rates and some of the things that we have and seasonality of those businesses. .

I think you're right. Yes, I think you're really right to question it, because sometimes those are undervalued inside of the comparisons that -- when you're looking at the majority of our sales being at retail value, and it's hard sometimes to you sort of lose the plot on that these dollars are valued at a different level in some way. .

That's right. I think that's very helpful because I know what the total scope is as well. I mean second question is just to unpack the sales guidance. So couple of angles, I'd appreciate you taking. The first is, you've been in a net closure cycle for the peak sales and total dollars being down. It's not necessarily a huge surprise.

But I'm wondering if you can just give us a scope of what factored the closures of the net retail footage declines has had as an impact on sales versus the underlying performance of the business?.

And then how that factored into the way that you're guiding and the takedown from mid- to high single to kind of a low single-digit range, which seems like a more extreme revision? So if it's more than just the footage changes, if it's something in addition that you could just provide some additional context that would be helpful. .

Sure. So I can start with some of that stuff. So yes, we did lower our full year revenue guidance. There are a few things that go in there, like, first, as we talked about, we did have some misses in first half of the year, especially in the second quarter, as we did have some of this challenging comparisons with Pay Your Age Day events.

Now we did have -- as you talked about, we did close 6 stores this year in second quarter, and the timing of Walmart stores has shifted a little bit impacting our seasonality and timing between quarters. As we said on one of our previous calls, we expect over the next 18 months or so or next 2 years to close up to 30 stores.

We are in constant negotiations with our landlord community. And as we have a lot of optionality with our leases, we are going to be taking advantage of those. And if we are not getting the terms and achieving profitability that's expected for us, we may be walking from some of those locations, and that could impact the top line..

In addition, as we think about the second half of the year, there are more positive things coming up as we believe Frozen should be our biggest license of the year, and that should be floor set, I think, early October for us. We also are going to be getting a benefit from opening of additional 17 stores, Walmart locations.

We did -- our initial guidance included few more stores, but some of those shifted the timing into beginning of next year. We expect still to have double-digit increase in our e-com business, as we continue as well to drive our non-retail revenue streams in form of our commercial revenue. So we feel good about some of those things.

Another piece that's worth noting, Stephanie, it's the exchange rate risk in U.K., with the pound devaluation and especially at the current rates, it's going to be at least 1%, probably a little bit more of sales decline on a full year basis due to the weakening of the pound. .

Yes. And Stephanie, I also think it's important to understand that the retail changes that we're making when you -- talking on a more macro level are really fundamental, when you start to think about it. It's -- we're shifting not only away from and managing down the traditional mall-based business as a percentage of our total retail offering.

And in that percentage of total retail offering, it's inclusive of, when we think about it in its broadest terms, with the third-party retail and seasonal shops and shop-in-shops with a variety of different models..

But at the end of the day, what you're going to end up -- what we believe we're going to end up with is something that's very different from what was kind of a cookie-cutter 2,500, 3,000 square-foot store that rolls out in what would have been considered traditional or is now considered traditional mall retail to something that has a decrease in square footage per store yet the number of stores would increase for us to have a broader accessibility to consumers to be able to experience Build-A-Bear that we believe will buoy these other revenue streams.

So you end up with our goal of having more yet smaller more profitable locations. So your average store volume goes down, but your average -- but your total store count goes up.

Does that make sense?.

It does. Yes. So I think looking at kind of footage basis versus a unit basis, it seems to be a shift that we need to make in the modeling.

If you agree with that?.

We have looked at that, and Voin can add some more color. Again, we have -- there is that challenge that what you brought up in the first question of how do you normalize on the third-party retail versus our owned and operated retail. But there are ways to do that, I think, that will help people understand this fundamental shift that we're making. .

And also with some of the things that have been done over the last couple of years and diversification of our real estate format, our concourse shops are about 200 square feet. Our Walmart locations are about 1,000 or in that vicinity. Our traditional stores are 2,000 to 2,500.

So the mix of real estate format definitely impacts that square-foot calculation, and it is challenging for you guys to model, but we can try to work to provide some additional color so that people can have better understanding on some of those things and help you model the revenue a little bit better. .

Voin, could I ask you one more? And just related to the tariff situation, I know you quantified -- provided the qualification that you're shifting some of your production outside of China.

But can you just remind us what percentage of your U.S.-bound goods come from China today and what your goal would be?.

So today, we probably have -- over 90% of our goods are coming from China, and we are going to be working to diversify and shift our sourcing base. And maybe over next 12 to 18 months to have like maybe 1/3 or roughly so of production coming from outside of China.

And we'll continue to look and review that number as we go forward and understand what kind of challenges and changes are going to take place with the new tariff structure. .

Yes. It's important to note, though, for the vast majority of that shift, we are working with long-term partners and existing production facilities and companies. .

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments. .

Thank you for joining us today, and we look forward to updating you on our business on the third quarter call. .

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time. Thank you, and have a wonderful day..