Yahoo Finance Build-A-Bear Workshop, Inc. (NYSE:BBW) Q4 2023 Earnings Call Transcript
Build-A-Bear Workshop, Inc. (NYSE:BBW) Q4 2023 Earnings Call Transcript March 14, 2024
Build-A-Bear Workshop, Inc. beats earnings expectations. Reported EPS is $1.34, expectations were $1.32. BBW isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Build-A-Bear Workshop Fourth Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Gary Schnierow, Vice President of Investment Relations and Corporate Finance. You may begin.
Gary Schnierow: 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 fourth quarter and full year performance and update the progress we've made on our key priorities. After, Voin will review the financials in more detail and provide our guidance. We will then open the call to take your 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 our call and webcast will be available later today on the IR site.
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 of the company's annual report on Form 10-K. We undertake no obligation to revise any forward-looking statements unless required by law. Also during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items, which management believes can be useful in evaluating the company's performance. The presentation of non-GAAP financial measures should not be considered in isolation or a substitute for results prepared in accordance with GAAP.
If non-GAAP measures are presented, you will find information regarding these non-GAAP financial measures and a reconciliation in the company's earnings release. And now I would like to turn the call over to Sharon.
Sharon Price John: Thank you, Gary. Good morning and thanks for joining us for Build-A-Bear's fourth quarter and fiscal 2023 earnings call. We are pleased to again report record results as we continue to execute against our strategy, which is focused on the evolution of our business model to profitably leverage the power of the Build-A-Bear brand. Fiscal 2023 represents the third year in a row of record results for Build-A-Bear. In keeping with this trend and as reflected in our guidance in this morning's press release, we expect to deliver a fourth consecutive record breaking year in fiscal 2024. Now to recap 2023. Specifically for the fourth quarter revenues increased nearly 3% to over $149 million and we delivered pre-tax income of more than $26 million.
While these numbers were within the previously provided guidance range we would like to note that the results were softer than originally planned due to a combination of e-commerce disruption and some overall fourth quarter economic challenges accentuated by severe January weather. Voin will provide some more insights on that impact in his remarks. Turning the page to full year fiscal 2023 results, revenues increased nearly 4% to a record $486 million and pre-tax income increased 7% to over $66 million also a record for the company. As noted we attribute these 2023 results as well as Build-A-Bear's meaningful expansion and profitable growth over the past few years to the ongoing successful execution of our strategy and the evolution of our business model, which I will highlight in a moment.
But first to better understand the progress we have made as a comparison, fiscal 2023's $486 million in total revenue is up 44% from the $338 million generated in fiscal 2019, the last pre-pandemic year. Additionally, this revenue has delivered a significantly improved level of profitability. The $148 million revenue increase over the past four years generated an incremental $65 million in pre-tax income and we have driven this financial improvement across all three of our business segments. As a reminder, our strategy is to deliver long-term profitable growth and is grounded in our most valuable asset, the power of the Build-A-Bear brand. In summary, the company's strategic initiatives are: one, the global expansion of unique experience locations.
This includes the evolution of store types and business model; two, the acceleration of a comprehensive digital transformation, this ranges from systems upgrades to e-commerce integration to content creation; and three, the continuation of investment to support initiatives that leverage Build-A-Bear's now multi-generational brand to drive incremental profitable growth. Some of the recent progress that we've made in each of these initiatives includes first our workshops are a critical part of what creates a valuable point of difference in the marketplace. Guests come to Build-A-Bear workshops for an experience in creating their own unique furry friends. This is why up to 80% of visiting guests create plans in advance to go to their local Build-A-Bear workshop often in celebration of birthdays, holidays or special occasions.
We cultivate these memorable and shareable one-to-one moments with guests through our exclusive Bear building process. After building their unique furry friend, guest visits conclude with us collecting first party and loyalty club data for more than 80% of our customers, which enables us to directly communicate more meaningfully with them to drive further engagement and repeat purchase whether it be on the Build-A-Bear website, watching content, sending a gift or coming back to a store perhaps at one of our many tourist locations during their next family vacation. Given a store visit is the most common first step in a customer's Build-A-Bear experience plus our top tier store economics and the independent research showing a clear market opportunity for additional workshops, we focused on the expansion of our store fleet post the COVID pandemic.
You might recall on our fourth quarter 2021 earnings conference call, we stated that we expected to add between 15 and 20 new partner operated and corporately managed retail experience locations over the next two to three years. Today, we are pleased to share that we opened 44 new locations in just the past two years, more than doubling the previously stated expectation. And existing international franchise partners have also started their post-COVID expansion, adding a net six stores in 2023. In summary, between our three global experience location business models, net new unit growth was nine stores for 2022 and 37 stores for this past year. Today, we are guiding to net new unit growth of at least 50 additional retail locations in 2024 on a global basis, which would bring the three-year net new unit growth to nearly 100 stores by the end of this year.
Our second strategic initiative has been an ongoing, comprehensive digital transformation that touches nearly every aspect of Build-A-Bear and is designed to elevate business efficiency, integrate customer communications and accelerate incremental opportunities like gifting and personalization programs. The ultimate goal is to create a cohesive digital store and marketing ecosystem that expands Build-A-Bear’s addressable customer base and the lifetime value of our guests, in-store, online or otherwise, to drive overall sales and profitability. One of the first steps in the evolution to becoming a more integrated omni-channel organization was to replatform and upgrade Build-A-Bear’s e-commerce business. This helped to drive a tripling of total e-commerce sales since 2018, inclusive of the 2023 softness.
That said, as we have noted in the past, we have much greater aspirations for our e-commerce business as we believe the Build-A-Bear brand has a unique opportunity to expand into gifting more meaningfully. Gifting alone is a multibillion dollar category. Therefore, after a multiyear digital transformation effort ranging from a new warehouse management system to the implementation of buy online ship from store abilities, the goal is to accelerate the move to the next step of the company's digital strategy. With that in mind, we have recently created the new role of Chief Customer and Digital Officer with a single oversight of both website and customer marketing. The position touches all points from digital to in-store, including loyalty and CRM, plus creative and guest services, and is designed to unleash the power of a much more integrated approach to driving the business.
We expect this first of its kind structure for us to elevate and connect our messaging, while providing an appropriately personalized experience wherever, whenever and however our guests choose to engage with Build-A-Bear. Our third strategic initiative is the increased investment to support profitable growth. As corporate store operating margins remained above 25% for the third consecutive year and we have continued to shift to an asset-light, partner-operated store model, we have meaningfully improved the company’s cash flows. Build-A-Bear’s more consistent cash flow has allowed us to make longer term marketing investments in entertainment initiatives that we expect to be evergreen. The expansion of our annual Merry Mission marketing campaign in the fourth quarter is just the latest example of that opportunity.
In conjunction with overall multifaceted holiday efforts, we released Build-A-Bear’s first ever animated theatrical film, Glisten and the Merry Mission, based on the characters and storyline of the multi year, top selling holiday plush collection. And while we're excited about the film as a pure entertainment vehicle, we primarily look at it as another piece of a comprehensive content strategy. We are utilizing content and entertainment related efforts such as the movie and in this case, as well as Merry Mission music videos, the Merry Mission gaming app, the Merry Mission section of our Roblox Build-A-Bear Tycoon game, and the transformation of Build-A-Bear Workshops into temporary Santa’s Workshops during the holiday season is a comprehensive marketing effort to bring the company's entire customer-facing communications to life through characters and compelling stories to drive awareness, engagement, affinity and ultimately, sales.
With that in mind, although, as we mentioned, fourth quarter was lighter than expected, this marketing effort drove Merry Mission product sales up more than 65% year-over-year. With this multiple touch point marketing model in place, we expect Glisten and the Merry Mission to become a part of our annual holiday tradition. It is important to understand that none of this could happen without the power of the Build-A-Bear brand. But what do I mean when I say the power of the Build-A-Bear brand? Well, now that almost 250 million furry friends have been made over the past 25 years around the world, our guests have no doubt enjoyed untold numbers of special moments, smiles, stories, laughter and fuzzy hugs with their Build-A-Bear animals. These memories translate not just into the 93% aided brand awareness in North America that we enjoy, but more importantly into trust, affinity and preference.
Over the past quarter century, these special memories have made Build-A-Bear, in a word, beloved. In fact, just recently, WPP's brand analytics platform, BAV recognized Build-A-Bear for many of these attributes on their list of the 20 most influential retailers across North America list. BAV notes that strong brands have deep emotional meaning for customers and this is what gives a brand influence. We are pleased that by adding a little more heart to life, Build-A-Bear is recognized alongside with such iconic brands as Disney, Apple and Nike. With the continued opportunity to leverage that brand power, I will turn our outlook to 2024. Quarter-to-date following softer February sales that were reflective of some of the challenges we had experienced in the fourth quarter, we entered March with a little bit of a positive change in trends.
Although, we are balancing this with the reported consumer spending concerns and some toy industry reports with downward expectations for 2024, we remain confident in providing guidance with the expectation of continued growth as we execute on the three key pillars of one, store expansion with the expectation of net new unit growth of at least 50 stores globally; two, digital transformation, including our recent actions to advance the company’s e-commerce business; and three, investment to support further growth. Build-A-Bear’s new phase of sustainable free cash flow, combined with the business model shift to more asset like partner and franchise stores has allowed us to increase investment to support growth while also returning cash to shareholders.
Over the past three years, we have returned more than $90 million to shareholders through stock repurchases and two special dividends while remaining debt free. Reflecting management’s and the Board’s confidence in Build-A-Bear’s continued financial performance, we are now initiating a regular quarterly dividend of $0.20 per share while continuing to buyback our stock. Overall, we remain pleased with Build-A-Bear’s record breaking results in 2023, as well as the many accomplishments of this year. We are also thoroughly excited about the opportunities across nearly every aspect of our business for 2024 and beyond. Finally, one of the most exciting efforts to watch for is the rollout of a comprehensive new brand campaign. This campaign is designed to further expand the appeal of Build-A-Bear while simultaneously connecting multiple generations to a universal message designed to put our beloved brand right in the middle of the collective conversation.
Again, the multi-dimensional campaign will be launched across all consumer touch points and is called the stuff you love. Beyond the obvious double meaning of the word stuff, the big idea relates to Build-A-Bear not only as one of the things that is loved, but that Build-A-Bear both enables and indeed is often woven into the memories about all the stuff we love. In closing, after over a decade of service to this brand and company, I can truly say that I’m sincerely appreciative to Build-A-Bear’s associates, guests and partners as we continue to work toward our mission of adding a little more heart to life. And now, I would like to turn the call over to Voin.
Voin Todorovic: Thank you, Sharon, and good morning, everyone. It’s good to speak with you again today to share our results for our fiscal fourth quarter and full year of 2023. Before I touch on our financials from the past year, I want to recap a few highlights. First, we are pleased that we delivered our third consecutive year of record results as we grew across all segments, expanded gross profit margin and increased pre-tax income versus last year. In addition, earlier today, we announced our 2024 outlook, reflecting expectations for another record year. Also, as the result of our solid business performance and strong cash flow generation over the past three years, we have paid two special dividends and repurchased more than 1 million shares of common stock, returning over $90 million to shareholders.
To put this in perspective, this return of capital to shareholders represents approximately 30% of our current enterprise value. On top of this, our Board has approved the initiation of a $0.20 per share quarterly dividend, showing confidence in the company’s ability to sustain profitable growth based on our long-term strategic plans. Now moving to our financial results, starting with a more detailed review of the fourth quarter that reflects one extra week compared to the prior year. Total revenues were $149.3 million, up 2.9% year-over-year. Net retail sales increased 1.5% year-over-year with a positive contribution from stores due to the extra week and an 8.8% decline in e-commerce demand. Store sales were particularly impacted by a two-week stretch of bad weather in January when we experienced over 250 days of store closures.
Our traffic was up, but we saw a decline in dollars per transactions for the quarter. Commercial revenue, which primarily represents wholesale sales to our partner operators and international franchise revenue rose a combined 31.1% versus the prior year. Gross margin was 56.4%, an improvement of 140 basis points compared to last year. Benefiting from merchandise margin expansion reflective of lower freight cost and leverage of distribution costs. SG&A expenses were $58.5 million or 39.2% of total revenues compared to 36.9% of total revenues in the 2022 fourth quarter. The 230 basis point increase in SG&A was driven by an increase in marketing expenses, higher wages due to inflation, the addition of talent and other investments to support future growth.
Even though, SG&A was higher with growth in gross profit dollars, we delivered $26.2 million of pre-tax income, nearly flat to last year. EPS increased 12.9%. On an adjusted basis, EPS decreased 3.6% as our tax rate increased from 22% to over 27% as we remove the benefit of the release of a tax valuation allowance. Now moving to highlight a few of our full year results. For fiscal 2023, total revenues were $486.1 million, up 3.9% year-over-year, which included the extra week in the fourth quarter. Net retail sales increased 2.2% year-over-year and were up close to 70 basis points excluding the extra week. For the year, our store traffic again outpaced reported national retail traffic. Our transaction growth was positive for the year, while dollars per transactions were down low single digits.
E-commerce demand was down 5.8% for the year and our commercial and international revenue rose a combined 37.7%. Pre-tax income grew 7.1% to $66.3 million for the year. Higher gross profit dollars more than offset the increase in SG&A and led to pre-tax margin expansion of 40 basis points to 13.6% of total revenues. Excluding the benefit of the 53rd week, pre-tax income grew approximately 3%. Earnings per share was $3.65 per diluted share, a 15.9% increase aided by a lower share count in a decrease in the tax rate due to the release of valuation allowance. On an adjusted basis, EPS was $3.42, an increase of 8.6%. With respect to the balance sheet. At year end, we had cash and cash equivalents of $44.3 million, an increase of $2.1 million compared to year end 2022.
This was after returning $42.4 million to shareholders through a special dividend payment and share repurchases during the year. Inventory at year end was $63.5 million, declining $7 million or 9.9% from the end of the last year. We remain comfortable with the level and composition of our inventory. Turning to the outlook. The full details of our guidance are included in our press release, but I will highlight a few key metrics compared to fiscal 2023, excluding the impact of the 53rd week. We currently expect total revenue to grow on a mid-single-digit basis. This growth is partially driven by the addition of at least 50 net new experience locations, with the majority coming through partner operated expansion both internationally and domestically.
Our revenue growth will be back half weighted as we add locations as well as due to a more favorable fourth quarter comparison. In addition, the timing of shipments and the opening of partner-operated locations may create some differences compared to last year. We note that commercial revenue has a particularly difficult first quarter comparison, but with our expectation that partner-operated stores will be the majority of new store openings this year, we still expect strong growth in this segment on a full year basis. Pre-tax income to grow in the mid-single-digit range on a full year basis, but we expect to have unfavorable timing of marketing expenses in the first quarter of the year, as we launch our new comprehensive brand campaign, the stuff you love, and continue the integration and evolution of our digital transformation strategies to optimize customer lifetime value.
Our outlook also reflects increased freight costs caused by conflict in the Middle East and ongoing wage and inflationary pressures and increased depreciation expense. In closing, I would like to thank all our store and warehouse associates as well as corporate team members for contributing to our record results, which has positioned us for our fourth consecutive record breaking year in 2024. This concludes our prepared remarks and we will now turn the call back over to the operator for questions. Operator?
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