Build-A-Bear Workshop, Inc. (BBW) Earnings Call Transcript & Summary

Greetings, and welcome to the Build-A-Bear Workshop Investor Presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Glen Akselrod of Bristol Capital. Thank you. You may begin.

Thank you, Diego, and thank you, everybody, for joining our webcast today with Build-A-Bear. The purpose of today's presentation is to give our audience a better understanding of the business through a presentation and then questions with management. Just a reminder, this is not a quarterly earnings call, and our purpose today is just to give you a high-level overview of the business. The company did release their prior earnings results recently, and they are available on the company website. Today's discussion is going to be led by CEO, Sharon John, who is also joined on the call by Voin Todorovic, CFO. You should see their presentation in the webcast. If you'd like to get a copy, simply e-mail me at Glen, [email protected]. I'll be happy to send you one. We will break for questions at the end of the formal presentation. And when we do break, we encourage those questions. And as a reminder, we're just taking questions through the web portal. [Operator Instructions] I won't read the forward-looking statements, but I do state that they apply, and I reference them on Page 2 of this PowerPoint. With that said, once again, thank you for joining us. Remember, this is fairly informal, and we do encourage questions to help you better understand the business and its growth path. And now I'll turn the call over to Sharon to start her part of the discussion and presentation.

Thanks for everyone being here this afternoon or morning, wherever you are. And we'll just get started with some key investor considerations. I do want to start out with 4 points about where we think a lot of our brand power and business power lies. One is that we do have a very strong brand. Build-A-Bear brand is a trusted brand. It's iconic at this level -- at this moment. We believe that it is capturing the current consumer zeitgeist. People are really wanting to have more personalized one-on-one relationships with brands. We are a very shareable experience. And what I mean by that is our brand and that experience location process generates a lot of UGC from our consumers. We have now evolved into very topical categories of gifting enthusiasts in the collectibles as well as the nostalgia brands. The second point is this really dynamic and strong relationship that we have with our consumers and our guests, and they are in a lot of different categories. We're going to give you some information about that. We're multigenerational, given our 25-year-old history, and we span ages, genders and socioeconomic strata and have a lot of great data on our loyalty members as well as first-party data that we believe we can drive engagements and value. The third is a dynamic business model where we've been working on in the last few years to diversify the company across multiple channels. We still maintain that vertical experience location portion of our business that allows us to drive our products directly to the consumer, but we've expanded into different sorts of revenue models as well, and we'll go into that. That's beyond the digital and e-commerce, but into additional categories. And then we've demonstrated consistent financial strength, business strength, consistent profitable growth. We have comparatively high margin, good free cash flow, a clean balance sheet, and a seasoned executive team that has been together through quite a few things at this point. So that leads us to a hypothesis, the thesis of saying with all of those points that we believe that we're positioned for continued growth across a number of these revenue streams that we've created to monetize this brand, and we believe that we have comparative control over our future to some degree. And what I mean by that is because it is our brand, because we have the direct relationship and access to communicate with consumers and because we're in a vertical retail environment, we believe that we're poised for a lot of opportunity in the future. Very quickly the journey, you can take a look at this. But in a nutshell here is we started as a mall-based vertical kids retailer that became a brand through all of these experiences, the 225 million experiences that have now been had in our stores, and pivoted to a brand-first company that can monetize through channels, categories, consumers and content. We just celebrated our 25th year, and that was a journey all this time to what we call more in that I know that it's often believed that everything I'm going to say that we're more than is what all we are if that make sense. But we are now clearly more than malls, more than plush toys, more than just workshops and more than kids. The next page, which is Slide 6, gives you just some snapshots about some data points that support that -- those facts. And again, reiterate what we are now, which is a multichannel, multigenerational experience-based brand company that operates in diverse product categories and appeals to a broad consumer group. Picking out some of these data points, you'll see our e-commerce is now a very meaningful piece of our business at 20%. And at the end of 2021, 35% of our retail portfolio is now outside of what one would call a traditional mall. We have 500 -- about 500 global locations, multiple business models, multiple countries. I mentioned how many furry friends have been made in our -- in Build-A-Bear over the course of the last 25 years. 40% of our sales are to teens and adults, strong licensing portfolio, really robust brand equity, beyond plush and gifting, pajamas, pet toys, content, NFTs, going-to-launch gaming and a lot of passionate employees that help create that relationship. Some data about the brand. One of the ways that we're able to create that is we engage in life moments with families and consumers and individuals. This gives you a little bit of an idea of all the different ways that we engage and all the different moments that it makes sense for Build-A-Bear to be a part of consumers' lives and weave ourselves into their lives. And the biggest one actually beyond birthday is the just because. People like to just come to Build-A-Bear and experience it with no real reason we're finding. The brand is beloved because of that emotional connection. We are extendable and well known. You'll get a sense of that in the bar graph, where you can see us compared to other well-known family brands on a couple of metrics, including awareness and distinctive. Very important elements. These are affinity types of data points. Then we're very high on the affinity level. It's important to understand that we drive a lot of our traffic at our experience locations. It's estimated, from exit surveys, that over 60% of our store visits are planned as a special trip. And to put that in really simple terms, we're creating the traffic to the mall. The mall is not creating the traffic for us in those areas where we are mall-located and otherwise. We are more balanced from a seasonality perspective than one might think if you only believed we were a toy company. That seasonality comes a lot from the fact that we do have these different moments in time. Valentine's is actually our second most common season, but birthday spread, which is our largest reason for coming, spread across the entire year by default. Important data point, 14 million names in the first part from a first-party data perspective. We have a -- on Page 10, you'll see some data about how diverse and coveted, frankly, our consumer base is. Lots of interest across generations. We have -- you would expect households with children is a big part of our consumer base, but we also are diverse, again, with that teens and adults who are buying them for themselves, if you look at the pie charts on the bottom right. And I believe it's often a surprise when I do this presentation of the balance between girls and boys. Finally, we have consumers who are most likely have attended college and are above average from a household ownership, marriage and income. Because of all this affinity, the well-known aspect of our brand, we do generate "free media." A lot of people pick up stories about Build-A-Bear. It's not that unusual for us to get 1 billion impressions on a single drop as we did with our After Dark program, our Baby Yoda program. And we've been generating about 10 billion media impressions over the course of the year, over the last 3 years, and that has significantly increased since 5 years ago. And as I said, we've evolved to be just integrated into pop culture. Lots of -- from TikTok to things going viral, to stars visiting the stores, to being integrated in popular television shows. I want to say, from South Park to the Pope, Build-A-Bear's media drives top of mind awareness for us. And we are considered a co-brand with over 75 world-class collaborators and licensees. You can just take a look across this Who's Who of pop culture that we get to mash up our brand with. And when I say mash up, I really mean it. We're not label [ flat ]. In our case, as I've said before, we don't just make a Darth Vader stuffed -- something that you stuff that looks like a Darth Vader. We're allowed to create a Darth Vader Bear or a Elsa Bear, a little bit different kind of relationship. And all of these brands allow us to put our brand mark on the product, which is also something that isn't common even with the power of this licensed portfolio. Again, I do want to reiterate, Build-A-Bear is seen as a brand itself, a strong brand itself, and that provides balanced sales. These licenses still are less than 50% of our business. That -- what we're then able to do when you think about this dynamic business model that we've created, is harness the power of the brand. And now all of these tools with technology that we have to communicate directly with these consumers to drive a circle of engagement, it is not an uncommon model where you're ingesting different consumer touch points from a one-to-one experience, to an e-mail, to a targeted social post, to seeking out consumers who have affinity or look-alikes to get them to engage with the brands, either in the experience location, to go into e-commerce, watch one of our movies on Netflix, buy some pet toys at PetSmart, and you see how the circle of value starts to get -- to elevate. And by getting the consumer to experience the brand in our location, that drives affinity and then getting them to want to engage in other ways, which then often gets them to come back to the store. It is a lifetime value model. I think it's also important to pause on the importance of the experience locations, the retail part of Build-A-Bear and how dynamic that is between the physical locations and the e-commerce side. We do have award-winning retail locations, about 25% average contribution, basically 100% of our locations are EBITDA positive in North America. 50 million guests per year cross a lease line for us to have this experience. We have lots of different formats, which we will share with you on the next page. And we serve as many distribution centers for e-commerce, the buy online ship from store, buy online pick up in store, a big unlock for us. That is a very efficient model for us to leverage overhead and labor in these locations, and it has worked very well for us. On 17, you get a sense of all the different models we have so that we are as flexible as possible to be where the consumer wants us to be, in the way they want us to be, working with partners from Great Wolf Lodge to Carnival Cruise Lines and in different countries around the world. We've recently opened -- we're on track to get our 20 new locations open for 2022 that we've mentioned, most recently, and Six Flags Magic Mountain and the Pro Football Hall of Fame. We've added testing and adding new formats, evolving constantly. A new one that's been opened in [ East ] St. Louis is the Build-A-Bear Adventure, which includes an arcade and party rooms, and has a bigger backroom for that fulfillment that I was sharing with you. And we've learned to operate efficiently and profitably. Very short form in terms of how long we're there. Two, of course, years. And each one of these models has a little bit of a different approach. One is the corporately managed stores are more traditional retail model, third parties more of a wholesale model and international is a franchise model. On 18, again, you see that we now have a significant portion of our sales coming from e-com. That is important to us. Our most valued consumer, and this is true in a lot of multichannel companies, are the consumers that will shop in both areas. They have different reasons for being. It's an important piece of business for us. It is also a profitable piece of business for us. We think about this in terms of we want to grow our total business. We're agnostic, to a great degree if the consumer shops online or shops in the store because our profitability is similar. One of the reasons why that is the case versus, say, a lot of other vertical retailers, which are often apparel retailers because we don't have a lot of returns, because the clothes always fit the teddy bear. And since the shift to driving e-commerce and building out all of the new -- a lot of the new technology and dynamics that we have there, since 2019, since we first did that, we've grown over 150%. And I think on the previous couple of pages, you saw another award from Newsweek, but also here one of the fastest-growing online shops according to Newsweek for 2022. E-commerce also provided us a fabulous platform, especially when going mobile-first, to drive additional business, to not think about this as a cannibalistic plan, but an additional business for our teens and tweens by driving that collector and gift-giving business through our buildabear.com. So our primary and secondary targets are different based on the physical experience and the online experience. It doesn't mean that we don't appeal to both in both places, but it's the primary and secondary question of making sure that we're driving a broad consumer base and that we're not again cannibalizing. So if families and children in the retail locations and teens and tweens and adults on dot-com. Part of that is we did not want to just singularly digitize our in-store experience, although we did do a version of that, which I'll share here. So these are just some of the subsites that sit inside of buildabear.com, so that consumers can have special and procured experiences online. First, of course, that we have the landing page, which, by the way, supports the Build-A-Bear Workshop because the #2 and 3 pages that are visited are plan a visit and plan a party. So the dynamic relationship between our digital and physical is at the very beginning of the experience. As well as, of course, we're encouraging consumers that shop in the store to go online and do -- and have yet another experience. So the Bear Builder goes -- takes you through a process. Bear Builder 3D is an animated experience for a younger consumer with a side by side. HeartBox is gifting. We have an entire gift shop where you can put in consumer-centric for the receiver, and we will make suggestions for you. The Bear Cave is age-gated. Recently launched Pajama shop. And of course, we're in other locations, such as Amazon and Facebook as well. 21 provides you with some of the remarkable data that we've managed to drive since we've launched a lot of these new capabilities through -- mostly through our relationship with Salesforce. Very strong digital feedback and data here. And again, that first-party data is of critical nature. The next few pages just give you a bit of a highlight of some of the things that we're doing on the types of categories that a brand -- a company with this kind of brand power has capabilities to extend. We had -- we use a lot of this content creation for marketing as well as it drives product development for us in some cases. But from short form to NFTs, as I mentioned, to gaming, new movies, radio and music, we're in the content business, and it helps us drive awareness for our brand as well as on the next page, 20, 23, that brand power also gives us the leverage to diversify revenue streams into new categories with something that we call outbound licensing that does drive margin-rich revenue to us because it's royalty revenue. But really importantly, these products that you're seeing here from bedding, to toys, to bicycles, to pet toys, puts us in literally tens of thousands of doors where our brand has a presence, and that's important as well. That's just one more reason for us to be top of mind. And with that, I will turn it over to Voin to provide some financial results update.

Thank you, Sharon. And I'll start on Slide 25 and talk a little bit about 2021, the results. 2021 was the most profitable year in Build-A-Bear history. We delivered the highest revenue in over a decade and the highest profit in company's history. And even on the slide, you can see that our total revenue of $411 million was over 21% growth versus 2019. Pretax improvement significant versus 2019, and it was really important for us to know that like we came out of COVID stronger, and we continue to build on this momentum. This momentum in 2022, so far, for the first 9 months, we reported our results last week, total revenues of about $323 million versus about $282 million last year, so significant growth. About $36 million in pretax income compared to $31 million. And the confidence in the business and the momentum that we have, so far in Q4, give us confidence to raise our guidance on a full year basis to be now $455 million to $465 million versus $440 million to $460 million that we had previously. And we also raised our pretax income range to $56 million to $63 million compared to $52 million to $62 million. So we continue to be very pleased with the results and the momentum that we are seeing in our business. Just a few things. I think it's important to note when we talk about a turnaround, and some of the slides -- some of the graphs on Slide 27 are comparing full year results. And again, these are going to get updated. And based on our guidance, we expect them to improve. But I just want to highlight a couple of the things, like when we think about profitable stores. Nearly all of our stores in North America are profitable with the average contribution margin over 25%. When you think about when we got here in 2012, that was about less than 10%. Also, there was a lot of work done from the diversification perspective, and about 35% of our locations are now outside of the traditional malls. And last but not the least, when you think about the increase in sales, we are also seeing increase in our average dollar per transaction. And it went up from $35 to over $53 during this timeframe between 2012 and 2021. And it didn't come just through increase in price, it came through increases in units per transactions, too, as well as the average retail has gone up. So us telling more comprehensive marketing stories and connecting with our consumers, it helped drive that overall revenue. This is where the experiential piece come to play, and this is why stores are a critical piece of our business. And we continue to drive that connection with our guests. As we think about sustainability of our business, and when you look on the top of this slide, we are seeing some consecutive improvement in our quarterly revenues. And again, quarter-after-quarter, we are delivering some record profitability results despite some of the challenges that we are seeing this year from the macro environment, especially inflation and freight-related as well as some economic impact from fluctuation in exchange rates. So that's 2021, that was previously the best year in a decade and most profitable year. We expect to beat this year and mid -- if we achieve midpoint of the range, that will be just shy of about 12% revenue growth. And our pretax income during the same timeframe would grow about 17.5%, and the total pretax income would be just shy of 13% of sales. So like all signs of a really healthy business that we continue to manage. And these results also are helping us to stay and continue to be focused on shareholder returns. Over -- since Q3 of last year, we repurchased nearly 10% of our outstanding shares. Last year in Q4, we declared $1.25 per share special dividend. We have now multiple Board-authorized programs. We completed the first one of $25 million. And right after that, our Board authorized a new $50 million buyback, and we still have about $46 million left. And all this stuff culminated so far in a multiyear high stock price of about $25.67. And with that, I'll pass it back to Sharon.

Okay. So we believe that this -- the accomplishments as well as the team have -- we're quite proud of what the organization has been able to do from a financial side. But we also believe that, that's because of a long-term strategic plan that we've shared and have been quite clear about since for about the last -- I've been here 9 years. Voin has been here about 8 years. We clarified the objective of to pivot this company from a mall-based retailer, as I mentioned in the beginning, to a branded intellectual property company that just -- that uses vertical retail and a number of other revenue streams to monetize the value of the brand. And we provided at the beginning of this fiscal year, some objectives that we had, including the leveraging our ongoing digital transformation actually to accelerate that digital transformation. And we highlighted some of the objectives that underneath, from a tactical perspective, including the expansion of the loyalty program, adding on new modules, expanding our addressable market, utilizing digital media and brand building tools. All of these things have been accomplished to leverage the capabilities that cross both of our digital and physical assets to evolve those retail experiences and go into new locations with new experiences and connect those consumers driving that lifetime value. We did -- as I mentioned, we do expect to have those additional 20 stores. We did, indeed, capitalize on our 25th anniversary celebration to drive sales and elevate the brand and the brand awareness. We introduced -- reintroduced parties into our stores. We've been on a hiatus through COVID. That historically has been 5% of our sales. We're still climbing back to that level, and believe we have some opportunity ahead of us. And we developed new digital experience, as I noted, not just the launch of Bear Builder 3D, but also now we're on the verge of the launch of a new gaming experience as well as NFTs. And then finally, it was that goal of continuing to drive financial strength and with a clean balance sheet, no debt and return value to our shareholders. In fact, we had a goal of -- and as we mentioned in our guidance from the beginning of the year was to beat the prior year, and that is currently based on our updated guidance, what we expect to do. And on 32, rather, just to reiterate and reflect back on those opening points, when you think about the brand power after all the information that we've shared with you, that 80% brand awareness is certainly strong, but we do not believe that our revenue or our business yet reflects the power of the brand that we've been building out the infrastructure and the capabilities to do that. So when you're benchmarking against other brands with that similar awareness and affinity metrics, it does show still a significant untapped potential for us to monetize across channels, across categories and to build more relationships with that broad addressable market. We believe that we can leverage that one-to-one relationship. There's a lot of companies today that started digital-first that now want and they're seeking out to assure they have that one-to-one relationship. We already have multiple stores, and we are excellent at running profitable retail. So elevating that relationship as well as that dynamic between the physical and the digital is key for us, and it gives us a very robust model that leads to our third point is we do not believe we are overstored. We do not believe we are oversaturated, and so we believe we have an opportunity to expand physically beyond 500 global vertical experience locations that we have. We believe that we can continue to grow e-commerce and that we can build on these touch points through outbound licensing in the locations where they are as well as entertainment, gaming, et cetera, and the tens of millions of digital interfaces that we can continue to grow to drive that business. And finally, we believe in the momentum that we're seeing. We believe that that is -- it's proven to be resilient at this point. The team is resilient. We are operating with double-digit operating margins. And again, that's generating good cash flow -- free cash flow and we've maintained no debt position. And that we're well positioned to execute against key initiatives to drive additional sustained profitable growth in the future. So that is the summary of why we stand by the opener remark of we believe there's continued opportunity for our company to grow across a number of revenue streams and that we believe that we have control over our future to a great degree. The last couple of slides highlight the management team that I was speaking of and the strong background of the Board, and there are some non-GAAP reconciliations in the back.

Perfect. Thank you very much. That concludes the formal remarks. [Operator Instructions]

We have a number of questions in the queue already Sharon. So I'll just get going. Can you talk about the lifetime value of the customer? How many customers come back as repeat buyers? And how do you acquire new customers? And what would you say is driving that recent growth?

Yes, so I'll start and then Sharon can add some more things. This is -- one thing when you think about our consumer base, like our kids come in as young kids where somebody else is making transaction on their behalf. And like now more and more of these kids, as they get older and have the kids of their own as adults and teens, they are getting their own accounts. So when you look at some of those things, it is a little bit more of a challenge for us to get a true lifetime value of our guests and what they spend. But the way that we track that stuff is based on the transactions and the database that we have and our Bonus Club Program. They are repeat guests that are coming. And we keep getting them engaged early in the process through our Count Your Candles Program, and we have some good data that tells us how often they are coming back. And with all the tools that we are using with Salesforce help and the journeys that are being created, we are trying to increase and try and maximize that lifetime value. So what we have been able to do, over the last several quarters and last several years, is to start to increase that frequency that we are getting from the Bonus Club guest. But, at the same time, we are getting these new guests that are coming into a brand as a collectors and teens, tweens and adults. So at the end of the day, the goal for us is to really drive more transactions. And whichever way the guest tends to engage with the brand, we are finding ways to communicate to them so that we can increase that repeat purchase. And typically speaking, the way when we look at some of those things internally, it's over last 12 to 15 months, what purchases people were making because, at some point, some of the kids, especially at the lower end, they start to age out before they come back into the brand. Sharon, anything else that you would like to add?

It's just that it's important to understand that we have a lot of different types of consumers, and we acquire those consumers in different ways. So I think that some more homogeneous brands it might be an easier discussion. We are -- for them to say, well, where we focus on men, 18 to 34, and you can talk about them as a collective. When you're as -- when you're beloved by a lot of distinct consumer groups, that's more difficult. So from an acquisition perspective, one of the key acquisition tools for us for the young kids is, as Voin mentioned, is the Count Your Candles program, where a child can come in on their birthday month and pay the age that they're turning in that month. That's a big acquisition tool for us, and because you have to be in the loyalty program to participate in this particular opportunity. So that is a big unlock for us, and we think can then reengage with them. We learn a lot about that family and the child. Their -- basically, their age based on the year -- based on the amount that was ultimately paid for the bear. And all the way up to the -- our super collectors, enthusiasts who often engage with us with some of these licensed products and buy the entire collection of something like a Pokemon or a Harry Potter. And we then know who they are and we're able to go back to them because they're often signing up to get information about when the next Pokemon product is coming out. But we originally acquire those consumers by speaking out and crawling all over the web for look-alike information or partnering with the licensed partner to send out information about the fact that their brand is available in a Build-A-Bear form.

Great. Next question, what are the biggest drivers of gross margin versus calendar year 2019? And is 52% to 53% a new baseline?

So when we compare stuff versus 2019, definitely several things have changed and shifted. Just as a reminder, or maybe just explanation for people that are new to the story. What we have in our retail gross margin, we have our occupancy and warehouse costs. So as we drive more sales, we do see leverage in those. But at the same time, as our sales grow, we are seeing some of that margin expansion. In addition to that, our merch margin has expanded, despite having some of the headwinds that we are seeing from the freight increases over last 12 months or so. And we have been like managing some of that through price increases to offset the inflationary pressure from freight and product cost. But at the same time, we have significantly reduced our promotional activity, and we have been able to drive AUR and then, with the leverage that we are getting from other areas, that's what's helping us expand these margins. And when you think about what 52%, 53%, is that a good baseline? Again, since Sharon and I have been here, we have been and we are always very focused on the expansion of margin. And I think there is -- besides this year, with all the unprecedented freight challenges, there was only 1 quarter in our 8-, 9-year history here that merch margin expanded, that's when we launched the Count Your Candles program in that particular quarter. So I think we have a long history of expanding our margin. And again, I don't like to set any fixed targets and things, but we are always aspiring to do better and find ways to expand even when we reach these highs looking for ways to get to the new level.

Super. And then speaking -- I guess, keeping on this theme. First, congrats. This is the next question. Congrats on the strong margin improvements during your tenure. What initiatives are in your pipeline over the midterm to protect or grow operating margins? And also, you mentioned not being overstored. What is your room to expand stores in the U.S.? How many U.S. stores do you think you might add before saturation kicks in?

[ You can ] answer first.

So I'll answer the first piece as it relates to operating margins. So definitely, we believe there is room even with some of the stuff that we have shared this year. On the first -- for the first 9 months of the year, we've seen about $10 million more in incremental freight compared to 2019. So if you make an assumption that a portion of that is going to come back next year as these rates are coming down, everything else being equal, we should see some improvement next year. But again, we continue to stay focused across the income statement driving higher sales, leveraging our cost and we continue to be smart and disciplined in executing. During all these years, we have been able to expand our operating margins, but at the same time, without sacrificing the investments and initiatives that we are trying to do to really drive future growth and to enable us to deliver some of those results. So we will continue to find ways to drive both top line and improve the bottom line. But -- and one of those things to drive the top line, I'll pass it over to Sharon to talk about store count.

Right. So let's -- we'll just focus on North America on that question. But before I do that, I just also want to point out that on the international franchise front, we believe that there is significant opportunity. We are not -- we're only in, what did I say, 8 or 9 countries at this point. And clearly -- and none of those are in Continental Europe, but we had -- we paused on that during the COVID years, but the Build-A-Bear brand has opportunity outside the United States. We'll just start with that. Secondly, in the U.S., we only have about 370 -- 50-ish stores, and that's a combination of third party. Those are our owned -- 350 owned and operated stores, and then another 60-some-odd in third party. And so each one of those is an experience for the consumer. So that's really not, when you think about a retail company or an experience-based company, that's not that many locations for the population of the United States. And we believe that we do have runway there. As we've mentioned, just this year, we've opened 20 additional locations. We are assessing what is the right number for 2023 and beyond. We are working with some partners to make that correct assessment on what our runway is in North America and expect to be able to share that at some point in the future in at least some rough way in the 3- to 5-year range type of approach. But between the third-party business, which understates our retail number, just to be clear, because that's a wholesale relationship like with Great Wolf Lodge, where the retail revenue is not reported through our numbers, just the wholesale revenue. That as we've built these relationships out, we're finding more and more opportunities with the hospitality tourist types of areas where consumers really go for fun and entertainment, that is beyond what would be the traditional mall. So, so far, we're quite -- as an example, as a proof point of this, we've been quite impressed with the 20-some-odd stores that we will have opened before the end of this fiscal year, and believe -- and that gives us a lot of confidence in this thesis.

Okay. Thank you. I'm going to build on this theme here as there's a few questions that sort of tie into it. So in terms of growth through your expanding retail locations, I think you answered some of the -- part of the question, which is what is your strategy in terms of targeting certain geographical areas and expansion. But maybe you could comment a little bit more outside of the United States and how you sort of see that rolling out.

Sure, Glen. So again, we believe there is a big opportunity. As Sharon mentioned, some of the challenges caused by COVID really prevented us even in some of these bigger markets that we signed a couple of franchises in couple of the biggest countries in the world, China and India. And they had their fair share of COVID challenges and disruptions, and still some of those are present in those respective areas. But we believe this is a big opportunity. Definitely, the brand is very strong in North America. And a lot of other companies have probably same number of stores in a franchise format as they have in North America. So we believe that's a big opportunity. But at the same time, it's more of a longer-term horizon. If you think about it, it's finding the right partners, it's building the infrastructure, opening the stores. And this is one of those areas we definitely believe there is value to be had. And finding the right partners around the world is definitely something that we are open in discussing and talking and getting the brand in more locations around the world. And also what we think about even in the market like in the U.K., where we own and operate stores, we don't have currently very many third-party retail locations. So we are looking even to that format to expand and increase the location count in places where we operate.

Okay. Question regarding digital, I guess. Can you talk about the traffic on your website and how that's performed over the recent period?

So digital demand, like this past quarter was a little bit softer. And some of that was expected as we were making changes to our website. We also said subsequent to the quarter through Cyber Monday, like at the time of our call, that we were seeing an improvement in positive trends and positive results on the web and strong traffic. We continue to stay focused and continue to make investments in digital, continue to test, especially with the new sites and the new investments that we are making in that particular business. But another piece that's very important to clarify, even though we are driving digital marketing and spend, a lot of that may not materialize through the online channel, but we are seeing significant traffic growth in our retail locations. So that is the value of the digital marketing that we are seeing. And we are channel agnostic if people are coming online or in stores. And what we are really looking at is the total transactions continue to go up. And some of the things that we are doing as a team are working and resonating with our guests, and that's definitely reflected in sales results that we have presented recently.

That's right. We actually shared that on the call that even though we did expect some -- a little bit of softness in the third quarter in e-commerce as we shifted over to a new mobile-first site and did a lot of A/B testing, re-set up -- started recalculating new analytics data so we could be more efficient and more effective, some of that, now that we've started to dig in, is that people -- our consumers shifted to in-store, to Voin's point. And I think that that is reflective of some consumer sensibility right now of wanting to be in person, wanting to do things together. And we were there for them to be able to do that. But at the end of the quarter, the total sales were increased. So that, again, is reflective of being a diversified company that allows us to be where the consumer wants us to be and be able to take advantage of the way they want to shop, when they want to shop.

The next question is tied to, I guess, macro trends. There's obviously a fear of recession out there, and some of your peers have been underperforming. How would you characterize your strategy in 2023 as you sort of deal with this recessionary potential climate?

So there is clearly a lot of different data on the dynamics of the recession. On whether we are in it or not in it, going to have it, not going to have it, it's far from a classic setup. And if we're already in it, I would say that we have bucked the trend and that our traffic and our results -- our traffic is outperforming traditional traffic and our results have been strong. If you want to -- if we believe that we're going to be in a recession that is more negatively impactful -- impacting to us right now, the couple of things to keep in mind is the more diversified you are as a company, usually the better off you are in those kind of situations. We -- when you think about the type of products that we offer, they are less -- they're more recession-resistant. We also have a higher income, more stable consumer base that is generally less impacted. And I think that we have proven our ability, as a leadership team, as a management team and as a company, to be very resilient and to be very flexible in situations where we need to shift tactics or strategies to assure the ongoing continuation of the company at the best levels possible.

Okay. Does your business have reoccurring revenues outside of the traditional franchise model?

Well, yes. I mean, third-party retail model, that's the wholesale model. So yes, we have that piece that's reflected in our commercial segment as well as we have the outbound licensing stream that's also in the same commercial segment that we are getting royalty income from our partners for use of our IP.

Okay. I'm not sure I understand this question, but I'm going to ask it and maybe it makes more sense to you. And then to the person asking the question, if it doesn't, please feel free to elaborate. Could you talk about any entry barriers you may have?

Well, I think that depends on the category or the channel that we're discussing from a barrier of entry. Unless you're talking about a competitor who -- and that we have barriers of entry from a competitor. We have a lot of barriers of entry from a competitor, which I think makes -- increases our innate value in that we -- it's very difficult to build a brand at this level of power. It's -- we had the retail infrastructure that we've been working on to make it as profitable as possible over the last 8 years. We've been in multiple years of relationships and discussions with our landlords to be -- to evolve that footprint to be in the best possible locations, the small -- reducing our total footprint to increase our sales per square foot, diversifying the locations where we are to be where consumers go for fun and entertainment. All of those are barriers to entry to be -- for another company to be -- to replicate Build-A-Bear. On a side note, kind of an interesting thing, we're often asked that to whom should we compare Build-A-Bear? And often, it seems to be a question where if we don't have a direct competitor, it's harder to model. But the truth is we don't have a direct competitor, but I think that that's [ protectorate ] value.

I think that part of my next question was answered earlier on, but I'm going to ask it just in case, and you could elaborate on it. What is the lifetime value of a customer and the cost to acquire a customer?

Yes. We don't share that information.

Okay. Perfect.

One thing like -- and again, Glen, maybe just on the second piece, cost to acquire, even though we don't specifically. When you think about Count Your Candles program, it's a big acquisition tool for us. And when you think about people are coming and celebrating and choosing to buy something, whatever birthday they are celebrating, and that's the sweet spot for our guests like probably 4 to 7 years old, so that kind of like gives you maybe an idea when people come in and like -- because that's, at the end of the day, if people come in and test the brand like at the lowest price point -- entry price point that we have. And that's the piece where we are getting kids as early engaged as 1 or 2 years old and you know that by definition, it's increasing that lifetime value, but we don't specifically provide some of those numbers.

Next question. Retail sales increased approximately 8% in the third quarter. Can you provide for us how much of that increase was transactions versus ticket-based?

So we haven't -- we definitely said transactions were up. We haven't talked specifically about the ticket prices. There is a little bit of tougher comparabilities when you think about like what's going on and some of the channels and some of the mix that's caused by last year's challenges. For example, Count Your Candles program is a good example as people get that entry price point. We saw an increase in that particular business. Last year, our inventory was a little bit spotty due to delays in supply chain, that product coming in and out. So when you are comparing some of the stuff people are, there is a little bit of a mix shift what people are buying year-over-year. But overall, we are seeing significant growth in transactions and more traffic and people coming to our stores.

Yes, we mentioned on the call that we believe that -- based on the data, that our sales are very -- it's a healthy business growth. Yes, some of the increase is related to inflationary or strategic price increases, but a lot of it is associated with that extra -- with more transactions.

Next question. Regarding your $12 million to $14 million expected CapEx, can you comment on what portion of this CapEx is growth versus maintenance?

So when you think about on any given year, there is probably $5 million, $6 million of what you would call core maintenance CapEx. Now there are some pieces when you think about like even reinvestment in the stores and touching these stores on a periodic basis to maintain these revenues. Roughly half of our growth -- half of our CapEx is related to stores and half of the CapEx is the digital transformation. So hopefully, that helps. But we continue to find ways and look at ways to maximize that area. And like when you think about the store business, we got to continue to make the investments because we do have a big fleet. And periodically, you have to touch some of those stores, especially when these lease events come up. So sometimes, that's like a little bit more challenging to answer it like what is the maintenance CapEx on that, because we do need to make those investments. But again, when we guided $12 million to $15 million or $14 million, about half and half, I think it's stores and digital at this point.

I've got a couple more questions in the queue, and then we'll end the call, assuming nothing else comes in. How do you assess your 2022 in terms of, I guess, your performance and still feeling pent-up demand since COVID has waned?

So how do we feel about 2022? I mean we feel strong about -- we feel good about 2022. We said at the beginning of the year that...

Sorry, Voin, I think just to make sure I didn't get the question wrong. I think the spirit of the question is to try to understand whether this year is just pent-up demand or if it sort of stays and is a sustainable trend?

Well, so just to give you -- got it. Thanks, Glen. So just to give you maybe a few data points, and then I'm sure Sharon may have some additional comments. When you think about, even the definition of pent-up demand, when I tell you -- 2 years later, like even last year when the things start reopening, and we had strong 2021. Every year, and this is what we have shared previously publicly, about 1/3 of our business is birthday-related. Through the birthday of one or a birthday party or people coming to -- again, I can probably argue there is not that much pent-up demand as it relates to birthdays. When you think about holiday seasons, like Valentine's Day or Christmas or holiday season or Halloween. Some of those things, I would argue, how much if you miss -- if you don't send somebody a gift for Christmas this year, are you going to send them 2 next year? I don't know. So those are type of things when you think about like how much pent-up demand there is. We said, in 2021, we believe there was some of that. It's hard for me to think there would be that much or any pent-up demand in '22 versus 2020. But again, even if there is some, I don't think that would be necessarily material from my point of view.

Okay. Great. Last question, and then I'll ask you guys if you want to leave any closing remarks for the group still on the call. So last question is, regarding the recession, looking at the stock performance, when the recession was back in '08, '09 happened, the stock price went down to 1/3 and took about 5 to 6 years to bring back to an upward trend. Are there any lessons learned from that? Any strategies to avoid the same thing happening again if we are indeed in a recession?

Yes, and I think that this is also related to the pent-up demand question. I think what is most critical to understand is the lessons that were learned in 2006 were the lessons -- or not learned in 2006 were the things that we came in in 2013 to correct. Over the last 9 years, that is what we've been doing, is pulling apart and putting back together, where does the value lie in this company and how can we create a platform and infrastructure to drive the business profitably and to leverage the equity of the brand in multiple revenue streams. We are now a dynamic multichannel company with a robust e-commerce arm and a profitable and growing physical retail arm that has also brand leverage in outbound licensing, franchising opportunities, content creation and entertainment. And those things did not exist in 2006, 2007, all the way to 2012 and '13. Well until we came in and went through the entire fleet, upgraded the fleet operating at a 25% 4-wall from a 12% 4-wall, 10%, 12% 4-wall with 20% some odd of the stores being unprofitable and significantly shifted our marketing, our communications, our digital side, ripped out our entire IT, rebuilt the entire website twice now, mobile-first, diversified consumer base, new categories. We're not even the same company and we're not -- from 2006, we're actually not even much of the same company from 2018, 2019 pre-COVID to now. So those are the lessons learned. And I would also state or restate that this leadership team as well as our balance sheet and cash flow has shown significant resilience. Recall that we shut down 100% of our retail stores and managed through it to come out stronger on the other end from COVID to now. So although we are never saying that we would not be impacted by some sort of severe recession or that we are recession-proof, I do feel confident that we, as much as any, have the tools and the team to manage through it effectively.

Perfect. Thank you for that, Sharon. And if you have any closing remarks, happy to hear them now. Otherwise, we'll end the call.

No, we really appreciate everybody tuning in. Appreciate your interest. I hope you go out and go to a Build-A-Bear. It's really fun. If you haven't done it, it means you probably don't understand the brand, but is the best way to do it and -- particularly during the holiday season, I think you would find it to be very insightful.

Thank you very much, Sharon. Thank you, Voin. Thank you to our audience. This concludes this presentation.

Thank you. All parties may disconnect. Have a great day.