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

Thank you. Earnings Conference call. At this time, all participants are in the listen-only mode. question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Shenero, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Build-A-Bear's second quarter 2026 earnings conference call. With us today are Chris Hurt, Build-A-Bear's chief executive officer, and Voyne Todorovitch, our chief financial officer and chief administrative officer. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially. Please refer to our forms 10-K and 10-Q, including the risk factor section. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release. is distributed and available to the public through our investor relations website. And now I'll turn the call over to Chris.

Thank you, Gary, and good morning, everyone. I appreciate you joining us today for Build-A-Bear's second quarter fiscal 2026 earnings call. As we communicated earlier this year, we expected fiscal 2026 to be a tale of two halves, with more difficult comparisons impacting the first half, followed by less less challenging comparisons and anticipated improved performance in the back half of the year. Although we continue to expect a stronger second half than the first, second quarter results fell short of our projections, driven mainly by continued traffic challenges due to the performance of our summer trend collection and a addition to macroeconomic conditions. As a result, we have moderated our direct-to-consumer expectations for the balance of the year, and together with our updated outlook for our commercial segment, reduced our full-year guidance. Voigt will discuss the updated guidance in more detail in his remarks. Second quarter was up against a particularly strong performance last year, when DTC revenue increased 11% and web demand increased 15%. These results were driven by a number of strong summer collections, including trend products with our innovative fruit stand assortment, exclusive licensed offerings such as the Sanrio Sweet Shop, and a selection of movie-related items highlighted by the How to Train Your Dragon launch featuring a new Toothless, which through the years has proven to be one of our most successful movie characters. Following the success of Summer 2025, we used this year's assortment to push even further into product innovation. including novel designs such as slushy plushies and berry goods. While these less customizable concepts did not resonate as strongly as anticipated and contributed to weaker performance than last year. The quarter also reinforced an important insight. Guests continue to respond positively to products that highlights Build-A-Bear's signature customization experience. For example, our dressable Chummy Shark, one of the key characters in our Make Your Own Summer collection sold out during the quarter. In Promise Pets, our own intellectual property continues to be a meaningful growth platform, driving higher than average dollars per transaction due to strong attachment rates of clothing and accessories. These insights and learnings will help us strike a better balance between continued product innovation and the core elements of the Build-A-Bear experience that resonate most strongly with our guests. Even as DTC sales came in short of last year's record level, it's important to note they represented our second highest second quarter DTC sales performance in the history of the company. Turning to the numbers, second quarter revenue was $115.3 million and pre-tax income was $11.6 million. For the first half of fiscal 2026, revenue was $240.6 million, pre-tax income was $35.5 million, and adjusted pre-tax income was $28.5 million, excluding the $7 million IEFA tariff refund related to 2025. Importantly, while our second quarter performance and revised guidance reflect near-term pressures, we remain confident in the strength of our brand, our long-term strength, and strategy and our ability to execute against the opportunities ahead. Notably, our Halloween launch delivered the highest non-fourth quarter sales week in the company's history. the third highest US e-commerce sales week behind only Black Friday weeks of 2020 and 2025. While August remains part of the difficult comparison period, our third quarter sales performance to date has improved over the first half. These early third quarter results reinforce our view that guests continue to respond strongly to Trend Right products, offerings, and loved characters, such as our recently redesigned Harry Potter bear that build on the customization and engagement inherent in the Build-A-Bear experience. With that as a backdrop, we remain focused on the four strategic pillars we have discussed over the past two quarters. One, drive organic growth. location expansion, 3 wholesale and outbound brand licensing, and 4 gifting and personalization. Together these priorities are designed to evolve and extend the Build-A-Bear brand including into large addressable markets beyond our traditional vertical retail channel. Our first pillar is organic growth. We must continue to drive our core business through trend-right products and compelling experiences. remaining true to what makes Build-A-Bear unique. Guests continue to value the creativity, self-expression, and connection that comes from building and personalizing their own furry friend. We remain focused on enhancing that experience across demographics and occasions. Just as importantly, our success has not been limited to core offerings. We have consistently demonstrated an ability to identify, create, and capitalize on powerful consumer trends, particularly those related to nostalgia, pop culture, collectability, and the adult market. Products such as Spring Green Frog, Pink Pony, and the like have been a great source of Caxolato and Capybara began as trend right offerings, but have since become enduring parts of our assortment, illustrating our ability to transform emerging trends into evergreen products while maintaining the core elements of the Build-A-Bear experience. The Halloween season has become another compelling example of our ability to identify, create, and capitalize on consumer trends, while also representing an increasingly important growth opportunity for the brand. This year's assortment featured trend-right products, including a reintroduction of our fan-favorite Pogel Bat, a new Jumping Spider, and a new Pogel Bat. and mini beans of those respective products, all of which helped drive the record-breaking launch week of this seasonal collection. As a reminder, these seasonal and trend-driven launches often generate significant user-created content, helping drive engagement, traffic, and ultimately sales. As we approach our 30th anniversary in 2027, we will kick off a year-long celebration commemorating three decades of memory-making experiences. Throughout the coming year, we plan to continue to reintroduce some of our most popular, nostalgic furry friends from our vault, reconnecting guests with their memories. and fans with a build-a-bear character from the past. As part of that celebration, beginning in October, we will also introduce a special version of our beloved mascot, Bear Me, one of our most recognizable characters, both to longtime fans as well as to a new generation of guests. We also continue to see meaningful opportunities within licensed products and collector-driven engagement. Today, we launch our new Sanrio Halloween collection, highlighted by the popular Laura Manic duo, Berry and Cherry. This launch establishes Build-A-Bear as the first retail. Taylor in the US, Canada, and the United Kingdom to offer Laura Manick in plush form, further strengthening our position as a destination for sought-after licensed characters for all ages. Looking ahead, we continue to amplify the Build-A-Bear brand by leveraging the powerful combination of nostalgia, licensing, and innovation that differentiates us in the marketplace. Our upcoming collaboration with McDonald's is a great example. Later this year, McDonald's will begin rolling out Build-A-Bear themed Happy Meals in the United Kingdom, bringing together two iconic brands in a way that introduces Build-A-Bear to new customers while reinforcing engagement with existing fans. We've this collaboration represents a unique opportunity to increase brand awareness, create cultural relevance, and introduce Build-A-Bear to new customers through one of the world's most recognizable brands. Turning to our second pillar, location expansion. During the second quarter, we added five net new locations, bringing total net new openings to 12 through the first half of physical 2026 and ending the second quarter with 674 locations across 37 countries. We remain on track to achieve our objective of opening at least 50 net new locations this year, with the majority expected to be international partner-operated locations. This expansion reflects the global appeal of the Build-A-Bear brand and enables us to extend our reach efficiently into new markets. Turning to the third pillar, we remain committed to extending the reach of the Build-A-Bear brand through wholesale and licensing opportunities. As a reminder, our wholesale business remains largely program-driven and opportunistic, as we continue to make investments to grow our traditional wholesale channel and do not yet have broad replenishment. We are disappointed that this business has not developed at the pace we anticipated. We were unable to repeat the multi-million dollar Walmart program and other wholesale opportunities have progressed more slowly than expected. However, our experience with Walmart, namely the successful sell-through of our Build-A-Bear branded non-licensed products, demonstrated that a brand can extend into large-scale third-party distribution and reach consumers beyond our traditional channel. We continue to view wholesale and outbound licensing as attractive opportunities to further leverage the strength of our intellectual property, generate incremental profitable revenue, and extend the Build-A-Bear brand to new customers. Our fourth pillar focuses on enhancing gifting and personalization. Our new highly immersive, multi-level location at Icon Park in Orlando, which remains on track to open in the third quarter, will showcase an elevated expression of the Build-A-Bear experience and will debut a number of premium gifting, and personalizations offerings. Among them are our first-ever design studio, a high-touch, appointment-based experience where guests work one-on-one with a design consultant to create a truly one-of-a-kind furry friend by selecting elements such as the animal, fur type, and the animal's name. eye color, and again, creating a truly one of a kind design. A new personalize me station, offering furry friend embroidery and clothing customization that creates lasting keepsakes. Enhancements to our hear me station that highlights our record your voice functionality, which is a critical differentiator for our brand. And a new scent bar, where guests can personalize a scent to be to their furry friend. And Build-A-Bear Bake Shop, featuring guided dessert experiences that extend the creativity and personalization of the workshop while providing guests with a unique way to celebrate special occasions. These are just some of the many features we are introducing to create a highly differentiated experience at our new location at Icon Park, allowing us to showcase the full breadth of the Build-A-Bear brand while creating new opportunities for personalization, gifting, celebration, and gift engagement in a promoting way. a premier tourism destination. We intend to apply relevant successes and learnings from our Icon Park location to evolve offerings within our store portfolio. In summary, our first half performance fell below our expectations. We have revised our physical 2026 outlook. Importantly, the early response to our Halloween launch and recent product introductions reinforces our confidence in the enduring strength of the Build-A-Bear brand and we remain focused on our strategic growth initiatives. With that, I will turn the call over to Boyne to review our financial results and updated outlook in greater detail.

Thank you, Chris, and good morning, everyone. I will discuss the quarterly results and then share more about our updated full-year outlook. As we shared in our last call, we expected a year-over-year decline this quarter. However, results fell short of our projections, primarily due to underperformance from summer trend products, as well as ongoing macroeconomic challenges, both contributing to weaker traffic. Specifically, for the second quarter, total revenues were $115.3 million, a decrease of 7.2%, mainly driven by a decline in our direct-to-consumer business. In the direct-to-consumer segment, transactions declined primarily due to lower store traffic. Average unit retail also decreased, partially offset by an increase in units per transaction. Domestic store traffic was down and lagged broader US traffic trends. Last year's second quarter benefited from particularly strong traffic and robust demand for new collections, especially among teens and adults. Despite the year-over-year decline versus second quarter, total direct-to-consumer revenue grew 3% versus 2024. E-commerce demand declined 15.6% compared to last year as web traffic remained soft. However, demand improved sequentially from the first quarter, reflecting progress against our initiatives to strengthen the digital business. While year-to-date performance remained below last year, the team continues to make progress while returning this channel to growth. Gross margin for the quarter was 54.2%, a decrease of 340 basis points compared to last year, reflecting occupancy cost, the leverage, and increased promotional activity. SG&A expenses were $51.4 million, or 44.6% of total revenues, compared to 45.4% last year. The 80 basis point decrease in SG&A was driven mainly by lower incentive compensation expense. Our pre-tax income was $11.6 million compared to $15.3 million last year, a decline of 24.1%. Turning to the balance sheet, at the second quarter end, our cash balance was $14 million, representing a $25.1 million decrease versus last year. Mainly driven by a higher level of stock repurchases compared to the same timeframe last year, the timing of capital expenditure activity that was more front loaded in this year to support our strategic initiatives. Inventory at quarter end was $81.1 million, a decrease of $600,000 compared to the same period last year. The company remains comfortable with the level and composition of its inventory, and we currently expect to finish the year at or below last year's level. We continue to deliver capital to shareholders as we return $8.5 million to shareholders during the quarter. Over the past 12 months, we have reduced our share count by more than 5 percent and we currently have $43.2 million remaining under the Board authorized $100 million share Repurchase Program. Turning to the Outlook. We reduced our revenue and pre-tax income guidance, as well as our expectations for commercial segment growth. We continue to expect the addition of at least 50 net new experience locations, most of which will be operated by our international partners. We have lowered our revenue guidance to a range of $500 to $525 million, down from our previous range of $530 to $550 million. This reflects second quarter results below our expectations, continuing traffic uncertainty. and no longer expecting to anniversary our multi-million dollar Walmart order from last year. For the second half, we expect third quarter performance to improve sequentially, supported by a more favorable year-over-year comparison. As Chris noted, we are seeing positive momentum in our stores and e-com at the beginning of our third quarter, but our performance is still slightly below our prior expectations. Looking ahead, as is typical, we expect the fourth quarter to be our strongest quarter, even with an anticipated year-over-year decline in commercial segment revenue. Moving to our updated pre-tax income guidance, we have lowered our pre-tax income guidance range to a range of $60 million to $68 million, down from our previous range of $72 to $78 million. Excluding the approximately $7 million of the tariff refund related to prior year costs, we expect expect adjusted pre-tax income to be in the range of $53 million to $61 million. The outlook also reflects $10 million to $11 million of ongoing traffic tariffs and related costs, based on the current increased tariff rate of 12.5%, as well as approximately $3 million in longer-term investments. In closing, we continue to see opportunities to expand our global footprint and to further develop our wholesale business. Even with our updated guidance, we expect 2026 to be one of the stronger years in Build-A-Bear history and we are focused on working to build teams and strengthen our foundation for fiscal 2027 and beyond. With that, we would like to thank our store and warehouse associates, along with our corporate team members and partners, for their dedication to the Build-A-Bear brand, as we continue to work toward delivering on our strategic mission to add a little bit more heart to life around the world. This concludes our prepared remarks. We will now turn the call back over to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the phone. pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question today will come from Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thank you for taking a couple. Yes, maybe we'll start on the commercial side. lost four partners. Maybe talk a little bit about what happened there and what's behind, you know, the updated guide, assuming no commercial growth in 26.

Yes, thanks Chris and good morning. From our commercial segment we had got into a plus 20% for the full year. With the reduction of the Walmart multi-million dollar that we now don't anticipate that that will happen in the back half of the year. that was a reduction in that guidance. We do anticipate to still be close to our original guidance with our commercial segment, with our international partners and our domestic partners. There is certainly a repositioning of some of those store locations and we still have our guidance to open at least 50 net new locations this year.

Got you. And with respect to Walmart, I mean, it sounded like things were going pretty well there. Any other details you can provide on that front?.

Yes, as we talked about, you know, from the Walmart last year, that was an opportunistic opportunity for us with a direct program going into those locations. This year, we were unable to, you know, anniversary that particular program and there has been some slowness in anticipation of other wholesale opportunities within the back half. We are continuing to work on those wholesale to be able to provide replenishment and to be able to work into those as we move forward. We still see this as an important opportunity and growth strategy for Build-A-Bear. As we talked about with that Walmart last year, we did see a strong sell-through with the Build-A-Bear branded licensed products, and we believe that that is the opportunity.

opportunities. Got it. That's helpful. And just in thinking in terms of wild cards, You know, kind of looking at what's going on in Iran and, you know, the potential China response. Is that one of the bigger, you know, potential negative wild cards? If the U.S. really presses China, China reacts unfavorably. Is there a potential there from a kind of check? Chinese tariff perspective that could have a meaningful negative impact on you guys later this year, 27? Yes.

I'll take that, Chris. So thank you for the question. It is very challenging to answer some of those things. Clearly the geopolitical and macro environment do impact us in some cases more or less. But tariffs, even this quarter, have changed from 10 percent, what we assume, to 20 percent 12.5%. Again, that's something that's outside of our control and if and when it will happen, if it happens at all. But we continue to stay focused on what we can control. We are working with our partners around the world really to find ways to mitigate some of those things and strengthen our supply chain. to support our business across the globe. And clearly some of those challenges, especially if there is a hike in oil prices, will impact us directly or indirectly, but it is really challenging to think about what those impacts are. But, you know, in the past we have a, strong history and good history of finding ways to mitigate some of the challenges during those times of the.

is a neutral spike, if you will. Fair enough. I will leave it there. Thank you, guys.

Thank you. And our next question, we'll hear from Eric Better with SCC Research. Please go ahead.

Good morning. Good morning, Eric. Morning. What are you seeing in terms of the consumer What are you seeing in terms of their purchasing, in terms of imperative to purchase, and are they trading down for some of the other pieces now that you have the mini beans and some other pieces? Is that part of the issue too?.

Thanks for the question, Eric. As we stated, our second quarter performance was below our expectations and we've seen a continuation of persistent traffic challenges throughout the quarter. We have seen, as we move into the first half, of the third quarter, as I talked about with our Halloween launch, we have seen a change into those traffic patterns to the positive, and we've seen a change in our sales performance. While slightly still below our expectations, that performance of our Halloween product really demonstrates the ability of people to come in and go through the full experience. We are seeing our four levers as far as DPT, the above last year, and we've been able to take people through that, as we said, that entire experience. Those items are Halloween collection, or more back to our core items, where people are able to dress those, be able to go through the full experience. And that has given us the outlook of the third quarter as we move through. Although August is still a part of our difficult comparison period, we see this as a positive sign moving forward. But again, slightly below our prior expectations.

Great. And when you look at, you know, are the inventories somewhat distorted? Are the inventory comparisons here somewhat also distorted here in Q2 by the tariffs being now part of the cost of goods and last year they weren't? You know, how should we think about the inventories going forward? I know you said at the end of the year it's going to be flattish. Is that because in general, like, A, you do a good job of the inventory?.