Build-A-Bear Workshop, Inc.

Greetings and welcome to the Build-A-Bear Workshop Investor Presentation. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may submit a question via the web at any time by typing them in the Ask a Question field on the left side of your screen. If anyone should require operator assistance during the conference, press star zero on your telephone keypad. If you're on the webcast, click the question mark icon on the upper right-hand corner of your screen. Please note this conference is being recorded. I will now turn the conference over to our host, Glenn Axelrod 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're 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 Vaughan Todorovic, CFO. You should see their presentation in the webcast. If you'd like to get a copy, simply email me at glen, G-L-E-N, at bristolir.com. 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. If you're listening over the telephone, please access the web link that I sent earlier today to ask that question. Remember, you can submit a question using the text box within the portal at any time. I'll ask the questions on the air for everyone to hear, and then Sharon or Vaughn will answer. I'm not going to reference any names, but I will read the questions asked. And as we have a fairly large audience today, if I can't get to your question online in time, and it has not yet been addressed during the call in Canby, I'll come back to you by email. I won't read the forward-looking statements, but I do say that they apply, and I reference them under page two 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 four 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 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 are now evolved into very topical categories of gifting, enthusiast, and collectibles as well as a nostalgia brand. 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 multi-generational, 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 engagement 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 margins, good free cash flow, a clean balance sheet, and a seasoned executive team has been together through quite a few things at this point. That leads us to a hypothesis, a thesis of saying 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. We believe that we have comparative control over our future to some degree. 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, these 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 makes 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 six, gives you just some snapshots about some data points that support those facts and, again, reiterates what we are now, which is a multi-channel, multi-generational, 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 about 500 global locations, multiple business models, multiple countries. I mentioned how many furry friends have been made 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 helped 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 birthdays, 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 with 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 levels. 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's 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, you know, 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 on from a household ownership, marriage, and income. Because of all this affinity, the well-known aspect of our brand, we do generate, quote, unquote, free media. A lot of people pick up stories about Build-A-Bear. It's not that unusual for us to get a billion impressions on a single drop, as we did with our After Dark program or our Baby Yoda program. And we've been generating about 10 billion media impressions over the course of the year, over the last three years. And that has significantly increased since five years ago. And as I said, we've evolved to be just integrated into pop culture. Lots from TikTok to things going viral to stars visiting the stores to being integrated in popular television shows. I like to say from South Park to the Pope, Build-A-Bear 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 slaps. In our case, as I've said before, we don't just make a Darth Vader stuff, 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 license portfolio, again, I want to reiterate Build-A-Bear is seen as a brand itself, strong brand itself, and that provides balanced sales. These licenses still are less than 50% of our business. 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 interjecting different consumer touch points from a one-to-one experience to an email to a targeted social post. to seeking out consumers who have affinity or lookalikes, to get them to engage with the brand either in the experience locations, 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 elevate. And by getting the consumer to engage experience the brand in our locations, 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 that 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'll 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 20 new locations open for 2022 that we've mentioned most recently in 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 St. Louis is the Build-A-Bear Adventure, which includes an arcade and party rooms and has a bigger back room 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 to, 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 party is 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 consumers, as this is true in a lot of multi-channel companies, are the consumers that will shop in both areas. They have different reasons for being there. 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, is because we don't have a lot of return because the clothes always fit. Always fits a teddy bear. And since the shift to driving e-commerce and building out 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 build-a-bear.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 a 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 .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 sub-sites that sit inside of Build-A-Bear.com so that consumers can have special and procured experiences online. First, of course, we have the landing page, which, by the way, supports the Build-A-Bear workshop because the number two and three 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 have yet another experience. So the Bear Builder takes you through a process. Bear Builder 3D is an animated experience for a younger consumer with a side-by-side. Heart Box is gifting. We have an entire gift shop where you can put in consumer-centric products 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, 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 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 more. as well as on the next page, 2023, 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, you know, 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 Voyne to provide some financial results updates.

Thank you, Sharon. Thank you. 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 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, pre-tax 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 nine months, we reported our results last week. Total revenues of about $323 million versus about 282 last year, so significant growth. About $36 million in pre-tax income compared to 31. And, you know, confidence in the business and the momentum that we had so far in Q4 gave us confidence to raise our guidance. on a full year basis to be now $455 to $465 million versus $440 to $460 million that we had previously. And we also raised our pre-tax income range to $56 million to $63 compared to $52 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. Important to note, when we talk about a turnaround, 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, you know, like when we think about profitable stores, you know, 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, you know, 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 comes 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 improvements 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 time 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 be this year in mid, if we achieve midpoint of the range, that will be just shy of about 12% revenue growth. And our pre-tax income during this time timeframe would grow about 17.5%. And the total pre-tax income would be just shy of 13% of sales. So, like, all signs of a really healthy business that we continue to manage. And, you know, these results also are helping us to stay and continue to be focused on shareholder returns. 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 multi-year high stock price of about $25.67. And with that, I'll pass it back to Sharon.

Okay. So, you know, we believe that the accomplishments, as well as the team, have, you know, 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 nine years, Boeing's been here about eight years. We clarified the objective of the pivot this company from a mall-based retailer, as I mentioned in the beginning, to a branded intellectual property company that uses Vertical Retail's 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 those 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 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 experiences, I noted, Not just the launch of their builder 3D, but also now we're on the verge of the launch of a new gaming experience as well as NFT. And then finally, it was that goal of continuing to drive financial strength, again, and with a clean balance sheet, no debt, and return value to our shareholders. In fact, we had a goal of, 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 2032, rather, just to reiterate and reflect back on those opening points, When you think about the brand power, after all 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 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 are 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 over-stored. We do not believe we are over-saturated. And so we believe we have an opportunity to expand physically beyond the 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 and 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 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 a no-debt position in 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 opening remarks 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, Sharon. I think that concludes the formal remarks. Ladies and gentlemen, if you have a question, please use the question and answer text box within the webinar portal, and we'll make sure to ask that question. So 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?

Yeah, so I'll start, and then, you know, like Trent can add some more things. You know, this is... One thing when you think about our consumer base, you know, like our kids come in as young kids where somebody else is making transactions 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, you know, we keep getting them engaged early in the process through our Count Your Candle 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 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 guests. But at the same time, we are getting these new guests that are coming into a brand as 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 guests tend to engage with the brand, we are finding ways to communicate with 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?

Oh, 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 for them to say, well, we focus on men 18 to 34, and you can talk about them as a collective. 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, as Roy 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 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 re-engage with them. We learn a lot about that family and the child, basically their age based on the year, based on the amount that was ultimately paid for the pair, and all the way up to 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 seeking out and crawling all over the web for lookalike 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. Thank you for that. 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. But at the same time, you know, as our sales grew, we are seeing some of that margin expansion. In addition to that, our March margin has expanded despite having some of the headwinds that we are seeing from the freight increases over the last 12 months or so. And we have been, you know, like managing some of that through price increases to offset the inflationary pressure from freight and product costs. 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, Glenn, what, 52, 53, is that a good baseline? Again, since Sharon and I have been here, you know, we have been and we are always very focused on expansion of margin and And I think there is, besides this year with all the unprecedented freight challenges, there was only one quarter in our eight, nine-year history here that merged marginally and 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. Thank you for that. And then, I guess, keeping on this theme, first, congrats. This is the next question. Congrats on 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?

Okay.

So I'll answer the first piece as it relates to operating margins. So definitely we believe, you know, there is room, even with some of the stuff that we have shared this year. for the first nine months of the year, we've seen about 10 million more in incremental trade 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 costs. And, you know, we continue to be smart and disciplined in executing. During all these years, we've 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, you know, and one of those things to drive the top line, you know, I'll pass it over to Sharon to talk about that.

Right. So, 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, eight or nine countries at this point. And clearly, and none of those are in continental Europe, but 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 350. 70, 50-ish stores, and that's a combination of third-party. Those are our 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 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 three to five year range type of approach. But between the third party business, which It 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. As we've built these relationships out, we're finding more and more opportunities with these hospitality, tourist types of areas where consumers really go for fun and entertainment that is beyond what would be the traditional mall. 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 open before the end of this fiscal year, 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 of outside of the United States and how you sort of see that rolling out.

Sure, Glenn. So, again, you know, 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 a couple of the biggest countries in the world, China and India. And, you know, they had their fair share of COVID challenges and disruptions and still some of those are present in those respective areas. But, you know, we believe this is a big opportunity. Definitely the brand is very strong in North America. And, you know, a lot of other companies, you know, have probably the 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, you know, this is one of those areas we definitely believe there is value to be had. And, you know, 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 UK 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, thank you for that. 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, you know, some of that was expected as we were making changes to our website. We also said subsequent to the quarter through Cyber Monday, you know, like the time of our call that we were seeing an improvement in positive trends and, you positive results on the web and, you know, strong traffic. We continue to stay focused and continue to make investments in digital, continue to test, especially with the new site 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 debt 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, you know, 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 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 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, reset 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 Voyne's Points. 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.

Thank you for that. 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. If we're already in it, I would say that we have bucked the trend in that our traffic and our results, our traffic is outperforming traditional traffic and our results have been strong. If we believe that we're going to be in a recession that is more negatively 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, thank you. 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 and that we have barriers of entry from a competitor. We have a lot of barriers of entry from a competitor, which I think increases our innate value in that it's very difficult to build a brand of this level of power. We have the retail infrastructure that we've been working on to make it as profitable as possible over the last eight years. We've been in multiple years of relationships and discussions with our landlords to evolve that footprint to be in the best possible locations, 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 for another company 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, you know, 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 a protectorate value. Okay. Thank you.

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

Yeah, we don't share that information. Okay, perfect.

But one thing, like, again, Glenn, 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 four to seven years old. So that kind of like gives you maybe an idea when people come in and like, you know, because that's at the end of the day, people come in and test the brand like that's the lowest price point, entry price point that we have. And, you know, that's the piece where we are getting kids as early engaged as one or two years old. And, you know, by definition, it's increasing that lifetime value. But we don't specifically provide some of those numbers.

Okay. Thank you. 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. You know, 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've 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, there is a little bit of a mixed 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.

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

Okay, thank you. Next question. Regarding your $12 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 five, six 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 CapEx is related to stores. And half of the capex is digital transformation. So hopefully that helps. But, you know, we continue to find ways and look at ways to maximize that area. And, you know, like when you think about that. Store business, we got to continue to make the investment, you know, 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, you know, that's like a little bit more challenging to answer, like what is the maintenance cap, because we do need to make those investments. But again, when we got to 12 to 15 million or 14 million, about half and half, I think it's stores and digital at this point.

Okay, thank you. 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 fulfilling 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. You know, we said at the beginning of the year that

Sorry, I think just 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 – God, thanks, Glenn. 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, you know, even the definition of pent-up demand, when I tell you, Two years later, even last year when the things started reopening and we had strong 2021, every year, and this is what we have shared previously publicly, about one-third of our business is birthday-related. Either birthday of one or a birthday party or people coming to serve. Again, I can probably argue there is not that much pent-up demand as it relates to birthdays. When you think about holiday season, like Valentine's Day or Christmas, holiday season or Halloween some of those things I would argue you know how much if you miss if you don't send somebody a gift for Christmas this year are you going to send them to 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 So 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 a third and took about five to six 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?

Yeah, and I think that this is also related to the pin-up demand question. I think what is most critical to understand is the lessons that were learned in 2006, or the lessons are not learned in 2006, were the things that we came in in 2013 to correct. Over the last nine years, that is what we've been doing, is pulling apart and putting that together. Where does the value lie on this company, and how can we create a platform and infrastructure to drive the business profitably, and to leverage the equity of this brand in multiple revenue streams. We are now a dynamic multi-channel 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% four wall from a 12% four wall, 10, 12% four 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, few 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.

We really appreciate everybody tuning in, appreciate your interest. 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 it 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, Vaughn. Thank you to our audience. This concludes this presentation.

Thank you. I'll pause and disconnect. Have a great day.