Build-A-Bear Workshop (NYSE: BBW) reported Q3 EPS of ($0.42), $0.30 worse than the analyst estimate of ($0.12). Revenue for the quarter came in at $68.7 million versus the consensus estimate of $73 million.

• Consolidated revenues were $68.7 million compared to $76.2 million in the fiscal 2017 third quarter, a decrease of $7.5 million;
• Consolidated revenues decreased 9.8%, including a 7.4% decrease in North America and a 23.1% decrease in Europe, and also inclusive of a 17.8% increase in consolidated e-commerce sales. European results continue to reflect the impact of the ongoing uncertainty surrounding Brexit, as well as the May 2018 implementation of new privacy laws, which severely inhibited the Company’s ability to directly market to guests;
• Consolidated net retail sales were $65.3 million, a decline of 12.3%, compared to $74.4 million in the fiscal 2017 third quarter;
• Retail gross margin dollars decreased $8.0 million to $23.2 million compared to the fiscal 2017 third quarter. The retail gross margin rate declined 640 basis points to 35.5% including approximately 150 basis points related to non-cash store impairment charges outside of the U.S. and the adoption of the new revenue recognition standard as well as approximately 370 basis points related to the deleverage of fixed occupancy costs. The remaining decline was driven primarily by higher promotional activity related to the residual effects of Pay Your Age Day as well as the deleverage of distribution costs in the quarter. Notably, total occupancy and distribution costs were flat even with a higher store count resulting in a lower average cost per store;
• Selling, general and administrative expenses were $35.1 million, a decline of $1.1 million compared to the fiscal 2017 third quarter. The decrease was primarily driven by lower payroll and advertising costs;
• Pre-tax loss was $10.0 million compared to $3.9 million in the fiscal 2017 third quarter;
• Income tax benefit was $3.9 million with an effective tax rate of 39.3% compared to $1.4 million in the fiscal 2017 third quarter. The 2018 effective tax rate differed from the statutory rate of 21% primarily due to the jurisdictional mix of earnings; and
• Net loss was $6.1 million, or $0.42 per share, compared to a net loss of $2.5 million, or $0.16 per share, in the fiscal 2017 third quarter.

Sharon Price John, Build-A-Bear Workshop President and Chief Executive Officer, commented, “In a seasonably small third quarter in which we had forecasted a loss, we ultimately delivered sales and profitability below expectations. The majority of the shortfall was driven by three circumstances. First, we chose to strategically deemphasize our historically successful National Teddy Bear Day promotion to avoid the potential of long lines and frustrated guests on the heels of the Pay Your Age Day events. Second, our U.K. business continued to decline beyond expectations due to a challenging retail environment brought on by Brexit and the implementation of new privacy laws that have significantly inhibited our ability to build our contact database and market directly to our guests. And finally, organic family traffic to traditional malls continued to struggle which we believe was exacerbated by the comparative lack of high impact animated films that tend to bring our target demographic to malls with co-located theaters. Historically, we have seen increased traffic and sales associated with child-friendly film releases.

“In response, we have plans in place to recoup a portion of the lost sales from National Teddy Bear Day with a like promotion planned later this fiscal year. We are actively working to rebuild our U.K. consumer loyalty base and communication plans within the parameters of the new privacy laws. We are also intently focused on managing expenses through what we believe to be a temporary market disruption pending the resolution of Brexit and related issues. While we look forward to a strong and continuous 2019 family movie slate to help buoy traditional mall traffic with co-located theaters with expected benefits starting in January, we recognize that macro shopping habits have fundamentally changed in our core markets. We expect the strategies we have been implementing with our long-range real estate and e-commerce plans to ultimately lead to profitable growth.

Ms. John continued, “We believe we are taking the necessary steps to address the current business while our long-term focus remains on driving the strategies intended to transform the company to better monetize the equity of the Build-A-Bear brand. We have laid substantial groundwork and are beginning to see results on a number of fronts such as outbound licensing and the evolution and diversification of our real estate portfolio to include more tourist, seasonal, and shop-in-shop venues designed to broaden our consumer reach beyond traditional malls. Examples range from the recently opened location inside FAO Schwarz in New York City to six new pilot locations inside of a large national retailer. Additionally, our e-commerce business has consistently delivered double-digit quarterly growth following the upgrade of our website last October as we continue to add capabilities. In fact, even with a number of changes and disruptions in market dynamics, we believe many of the puzzle pieces of our overarching strategy from retail diversification to international franchising to out-bound licensing, are beginning to fall into place. With that in mind, we continue to systematically work toward our goal of a being a company that can consistently and profitably monetize the power of one of the most trusted, recognized and beloved kids’ brands today,” concluded Ms. John.

GUIDANCE:

Build-A-Bear Workshop sees FY2018 revenue of $340-345 million, versus the consensus of $346.3 million.

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