Prepared remarks
Greetings. Welcome to Build-A-Bear Workshop Third Quarter 2025 Earnings Call. Please note, this conference is being recorded. I would now like to turn the conference over to Gary Schnierow with Investor Relations. Thank you. You may begin.
Thank you. Good morning, everyone, and welcome to Build-A-Bear's Third Quarter 2025 Earnings Conference Call. With us today are Sharon John, Build-A-Bear's Chief Executive Officer; Chris Hurt, Chief Operating Officer; and Voin Todorovic, Chief Financial 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 Factors section. We undertake no obligation to update any forward-looking statements. 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, which is distributed and available to the public through our Investor Relations website. And now I'll turn the call over to Sharon.
Thank you, Gary. Good morning, and thanks for joining us for Build-A-Bear's Third Quarter Fiscal 2025 Earnings Call. Today, I would like to begin by thanking the entire team for continuing to drive our positive momentum from the first half to deliver year-to-date record revenue and pretax income. Results that reflect the many strategic and operational advancements we have been systematically executing over the past few years. Solid third quarter results coupled with the consistency of the underlying fundamentals give us confidence in reaffirming our full year guidance, inclusive of ongoing tariff headwinds. Based on this guidance, Build-A-Bear is positioned to deliver fiscal 2025 revenue of over $0.5 billion for the first time in the company's history. We believe our year-to-date results and positive outlook underscore the resilience of our evolved and diversified business model. Even as we navigate a challenging macro environment, we remain on track to deliver top-tier store contribution margins for the fifth consecutive year, while our asset-light commercial segment is expected to achieve its fourth straight year of growth exceeding 20%. This strong performance reflects our continued efforts to monetize the power, positioning and equity of the Build-A-Bear brand, such as leveraging our multigenerational appeal to expand the addressable market with teens and adults now representing about 40% of sales, opening unique experiential retail concepts, including new co-branded locations, and scaling through initiatives designed to go beyond our workshop like our new Mini Beans collection. Simply put, we're building on the brand's iconic status to reach more people in more places with more types of products for more occasions. Specifically for the quarter, revenue grew nearly 3% to almost $123 million, and pretax income declined $2 million to nearly $11 million, inclusive of about a $4 million negative tariff impact. For the first 9 months, revenue grew more than 8% to over $375 million and pretax income increased by 15% to almost $46 million, inclusive of about $5 million in a negative tariff impact. We also returned more than $26 million to shareholders through dividends as well as buybacks, which contributed to more than 24% EPS growth for the first 3 quarters of the fiscal year. Overall, shareholders have received over $160 million since the beginning of fiscal 2021. As we look toward the final and most impactful quarter of the year, our primary focus remains on delivering strong 2025 results. At the same time, we continue to advance the long-term strategic initiatives that position us for future success. As a reminder, these priorities have remained consistent over the last few years and include: One, expanding and evolving our experiential retail footprint; two, advancing our comprehensive digital transformation; and three, leveraging the powerful equity of the Build-A-Bear brand beyond our workshops while continuing to return capital to shareholders. Now Chris Hurt, Build-A-Bear's Chief Operations Officer, who has been an instrumental part of delivering our positive results over the past decade, will share more on expanding our retail footprint.
Thanks, Sharon. We remain committed to bringing our signature workshop experience, the cornerstone of the Build-A-Bear brand, into new markets through a mix of our corporately managed partner-operated and franchise business model. This quarter, we made significant progress, adding 24 net new experience locations with 70% of those openings outside the United States, bringing our total locations to 651 and extending our reach to 33 countries, underscoring the global appeal of our brand. We also expanded our corporately operated business model in North America, with 7 new stores, including 3 in Canada, 3 in the greater metro areas of New York and Atlanta, plus a return to Puerto Rico in the highly popular Plaza Las Americas Mall, where the store opening was met with tremendous fanfare as our guests were excited to once again engage with the Build-A-Bear brand. These openings, which vary in size and format, reinforce our commitment to high return opportunities in new markets. Our international partners and franchisees continue to drive growth in expansion with new locations in Colombia, Denmark, Finland, Mexico, New Zealand, Panama, Qatar, South Africa, Sweden, and the UAE. This expansion by our international partners and franchisees further demonstrates the scalability of the brand and our ability to continue to grow our international presence. We ended the quarter with 375 corporately managed stores, 108 franchise locations, and 168 partner-operated locations. Since Q2 of 2023, we have doubled the number of asset-light partner-operated locations, which now represents more than 25% of our total units. Given an emphasis on optimizing operations during the busy holiday season, we opened the vast majority of our planned expansion through the first 9 months and remain on track to achieve our guidance of at least 60 net new locations this year. We are also excited to share that after a decade, the Build-A-Bear brand reentered Germany in the first part of the fourth quarter with one of our existing European partners, Intersource, with locations now open in Berlin and Frankfurt. These openings were a tremendous success as guests were thrilled to once again experience a brand in their home market. An additional location is planned for Stuttgart later in the quarter. This marks another important step in our overall European growth strategy and further strengthens our global footprint by demonstrating international scalability. As a reminder, we opened the first Build-A-Bear Hello Kitty and Friends workshop in the popular Century City mall in Los Angeles in November of 2024, and it quickly became a successful destination for devoted and real fans, collectors, families, kids of all ages, and even Hello Kitty herself. This one-of-a-kind collaboration made it clear that the experience deserves a broader presence, especially in unique places that attract millions of visitors, both domestically and from around the world. As announced this morning, we are expanding the Build-A-Bear Hello Kitty and Friends workshop concept with corporately managed stores opening in early 2026 at 2 premier malls, American Dream just outside New York City, and Mall of America in Minneapolis. These co-branded experiential stores will complement our already established Build-A-Bear workshop at both shopping destinations. As new Build-A-Bear Workshop experience locations open around the globe, we are not only expanding our reach, we're adding a little more heart to life in more places for more people, positioning Build-A-Bear for sustained global growth.
Thank you, Chris. Our workshops and the emotional, memorable experiences they provide remain at the heart of the Build-A-Bear brand, and we're excited about continuing the expansion of our global footprint especially through our asset-light partner-operated model, which we believe offers a meaningful runway as we bring the Build-A-Bear experience to more markets and consumers around the world. As part of our digital transformation objective, which is focused on driving omnichannel growth, we recently appointed Carmen Flores as the Senior Vice President of E-commerce and Digital Experiences. Carmen, a seasoned executive, having led digital evolution at companies like Montblanc and the LEGO Group will partner closely with our brand and technology team to strengthen consumer engagement to drive our digital business through more personalized, seamless interactions powered by technology and AI because we know that some of our visitors come to buildabear.com to transact, while others come to find a store and plan a visit. We believe the real unlock for the concept of e-commerce at Build-A-Bear is striking the right balance between e-commerce and e-communications. Over the past few years, we have built a strong infrastructure and the next step is leveraging that through our people and processes to monetize that investment fully. Our third area is capitalizing on opportunities that leverage our 30 years of multigenerational brand equity for incremental growth. On top of our experienced location expansion that Chris discussed, one example of this effort is represented by pre-stuffed branded plush that can be sold outside of our workshop in a wide variety of retail environments. While we originally launched our proprietary Mini Beans collectibles in Build-A-Bear Workshop as a pilot project, given that we are now approaching 3 million units sold with over 60% growth in the third quarter alone, we believe this highlights the opportunity to drive broader global reach of the brand through thousands of additional points of sale beyond the workshop. In fact, Mini Beans' distribution has already expanded into a number of independent retailers. Specific third quarter highlights include our strong Halloween collection, featuring a new fan favorite, the Posable Bat that generated over 3 million social views, raising awareness of the entire Halloween offering. You may recall that 2024 had been our best-selling Halloween assortment on record, but we're pleased to share that we saw a double-digit increase in 2025, likely driven by the continued macro interest in the holiday, but also from our strong seasonal offering, including our exclusive Hello Kitty and Friends co-branded Halloween characters, further solidifying the power of that special relationship. Separately, on September 9, once again, we positioned Build-A-Bear as the celebrated centerpiece of National Teddy Bear Day, delivering record results on top of all of those teddy hugs during a special acknowledgment of the importance of stuffed animals. From a fourth quarter-to-date perspective, we're pleased to share that we delivered the best Black Friday in the company's history, with momentum improving after a slowdown at the end of the third quarter in October. While some of this shift may reflect external factors, we believe our holiday merchandising and marketing efforts have played a key role in driving our stronger conversion and higher dollars per transaction so far in the quarter. Turning to the holiday strategy. This season, we are offering fun trend animals like Gingerbread Axolotl, classics like our Timeless Teddy in Santa gear, stocking stuffers including our all-important gift cards, which are key to driving January traffic and sales, seasonal Mini Beans and new on-trend bag charms inspired by some of our historical bestsellers. And as always, we are reinforcing Build-A-Bear as an experiential destination. A big part of the strategy is being seen as a part of our guest's holiday tradition. That is why our core messaging leverages our centerpiece Merry Mission animated feature film, which this year celebrates the tenth anniversary of Glisten, the magical snowdeer and heroine of the movie with a limited edition version that really lights up. In closing, it's been a delight to be here in Manhattan this week, participating in Giving Tuesday with our value partners Salesforce and First Book, alongside the Build-A-Bear Foundation to provide books and bears to kids in need. This week's events culminate with today's earnings call from the New York Stock Exchange, where we will also take part in the annual tree lighting ceremony this evening. Without a doubt, I feel a genuine sense of pride and gratitude for this remarkable organization, our Board, shareholders, partners, and amazing guests around the world who not only enable us but also share in our mission to add a little more heart to life. And with that, I'll turn the call over to Voin.
Thank you, Sharon, and good morning, everyone. I will discuss the quarterly results and then share more about our full year outlook. We achieved the highest revenue in the company's history for both the third quarter and the first 9 months of the year. This was also the highest pretax income for the first 9 months. And absent the impact of tariffs, it would have also been a record for third quarter pretax income. These results underscore the durability of our evolved business model and the effectiveness of the strategic initiatives that we have implemented over the past several years. Moving to a more detailed review of our third quarter results. Total revenues were $122.7 million, an increase of 2.7%. As a reminder, this was on top of 11% growth last year. Net retail sales were $112.3 million, an increase of 2.5%. Looking at our direct-to-consumer sales in more detail, we saw solid performance in August and September followed by a decline in October around the time of the government shutdown. As Sharon mentioned, the fourth quarter to date has shown a positive rebound from October. For the quarter overall, store sales were up with a slight transaction decrease driven by a 1% decline in traffic. October also faced a tougher comparison due to a new license introduction last year that benefited traffic. For the quarter, domestic store traffic outperformed the national benchmark. Also, dollars per transaction were up as selected price increases and product mix contributed to higher average unit retail prices. E-commerce demand declined 10.8%, primarily due to challenging comparisons driven by a strong license product launch last year. The timing of web launches also shifted revenue between quarters, and as such, on a year-to-date basis, e-commerce demand is down less than 1%. Commercial revenue, which primarily represents wholesale sales to our partner operators, grew 4.2% for the quarter. The timing of shipments negatively impacted our third quarter. However, commercial revenue has increased 15.3% year-to-date. We continue to expect commercial revenue to grow by more than 20% for the year. Gross margin was 53.7%, a decline of 40 basis points compared to last year, primarily reflecting the impact of tariffs. Tariffs and related costs reduced gross profit by about $4 million in the quarter. SG&A was $55.3 million or 45.1% of total revenues compared to 43.3% last year. Higher store-level compensation, including medical benefits and higher minimum wage requirements, timing of marketing expenses, and general inflationary pressures contributed to the increase. Pretax income of $10.7 million was $2.4 million below last year's $13.1 million. Tariffs and associated costs reduced pretax income by about $4 million. EPS of $0.62 compared to $0.73 last year, reflected lower pretax income, a slightly lower income tax rate, and a reduced share count. Although this quarter is the first to be meaningfully impacted by tariffs over the first 9 months, we delivered record revenues and profits resulting in over 24% EPS growth versus last year. We also remain committed to returning capital to shareholders. During the quarter, we returned $13 million through dividends and share repurchases, bringing our year-to-date total to $26.1 million. We also maintained significant flexibility with about $70 million remaining under our Board approved repurchase authorization. Turning to the balance sheet. At the third quarter end, cash and cash equivalents totaled $27.7 million compared to $29 million last year. The company finished the quarter with no borrowings under its revolving credit facility. Inventory at quarter end was $83.3 million, an increase of $12.5 million. The increase was driven by accelerated purchases to mitigate contemplated changes in tariff rates as well as the inclusion of tariffs into the cost of inventory. In addition, a portion of the increase was made to support the growth of our commercial segment. We remain comfortable in both the level and composition of our inventory, which we believe positions us well to meet demand and execute our growth strategy for the balance of the year. Turning to the outlook. We are reaffirming our full year guidance as shared in today's press release. At the midpoint of our range, our annual revenue guidance implies about 2% growth in the fourth quarter. As you know, December has historically been the most significant month of the quarter and the year for Build-A-Bear. We also continue to expect our commercial segment to grow by more than 20% for the full year, which implies at least 30% growth in the fourth quarter. Turning to our pretax income guidance. The midpoint implies about $20 million in fourth quarter pretax income. As a reminder, we guided to less than $11 million in tariff impact for the year. For the first 9 months, we recognized about $1 million in the second quarter and roughly $4 million in the third quarter, which implies a remaining tariff impact of less than $6 million for the last quarter of the year. It is important to note that tariff impact in 2025 reflects only the last 7 months of the fiscal year. Additionally, as previously mentioned on our last call, our pretax guidance continues to include approximately $5 million in additional medical and labor costs. Of note, these costs collectively represent a headwind of almost $60 million for the year. In closing, we are pleased with our strong year-to-date performance. As we look ahead, our focus remains on executing the company's strategic objectives of expanding the global footprint, accelerating the digital transformation, and leveraging our strong brand equity while delivering consistent value to shareholders through disciplined capital allocation. Finally, I want to extend my sincere thanks to our store and warehouse associates, corporate team members, and valued partners around the world. Their dedication and collaboration were instrumental in delivering record first 9 months results as we continue to be on track to achieve our fifth consecutive year of record results. This concludes our prepared remarks. We will now turn the call back over to the operator for questions.
Questions and answers
Our first question is from Eric Beder with SCC Research.
I’d like to follow up on the tariff issue. Tariffs are around $10 million, and a portion of that was in Q2. As we look ahead to next year, what opportunities do we have to reduce this? If I project it, it could reach about $18 million in tariff impact next year. How should we approach this going forward and what is your strategy for further mitigation?
I'll take that, Eric. Thank you for your question. As we mentioned in our call, yes, this year, we had about 7 months of tariff expenses. We believe that's going to be less than $11 million total for 7 months. As we go into next year, even though we are not providing any guidance on 2026 at this point, there are going to be additional months. Clearly, the first 5 months of next year, we'll have some tougher comparisons because we are going to be experiencing tariffs. We continue to work to find ways to mitigate some of the challenges that are caused by tariffs. Even as you've seen in our quarter, this year in Q4, we had $4 million of negative tariff impact and our profits only declined by a smaller margin. So we continue to do things that are within our control. We are working with our partners in Asia to reduce our costs. We are looking at ways to selectively increase prices where we can to mitigate the offset of this additional cost. We are managing things within our control, such as promotions and discounts. And that's part of the reason, even in Q3, we are seeing a lesser negative impact of these tariffs on our financials with our strong margin results. So there are things that we continue to do to manage from the margin perspective as well as we are looking at things from the overall P&L perspective that are within our control to help mitigate some of those things that we are seeing. Now one of the positive things from the tariff perspective as administration like the Chinese rates will go from 30% to 20% next year. So that will be a little bit of a benefit compared to the 30% that we had for a big part of this year.
It's also important to realize that some of our strategic initiatives that we have implemented even prior to the tariff situation have been focused on the diversification of the company. And so as Chris noted in some of his comments, we are growing our store count outside the United States, which are not, for the large part, impacted by the tariff situation.
I want to discuss insights from our store visits. In 2025, we've seen a diversification in pricing; the Mini Beans continue to be a strong part of our business, priced around $10. At the same time, we've introduced some higher-priced items like the Giant Furry Friends. Regarding Glisten, it's a limited edition priced at $100. Where are we seeing gains from these products? Is this diversification attracting different customers, and how should we approach this going forward?
I'll start by saying that we've discussed diversification across many areas over the years and reevaluating the approach to Build-A-Bear Workshop. We believe that the brand equity extends beyond just our physical locations. Additionally, our global opportunities are significant, and we see great potential in appealing to multiple generations, as 40% of our sales come from teens and adults. This demographic, particularly through licensing, allows us more flexibility in pricing. In the past, we've successfully collaborated on high-end products, such as our Swarovski partnership, which has shown that we can cater to various gift types on both the lower and higher ends of the market. We believe there is an opportunity to reach a wider audience with more products and for diverse occasions. For instance, our Mini Beans at $10 are designed to be collectibles, encouraging customers to purchase multiple units. At the same time, we continue to provide accessible products like our birthday treat bear. It's crucial for us to explore what resonates with consumers while ensuring value. Our Glisten, for example, has been popular, motivating us to create our own limited edition collectibles this year, and early results have been promising.
Our next question is from Greg Gibas with Northland Securities.
Great. Wondering if you could speak to your promotional activity in the quarter? Was it something that you leaned into a little bit more? Or I guess, maybe how would you say compared year-over-year?
Well, actually, our promotional activity, we have been managing our discounts and promotional activity much more stringently. And we are actually seeing a lower discount rate in the quarter than we have seen over the last couple of quarters. This is one of those things that we believe is within our control, and this is one of the ways we are trying to help mitigate the impact of some of these additional costs that are outside of our control. And as a reminder, over many years that we've been with the company, we have done a tremendous job of expanding our merchandise margin, managing our margin cost, and being really focused on the experience and driving the overall ticket value versus really trying to drive growth through promotion. Our brand, it's very unique in a way how we are positioned and people are coming to our stores to celebrate their special events. And we believe creating the best experience for them and upselling and doing things to really enhance that experience is the way for us to both grow the business and deliver strong margin results. This goes in line as being a destination and people are coming to celebrate these special events and over the years, we have done, in my opinion, a really good job managing the margin and expanding it over probably 1,000 points over the last decade or so.
Got it. That's very helpful. And I wanted to ask if you could share anything more about trends that you're seeing with Mini Bean sales and then, I guess, just overall demand with that product line? And I guess progress with kind of new SKU introductions with that product line as well.
We are very excited about Mini Beans for several reasons. I mentioned in my comments that we are nearing $3 million in sales, and this past quarter we experienced a 60% increase. We are in the early stages but are selling Mini Beans in various retailers beyond the workshop and with many of our partners. These include organizations like Great Wolf Lodge and some partnerships in Europe, expanding our reach internationally. Mini Beans offer variety; they are collectible and seasonal with new characters being introduced. Some characters are inspired by favorites from the Build-A-Bear historical collection, and we create versions of seasonal products that customers like to purchase together. Recently, we have also collaborated with partners, leading to successful Mini Beans tied to our licenses. For instance, our partnership with Sanrio around Hello Kitty and Friends has proven to be highly beneficial, allowing us to create seasonal products and explore new locations together. Their fan base aligns well with that of Build-A-Bear, making this collaboration advantageous for both. We view Mini Beans as a significant demonstration of how we can expand beyond traditional make-your-own plush offerings. While we will maintain our focus on the destination aspects of our brand, which is integral to our identity, we recognize the growth potential that lies beyond that core experience.
Yes, that's good to hear. Congrats on the Black Friday.
Thank you.
Our next question is from Steve Silver with Argus Research.
I had a question about the tie-ins. I know you guys mentioned that you had a presence around the Wicked movie coming out, which came out like right around Thanksgiving, which may have contributed to the strong results on Black Friday. But I'm just trying to get a sense as to just broadly speaking, whenever Build-A-Bear is involved with a high-profile movie launch and a tie-in kind of thing, whether the sales that those products generate are really more concentrated around the launch of those movies or really what the tail looks like for how long beyond the launch marketing tends to go toward these products and how long the contributions extend?
Thank you. This is our second year with Wicked. The original movie's success was better than we anticipated, allowing us to prepare more effectively for this year. While we have a strong partnership, I can't definitively say it was the reason for our Black Friday success or the increase in sales. Our performance in November is driven by a much wider product assortment. The various licenses we hold help us connect with different consumer groups for various purposes, and our international growth also supports these efforts, especially during Black Friday. A notable point about Black Friday is the success of our jumbo products, which we promoted recently. It's crucial to meet consumer expectations for Black Friday, although our promotion for jumbos was limited, and it turned out to be successful. Regarding licensed products related to films, there is a wide variety of outcomes, and it's difficult to predict consumer reactions. With sequels like Wicked, we have more reliability since it's a known brand, but for new films, we need to manage our risk carefully, and overall, we do a solid job.
There are no further questions at this time. I would like to turn the conference back over to Sharon for closing remarks.
Thank you for being on the call today. And we certainly appreciate everyone joining us to hear our third quarter results and look forward to sharing our fourth quarter results with you next year. In closing, we wish you and your families a very happy holiday and a wonderful new year.
Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.