管理層發言
Greetings, and welcome to the Build-A-Bear Workshop First Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 D. Schnierow from Build-A-Bear Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and welcome to Build-A-Bear's first quarter 26 earnings conference call. With us today are Sharon Price John, Build-A-Bear's Chief Executive Officer; J. Christopher Hurt, our Chief Operating Officer and CEO-elect; and Voin Todorovic, our Chief Financial Officer. During this call, we will 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 sections. 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, which is distributed and available to the public through our Investor Relations website. And now I will turn the call over to Sharon.
Thank you, Gary, and good morning, everyone. I appreciate you joining us today for Build-A-Bear's first quarter fiscal 26 earnings call. Before reviewing the business, as I near my last day as CEO of Build-A-Bear on June 11, I wanted to briefly reiterate what a privilege it has been to serve this beloved company for years. Build-A-Bear is an exceptional organization envisioned by an inspiring founder and nurtured by a remarkable team of people who care deeply about the brand — working at our headquarters in the U.S. and the U.K., as well as our warehouses and retail locations around the world. It is supported by amazing partners across scores of functional areas, from factories to fulfillment. I have gotten to know many of these individuals over the years and, like them, have been moved by the indelible, memorable impact Build-A-Bear can have on people of all ages around the globe. Needless to say, this has been incredibly rewarding — to have navigated the company through multiple challenges with this great team and to have been an integral part of its successful strategy, brand expansion, and revenue growth, particularly over the last few years, and the shareholder value that has been created since taking the position. One of the most important decisions, however, was to bring Chris Hurt on board as the COO in 2015. Over the past 11 years, Chris has proven his dedication to this company, as well as his resilience and ability to drive the business forward. As such, both the board and I believe he is ready to take the helm of Build-A-Bear. He will continue to be a trusted partner to this outstanding leadership team and the company at large, just as he was during his leadership of our largest business division, global retail operations, during a period of significant profit improvement and later while driving our global location expansion, as well as more recently with his oversight and process reinvention of our product and brand go-to-market strategy. With this successful track record, I have confidence that the company will be in excellent hands as he builds on our success while also taking the company to new heights. I look forward to staying appropriately engaged from my continued role as a member of the Build-A-Bear board of directors. With that, I would like to formally congratulate Chris as he takes the helm, and I am enthusiastically looking forward to this next chapter.
Thank you, Sharon, for the introduction and your leadership, as well as our partnership for more than a decade, which has helped the company operationally and financially evolve to achieve new levels of success. With the last five years of record results establishing the groundwork from which to drive the next phase of growth, I am proud to build on that foundation. Even though we have been pleased with advancements in our strategic initiatives ranging from store openings to learnings and positive impacts from innovative product launches, as you may recall from last quarter, we expected a slower start to fiscal 26 and expected first-quarter revenue to be approximately flat year over year, which was based on the traffic trends we were seeing through mid March. As the quarter progressed, unfortunately, the subsequent results fell below our expectations. While we are continuing to assess and address the causal factors both in store and related to the noted web demand challenges, we believe a portion of the softness and variability reflects a broader macro shift. Consumer sentiment data has been mixed but cautious, largely driven by geopolitical concerns and related price increases. Conversely, we had our best Valentine's Day in our North American history and a solid Easter performance. When consumers engaged with the brand in the quarter, both in store and online, it drove positive operating metrics, including higher dollars per transaction because of improvements in both units per transaction and price increases. This is directly related to our trend product launches, which are focused on the tween, teen, and adult segments of our business, and possibly a nod to the K-economy. We also saw an increase in our birthday treat bear, the key item of our entry-level Pay Your Age program designed for kids. This may reflect some trade-down behavior, but it remains important as this product serves as a key customer acquisition and loyalty program tool. It could be a bellwether for future brand relevance. It shows that children continue to choose Build-A-Bear as an experience to celebrate their most special day. To give you a sense of the scale of this program, we sell more than 20 thousand birthday treat bears each week, which in turn drives guests to join our Bonus Club loyalty program. Importantly, even as we have seen some traffic challenges, we believe both of these consumer group insights, as well as the ongoing interest around visiting Build-A-Bear workshops during key occasions like Valentine's, Easter, and birthdays, supports the continued underlying strength of the brand. All this led to mixed results for the first quarter. Specifically, we delivered $125 million in revenue, down 2% year over year, but still representing the second-best first quarter in the company's history and a 9% increase over 2024. The commercial segment sales grew 34%, partially offsetting a decline in net retail sales. While pretax income increased almost $24 million with a $7 million tariff refund benefit related to 2025, excluding that, pretax income was almost $17 million. While the first-quarter results were an important factor, they were not the only ones that we contemplated when looking at our revenue expectations for the remainder of the year. And while we have ultimately chosen to reduce our full-year revenue guidance, we remain confident in certain initiatives that are slated for the back half. Even as we are taking a more cautious view of the economic and geopolitical environment, traffic trends, and inflationary pressures, importantly, this update reflects a disciplined approach to aligning our outlook with current visibility and does not change our strategy or our confidence in the long-term opportunity. As part of our updated outlook, we are also revising our pretax income guidance to reflect the favorable tariff adjustment offset by lower-than-expected operating performance. Voin will provide additional details in his commentary. Moving to the strategy, as we have shared over the past several years, we have been evolving and diversifying our business model to better leverage the power of the Build-A-Bear brand. Simultaneously, we have taken a disciplined approach to strengthening the business operationally and financially. Today, Build-A-Bear is materially stronger than it was just a few years ago. For example, 2025 represented the largest revenue year in the company's history. We have meaningfully broadened the addressable market and have opened 129 net new global locations over the past two years. Our retail fleet is essentially 100% profitable and we have made substantial progress on systems investments not only to improve efficiencies but to more effectively expand into new channels of distribution. Therefore, looking ahead, our focus is increasingly on further scaling the company. We expect the next phase of growth to be driven by the four strategic pillars we discussed last quarter, which are all expected to drive revenue. As a reminder, the four pillars are: 1) drive organic growth; 2) location expansion; 3) wholesale and outbound brand licensing; and 4) gifting and personalization. With the pillars of organic growth and location expansion continuing to leverage proven strategies, and the newer revenue streams represented by the other two pillars, my intention is to highlight key advancement of select pillars each quarter to keep you informed of our strategic progress. Today, we will update you on our organic growth, international expansion, and wholesale. Organic growth is critical for the success of our omnichannel business. While both our stores and e-commerce businesses faced tougher year-over-year comparisons and we saw softer-than-expected traffic and revenue in the first quarter, our stores continued to deliver top-tier return on invested capital. Although our e-commerce business has continued to face challenges, we remain dedicated to mitigating the disruption associated with Google-driven AI search changes from last year. We are currently working with external partners while also adding experienced industry talent to develop targeted initiatives to enhance performance across the changing AI search landscape to drive improvements in our omnichannel metrics, loyalty program, and personalized engagement. Based on a softer-than-expected quarter-to-date performance, combined with continued tough comparisons and macroeconomic challenges, we believe the second quarter will likely be weaker than the first quarter, with easier comparisons and planned growth for the third and fourth quarters. With that in mind, we have plans in place to activate opportunities throughout the balance of the year, some of these efforts based on seasonal needs and new initiatives. While we did not successfully anniversary some key stories and license launches in the first quarter, we did have some strategic wins that will help inform our go-forward plan. Specifically, select launches resonated with our older collector consumer who often returns as adults and tends to over-index on nostalgic concepts. For example, our Fresh Frosted Animal Cookies collection, which harkens back to childhood for this segment, sold through most products in less than two weeks and was a top performer for Q1. Our public relations approach to this collection topped PR Newswire's published list of March's top five press releases due to its ability to catch both eyeballs and AI agents. We are pipelining additional creative nostalgic offerings later this year, especially as we get closer to our 30th anniversary kickoff, which I will discuss later. We also saw strength in our PromisePets collection, which we recently relaunched with a new marketing campaign. As you may know, PromisePets is one of Build-A-Bear's owned intellectual properties positioned as a product enabling kids to have an opportunity to demonstrate responsible pet ownership. PromisePets, including the launch of our first PromisePets mini beans collection, more than doubled sales year over year in the first quarter, and we believe this collection will continue to attract the core kid consumer back into our workshops. Our pre-stuffed collection of mini beans continued strong momentum in the first quarter, beating last year's results by almost 30% and selling nearly four million units since launch across all channels. We have continued to add to this collection with expansion in our own intellectual property, including the aforementioned PromisePets and the Kabu characters based on our kawaii-inspired animated series, which now has over two million views, along with licensed mini beans such as Sanrio's Hello Kitty. We reopened our newly remodeled New York City FAO Schwarz store, making one of our best stores even better and refreshing it with a fun twist — a New York subway-themed experience complete with a personalization station where guests can now create embroidered furry friends and personalized T-shirts right in the store. Thus far, overall guest response has driven positive results. Acknowledging the back-half weighting of the year, looking ahead, we want to share a few fun highlights. In August, we will be introducing a new, innovative Halloween collection to support what has become one of Build-A-Bear's biggest seasons, including exciting exclusive items. In October, we will kick off our yearlong 30th anniversary celebration, commemorating three decades of memory-making experiences, including opening our vault to relaunch some of the most popular nostalgic furry friends from the past for millions of guests and fans around the world. And in December, we will launch a refreshed Harry Potter collection in conjunction with the premiere of a new HBO series. We also saw key advances in our second pillar through continued expansion of the brand into markets both domestically and internationally through a mix of our three business models — corporately managed, partner-operated, and franchise — bringing our signature workshop experience to more people in more places for more occasions. We are particularly focused on international expansion with our asset-light partner-operated model through a broad range of formats, from smaller shop-in-shops to larger tourist destinations, as well as on our multilevel ICON Park store that will open later this year. This Orlando corporately managed tourist destination is planned to feature new innovations and experiences that are intended to enhance brand engagement while providing learnings for inclusion in other workshops. In the first quarter, we opened seven net new locations, making progress towards our goal of opening at least 50 this year. We added a new country in the quarter, the Philippines, bringing our international footprint to 37 countries, up from 19 just two years ago. As we have shared, Build-A-Bear reentered Germany in the early part of the fourth quarter through one of our existing European partners, Intersource. This has become our fastest expanding market, opening four stand-alone stores in the fourth quarter of last year with tremendous success and three more in the first quarter in Cologne, Hanover, and Munster. This marks an important step in our European growth strategy. We also continue to open stores in Italy, Colombia, Mexico, Latvia, and Norway. As is typical, we are constantly evolving our retail footprint, which is why we report our net new locations. For example, our Norway partner closed three shop-in-shop locations and replaced them with two full, stand-alone locations. Our Italian partner closed one location to open a superior tourist location in Como. Shifting back to the U.S., we continue to expand our corporate store footprint. Two additional Build-A-Bear and Hello Kitty & Friends workshops mentioned last quarter opened in Mall of America and American Dream. Early results are outpacing initial expectations, to the delight of enthusiastic Hello Kitty and Build-A-Bear fans of all ages. As a reminder, we believe our successful global expansion underscores the international scalability of the Build-A-Bear experience, reinforcing that a teddy bear hug is understood in every language. I also want to briefly touch on wholesale, part of our third pillar of growth. The goal for wholesale is twofold: to increase revenue and to extend our brand presence to tens of thousands of new points of sale. Importantly, we view wholesale as complementary to our workshops, with the intention of ultimately serving as a mechanism for awareness and trial, which should also increase brand affinity and drive traffic back to our stores for the full Build-A-Bear experience. In the first quarter, we expanded the team for this important strategy and opened a new Build-A-Bear showroom in Los Angeles to help serve our wholesale account base. This was partially based on the confidence from the recent launch into 1.5 thousand Walmart locations featuring our popular mini beans collection. I look forward to updating you as we continue to execute on these strategic pillars. Before closing, as we have discussed, we anticipate 2026 will be a tale of two halves, with more challenging comparisons in the first half and easier comparisons along with more opportunities in the back half of the year. Of note, this is Sharon's 52nd and last earnings call with us. I want to take another moment to thank Sharon for her truly exceptional leadership as our CEO. It has been a privilege to work for and learn from her over the past decade, and I know our entire team shares this sentiment. Under Sharon's direction, Build-A-Bear has created significant shareholder value, and the team here had a lot of fun in the process. We wish Sharon all the best in the next chapter and I am excited to officially step into the CEO role in two weeks and continue to execute on our strategy to deliver consistently strong returns on invested capital that our shareholders expect from Build-A-Bear. With that, I would like to turn it over to our CFO, Voin Todorovic.
Thank you, Chris, and good morning, everyone. Before sharing Q1 comments, I also want to express my deep gratitude for Sharon's exceptional leadership and partnership, which have been instrumental in driving our company's success and delivering value to our shareholders. Sharon, best of luck in your new endeavors. Now I will move to discuss our quarterly performance. On the last call, we shared that we expected this quarter to be flat with the prior year, but it fell short of our expectations. Specifically for the first quarter, total revenues were $125.3 million, a decrease of 2.4%, driven by a decline in our direct-to-consumer business partially offset by growth in our commercial segment. In the direct-to-consumer segment, transactions declined primarily due to reduced store traffic. While average unit retail and units per transaction increased, domestic traffic was down 7%, which lagged national retail traffic trends in the U.S. Last year's first quarter benefited from robust traffic and strong demand for our new collections, especially among teens and adults. This year, however, with a few exceptions that Chris mentioned, we have seen a more pronounced drop in store visits from this demographic, impacting overall results. E-commerce demand declined 26.1% as web traffic continues to be soft. The commercial segment, which primarily represents wholesale revenues, continues to be the fastest-growing segment of our business. When combined with international franchise revenue, these segments rose 34.1%. Gross margin for the quarter was 63.8%, an increase of 700 basis points compared to last year. This reflects a 560-basis-point benefit from the $7 million tariff refund related to prior fiscal year costs, as well as 140 basis points driven by an increase in average unit retail, partially offset by the leverage of occupancy costs. SG&A expenses were $56.1 million or 44.8% of total revenues, compared to 41.7% last year. Higher wage rates and investment in talent, followed by general inflationary pressures and timing of longer-range investments, all contributed to the 310-basis-point increase. Our pretax income was $23.9 million compared to $19.6 million last year. Excluding the 2025 tariff reversal, adjusted pretax income was $16.9 million. EPS totaled $1.45, reflecting high pretax income and a reduced share count, partially offset by a higher tax rate. Adjusted EPS totaled $1.03. Turning to the balance sheet, at the first-quarter end our cash balance was $26.2 million, representing an $18.1 million decrease versus last year, mainly driven by tariff payments and elevated CapEx to support our strategic investments. Inventory at quarter end was $77.8 million, an increase of $5.6 million mainly driven by tariffs embedded in our product costs, as well as our inventory levels required to support expected increases in sales activity in the back half of the year. The company remains comfortable with the level and composition of its inventory. We continue to deliver capital to shareholders, as we returned $14.3 million to shareholders in the first quarter and $45.9 million over the past 12 months through dividends and share repurchases. We have repurchased almost 650 thousand shares over the past 12 months, reducing our share count by 5%, and we have $47 million remaining under the board-authorized $100 million share repurchase program. Second quarter to date, we have repurchased almost 90 thousand additional shares. Turning to the outlook, we reduced our revenue guidance while increasing pretax income expectations. We continue to expect the addition of at least 50 net new experience locations, most of which will be operated by our international partners, and we continue to expect our commercial segment revenue to grow by at least 20% for the year. We have lowered our revenue guidance to a $530 million to $550 million range, representing essentially flat to 4% growth year over year, down from our previous mid-single-digit guidance due to first-quarter and second-quarter-to-date results coming in below our expectations and taking a more conservative view for the total year outlook. Moving to our updated pretax income guidance, specifically, we increased our pretax outlook to be in the range of $72 million to $78 million. This reflects $13 million of USTR tariffs we previously paid partially offset by the impact from the reduction in our revenue guidance. Excluding the approximately $7 million tariff refund related to prior-year costs, we expect adjusted pretax income of $65 million to $71 million. This outlook continues to reflect the current Section 301 tariffs and the related costs of approximately $10 million and assumes the 10% tariff rate for the rest of the fiscal year. The outlook also continues to reflect approximately $3 million in longer-range investments for fiscal 26. Given the current trends in the overall macroeconomic and geopolitical environment, we expect second-quarter profitability to be down year over year. Looking forward, our focus is to execute our strategy and manage controllable factors to address these challenges and cost pressures driven by oil prices and tariff inflation. We continue to see opportunities to expand our global footprint and further develop our wholesale business. Even with our updated guidance, we expect 2026 to be one of the strongest years in Build-A-Bear's history, with the potential to deliver another year of record revenues, maintain solid pretax income margins, and continue returning capital to shareholders. With that, on behalf of Sharon, Chris, and myself, I 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 towards 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. Operator?
分析師問答
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star-1 on your telephone keypad. You may press star-2 if you would like to remove your question from the queue. One moment, please, while we poll for questions. Our first question comes from the line of Eric Beder with SCS Research. Please proceed.
Hi. Could you talk about the $7 million impact? Will there be any further tariff impacts beyond what you described from the remainder of the refund in Q2?
Thanks, Eric, for the question. Let me step back and explain. The tariff situation has been very challenging over the last couple of years since April of last year, and it does create a lot of noise, especially in forecasting and accounting. On a positive note, tariff rates are coming down, which is beneficial to us, but it also creates uncertainty. When we think about what we shared in our previous guidance, we expected about $16 million of total tariff impact. That was about a $5 million net increase versus the $11 million we experienced last year. However, since the Supreme Court overruled a tariff decision, we booked $13 million in expected refunds. The way that number hits our P&L is part of our GAAP guidance on a full-year basis. We are calling out a couple of the components: $7 million of that $13 million relates to tariffs that were expensed in the prior fiscal year; that is why we are adjusting the numbers, as for modeling purposes that will be a better comparison for 2027. The remaining $6 million of tariffs relate to inventory and product costs that were in inventory at the end of the year and early this year, and as that inventory sells through, it will be offset with this $6 million. So we will see a benefit versus our previous guidance of approximately $6 million that relates to this year. That $6 million is split up; a larger portion will hit us in Q1 and a smaller portion will be released in Q2, tied to inventory timing. Tariffs will remain part of our forecast. As we mentioned in the prepared remarks, we still expect a full-year impact of approximately $10 million related to tariff costs that we continue to see, and our assumption is a 10% tariff rate for the rest of the fiscal year.
The $13 million refund — have you received any of it yet? And do you expect to receive it all this year?
We have received a small portion of that. We booked the receivable, and there are still some items to work through, but that amount is part of our results. The timing of cash receipt is a bit outside of our control, so we cannot guarantee receipt timing for the full amount this year.
Moving to Walmart, you ramped that up in Q4 and launched in Q1. What are the initial learnings from it, and why do you see it scaling for the rest of the year and longer term? Thank you.
Thanks, Eric. As we have stated, we have had a relationship with Walmart in various forms over the years. This was an actual Trend Pod placement in 1.5 thousand locations to test the viability of some of our products and new collections such as our mini beans, and to be on trend with blind bags and different packs of these mini bean collections. This is one example of where we are looking to expand our wholesale business. We opened a Los Angeles showroom to allow other accounts to view our new wholesale lines and grow this business. We have added to our team to support that expansion. As you know, there is a long cycle in the wholesale business, so we are putting plans in place to grow this pillar of our strategy.
Okay. Last question — Pokemon and the adult business. A lot of that is driven by rollouts and new pieces. I know you are revamping the Pokemon outfit here. What should we think about in terms of potential for movies or other licensed products going forward to help drive the adult market even more? Thank you.
Thanks, Eric. Licensing is an important part of our omnichannel business. Licensed products tend to skew toward tweens, teens, and adults in our "cadult" segment. We have had a long-standing partnership with licenses such as Pokemon, and those provide us opportunities to bring out new characters for collectors. Pokemon is one of the go-forward licenses we have had for several years and will continue to be an important part of our licensing strategy. Another example is Sanrio; we have exclusive Sanrio designs in our stores, and the success of that led us to open our first Hello Kitty store in Los Angeles in Century City. Based on the success of that, we opened Hello Kitty & Friends workshops in Mall of America and American Dream. Those opened in the first quarter and have exceeded our expectations and been well received by our Build-A-Bear guests and fans. Licensing is a part of our overall collection strategy and an important part of the cadult area, but we combine that with products for all consumer segments to ensure our workshops and online business are serving a broadened market from kids to adults.
Thank you.
The next question comes from the line of Chris Moore with CJS Securities. Please proceed.
Hey, good morning. Thanks for taking my questions. Maybe start with gross margins. Gross margins were up 140 basis points in the quarter year over year even without the $7 million tariff benefit. Can you talk about how you are looking at fiscal 26 versus 2025 from a gross margin perspective without the tariff benefits? Also, from a three- to five-year perspective, can you give any framework around financial targets and how that plays into location mix? Commercial is the highest growth, highest margins, and highest ROC. Is there a three- to five-year target in terms of the percentage of pretax income that will come from commercial, or any bigger-picture perspective beyond 2026?
We are pleased with the progress we made on gross margin and even excluding tariffs, there was a 140-basis-point improvement year over year. Some of that is related to timing and selective price increases implemented later in the year due to higher tariff rates last year, so we are seeing some benefits in Q1 as a result. Gross margin is an area we focus on, managing every link in the supply chain. Since I have been here, together with Chris, we have achieved over a thousand basis points of improvement in gross margin. We continue to find ways to improve sourcing, manage promotions, and control things within our control. As we go through the year, it will be important to continue the right pricing strategies and promotions to help drive traffic while protecting margin. Regarding the three-to-five-year targets, our strategic objective is to continue diversifying our business streams. We believe there is big opportunity from international store expansion and wholesale. We have not provided specific numeric targets for out years. When you look at those areas and model potential accretion to top line and profitability, you can make assumptions. Roughly half of our stores are in North America with about 350 locations we own and operate, and we are operating in about 37 or 38 countries internationally. There is no reason we cannot have as many or more stores outside the U.S. than inside. Strategically, we are focused on diversification of revenue streams that could significantly add to the top line and be accretive to the bottom line.
Got it. Very helpful. I appreciate that. I will leave it there. Thank you very much.
The next question comes from the line of Steve Silver with Argus Research. Please proceed.
Thanks for taking my questions. Hoping you could provide a little color around the shift in store traffic trends. It has been quite a while since Build-A-Bear talked about store traffic outpacing national trends because of being a destination. Can you provide color on what trends you saw in Q1 and whether the dip in store traffic has reinvigorated a focus on in-store parties to drive traffic?
Appreciate the question. Yes, our traffic was tougher in Q1 coming off five years of record results and a double-digit increase in Q1 of last year, so there are tough comparisons into this first and second quarter. We reviewed the timing of key stories and license launches and there is movement depending on timing of movies or other launch opportunities. The macroeconomic environment also played a part in traffic relative to national trends. That said, when our guests engage in-store, they are completing the full Build-A-Bear experience. Dollars per transaction are up, driven by price increases and units per transaction. Those are strong indicators of brand health. When people enter our stores, they are engaged and going through our entire process. We are looking at all areas of the business to drive traffic and parties are certainly one of those. As I mentioned earlier, our Pay Your Age bear is a birthday and celebration driver — we sell over 20 thousand of those per week — and those guests often bring family and other children, which creates opportunities for additional traffic. We are examining different programs to drive traffic and reverse the trend.
Thanks. One more: curious about the tourism environment, particularly in Florida, as you plan to open the ICON Park store in the second half?
Historically, our workshops in tourist areas are some of our highest-indexing and highest-revenue locations. We have seen different dynamics: people have booked vacations and those are happening, but there is also some trade-down behavior — for example, people may drive to a destination rather than fly or shorten stays. We see many variations in tourist behavior. Orlando remains a top tourist destination with about 70 million tourists annually. We are very excited about our ICON Park location. This multilevel location will be in the heart of ICON Park, an entertainment district with zero-price entry, and we will be one of the anchors. We expect this location to be a strong tourist performer and a top revenue producer.
The next question comes from the line of Keegan Cox with D.A. Davidson. Please proceed.
First, congratulations, Sharon, and good luck in your future ventures. Chris, excited to work with you. My question is on your commercial and franchise stores, specifically internationally — how are those performing, how do openings compare with internal expectations, and what gives you confidence in the store-opening pipeline for the rest of the year?
Thanks. Our commercial segment was up 34% in the first quarter, so those stores are performing very well. There are different formats in that segment from smaller shop-in-shops to stand-alone stores that have higher volume potential. Germany is an example where our partner is opening stand-alone stores and seeing success. In Norway, a partner replaced smaller shop-in-shops with two standalone stores due to success. We are targeting a 20% increase in the commercial segment and, as mentioned, we are in about 37 countries. There is a large opportunity to scale the Build-A-Bear experience internationally.
To add, sales to partners in the commercial segment are done through the wholesale model, so revenue recognition timing can differ from when our partners sell to the final customer. There is usually timing between when we sell product to them and when they sell the product to consumers, so performance can be a bit out of sync at times.
As a reminder, we work with partners in other countries and there are variables on timing of openings. We have plans and work with partners on design and inventory, but partners control actual opening timing. This asset-light model is less risky since partners invest capital to open stores and then buy inventory from us wholesale.
Got it. Follow-up: can you parse what drove sales in the retail business this quarter? You noted traffic was down but DPT and UPT are up. What is conversion like both in store and online? How much did online drive the decline this quarter? I'm trying to get a sense of that.
Traffic was down 7% and net retail sales were down about 5%. Last year's strong traffic and demand for licenses drove higher destination traffic, which affected conversion comparisons this year. E-commerce was a significant driver of the decline with web demand down 26%. The biggest challenge this quarter was traffic, partially offset by increases in dollars per transaction. We continue to focus on converting store traffic and upselling to drive sales and enhance the experience.
Awesome. Thank you.
This concludes the question-and-answer session. I will now turn the call back to Chris Hurt for closing remarks.
Thank you for joining us today. We look forward to you joining us for our second quarter 26 call.
This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.