Q1 2025 Earnings Summary
- Build-A-Bear is expanding internationally, planning to add at least 15 net new locations for the rest of the year. This includes increasing penetration in existing markets like Italy, where they opened 6 locations in 6 cities since late September, and expanding into new markets, signaling strong growth potential.
- The company is adding net 50 experience locations in the second half of the year, comprising both partner-operated and domestic locations. This expansion is expected to drive growth and help achieve their full-year guidance, demonstrating confidence despite economic uncertainties.
- Strategic collaborations with major entertainment companies, such as the integrated partnership with Paramount's new movie "IF", leverage theatrical content to drive store traffic and sales. By aligning with popular media, Build-A-Bear enhances brand visibility and creates unique customer experiences, which can boost revenue.
- Declining web traffic and online sales: The company experienced an 11.3% decline in web demand during the first quarter, significantly contributing to the overall revenue decrease. This downward trend has persisted into the current quarter, indicating ongoing challenges in the e-commerce channel. Management acknowledged that there may be "some choppiness throughout the year" as they focus on improving this aspect of the business.
- Consumer shift towards lower-priced products affecting revenue: There has been a slight decrease in dollar per transaction (DPT) compared to last year, possibly due to consumers trading down to entry price points amid economic pressures. This shift toward lower-priced items could impact overall revenue and margins if the trend continues.
- Increased SG&A expenses impacting profitability: SG&A expenses rose by 350 basis points to 41.5% of total revenues in the first quarter, driven by higher wages, timing of expenses, and inflationary pressures. While the company expects SG&A as a percentage of revenue to normalize for the full year, sustained higher expenses could pressure profitability if not managed effectively.
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Full-Year Guidance Confidence
Q: What gives confidence to maintain full-year guidance amid spending concerns?
A: Despite economic softness and a slight decrease in dollar per transaction, we are confident in achieving our full-year guidance due to expected growth in the back half of the year. We're adding at least 15 net new locations this year , including both partner-operated and domestic stores, which will drive growth. Additionally, we'll have easier comparisons following last year's Q4 softness. -
Web Demand Challenges
Q: Do you expect web demand challenges to persist?
A: Web traffic has been challenging this quarter, and some of these trends continue. We're working on initiatives to improve traffic but may experience some choppiness throughout the year. Factors include integration across our ecosystem and increased search competition due to our brand's success. -
Store Expansion Strategy
Q: What's the focus of your store expansion strategy?
A: We're focusing more on partner-operated expansion because it's an asset-light model. Examples include Great Wolf Lodge locations, where partners purchase fixtures, and we sell our products wholesale. This approach expands the brand footprint with less capital investment. -
International Expansion
Q: Are you building density in current markets or expanding geographically?
A: Both. We're increasing penetration in existing markets like Italy, where we've opened six locations in six cities since late September. We're also expanding into new markets; for example, our first store in Colombia is a stake in the ground for South America. We're engaged with partners globally and plan to add at least 15 net new locations this year. -
Expense Timing and Outlook
Q: What drove elevated expenses in Q1, and how will expenses trend?
A: Q1 expenses were elevated due to incremental costs for signage and marketing supplies related to our new campaign, "The Stuff You Love". We also had timing differences in certain payroll expenses between Q1 and Q2. On a full-year basis, we expect SG&A to be at or below last year's rate. -
Trade-Down Effect on Sales
Q: Seeing trade-down to lower end; what gives confidence in spending environment?
A: We observed a slight decrease in dollar per transaction, possibly due to guests focusing on lower-priced products amid the economic environment. However, we believe in our brand's strength and initiatives, such as new store openings and improvements in web demand, which give us confidence in our projections. -
Collaboration with Movie "IF"
Q: Any initiatives around the "IF" movie launch to drive traffic?
A: Yes, we've partnered closely with the "IF" movie, offering the lead character "Blue" in all stores and creating enhanced in-store experiences at select locations like Mall of America and New York. This collaboration is more integrated than past ones, aiming to connect theatrical content with our brand experience.