BBW

• Strategic Pillars: Management remains focused on four pillars: driving organic growth through trend-right products, expanding location footprint (targeting 50+ net new locations), growing wholesale/licensing, and enhancing gifting/personalization.
• Product Innovation vs. Core Experience: The Q2 summer collection (e.g., Slushy Plushies) underperformed because it lacked customization options. Conversely, core customizable items like the Chummy Shark sold out. Halloween launches have been highly successful, setting records for non-Q4 sales weeks.
• Location Expansion: Net new locations reached 674 across 37 countries. Partners are repositioning from smaller mall footprints to larger standalone stores, particularly internationally.
• Wholesale Challenges: The commercial segment disappointed as the multi-million dollar Walmart program from last year could not be repeated. Other wholesale opportunities progressed slower than expected due to lack of broad replenishment capabilities.
• Icon Park Experience: A new immersive location in Orlando is opening in Q3, featuring premium personalization services like a design studio, scent bar, and bake shop to elevate the brand experience.
• Brand Celebrations: Approaching the 30th anniversary in 2027, plans include reintroducing nostalgic characters from the vault and launching a special version of the mascot "Bear Me."

• Revenue Guidance: Lowered to $500–$525 million for full-year fiscal 2026 (previously $530–$550 million).
• Pre-Tax Income Guidance: Lowered to $60–$68 million (previously $72–$78 million). Adjusted pre-tax income is expected to be $53–$61 million, excluding a ~$7 million tariff refund from the prior year.
• Commercial Segment: Growth expectations reduced significantly; previously anticipated >20% growth, now expected to be flat or near flat due to the loss of the Walmart program.
• Traffic Tariffs: Guidance includes an assumption of $10–$11 million in ongoing costs related to current 12.5% tariff rates.
• Outlook: Cautiously optimistic for Q3 sequential improvement and a strong Q4, though still below prior year comparisons for commercial segments.

The company reported total revenue of $115.3 million, a decrease of 7.2% year-over-year. The Direct-to-Consumer (DTC) segment, which constitutes the vast majority of the business, saw revenue decline due to lower store traffic and a 15.6% drop in e-commerce demand, although DTC revenue grew 3% versus fiscal 2024. Gross margin decreased by 340 basis points to 54.2%, driven by occupancy cost leverage and increased promotional activity aimed at clearing summer trend inventory. Pre-tax income was $11.6 million, down from $15.3 million in the prior year.

• Macroeconomic & Traffic Pressure: Persistent challenges with store traffic and soft web traffic continue to impact sales performance.
• Geopolitical & Tariff Risks: Ongoing uncertainty regarding US-China trade relations and potential retaliatory tariffs poses a significant risk to supply chain costs and margins. Current tariffs are already impacting costs at 12.5%.
• Supply Chain Execution: Inability to replicate previous large-scale wholesale successes (e.g., Walmart) highlights risks in scaling third-party distribution without robust replenishment infrastructure.
• Product Misalignment: Risk that aggressive innovation in off-season periods (like summer) may alienate customers seeking core customization experiences.

Q: Analyst asked about the loss of commercial partners and details on the missed Walmart program. / A: CEO Chris Hurt explained that the guidance reduction stems largely from failing to repeat the multi-million dollar opportunistic Walmart program from the prior year. While international and domestic partner openings remain on track for 50+ net new locations, traditional wholesale progress has been slow due to a lack of broad replenishment capabilities. However, strong sell-through of branded licensed products at Walmart confirms the strategic value of this channel.

Q: Analyst asked if geopolitical tensions and potential Chinese tariff hikes pose a major risk. / A: CFO Voin Todorovic noted that while tariffs fluctuate (currently assumed at 12.5%), these macro factors are outside management's control. They are actively working with global partners to mitigate supply chain impacts. He acknowledged that oil price spikes or severe trade retaliation could negatively affect margins, but emphasized their history of navigating such disruptions.

Q: Analyst asked about consumer trading down and inventory distortion from tariffs. / A: CEO Hurt stated that despite traffic challenges, customers are still engaging fully with the customization experience, evidenced by strong Halloween performance. CFO Todorovic clarified that inventory levels are manageable and expected to finish flat YoY. He noted that while tariffs added ~$1M to costs in Q2, the benefit of lower tariff rates compared to late 2025 should help stabilize costs in the second half.

Q: Analyst asked for takeaways from the weak summer launch compared to last year's success. / A: CEO Hurt admitted they "pushed innovation too far" with non-customizable summer items like Slushy Plushies, which did not resonate. In contrast, Halloween succeeded by returning to core, dressable, customizable characters. The lesson is to balance trend-driven items with the signature Build-A-Bear customization experience, especially avoiding over-innovation during seasons where core engagement is key.

Q: Analyst asked for clarification on early Q3 improvements and the specific impact of the lost Walmart deal. / A: CEO Hurt confirmed sequential improvements in both traffic and sales reads following the Halloween launch, though August remains a difficult comparison period. CFO Todorovic quantified that nearly all the decline in the commercial segment's growth outlook is tied to the inability to anniversary the Walmart deal, alongside slower-than-expected progress in other wholesale initiatives.