Maxine Clark, founder and chief executive of Build-A-Bear Workshop, insisted on the first-quarter earnings call that disappointing financial results were not "representative of the value management was adding to the company," as reflected in brand growth over the long-term. Performance metrics suggest, however, that recent initiatives to push lower-priced stuffed toys during these tough economic times could be fronting an inevitable truth-the "build-your-own" model is losing appeal with parents and tech savvy kids.
Faced with a slowing economy, the mall-based specialty retailer moved away from featuring its $18 and $20 stuffed toys in ad campaigns, going instead with $10 and $12 price points to attract walk-in traffic. Although management said it saw success in attracting new customers, the company posted an $826,000 loss in the first-quarter (compared to earnings of $6.4 million a year earlier) on a 25.5 percent decline in retail sales to $96.3 million.
Gross profit margin declined 700 basis points year-on-year to 36.6 percent, which management attributed to occupancy costs associated with store closings-contractual liabilities, such as utilities and rent-in North America. Despite repeated queries by retail analysts on the conference call, management refused to directly address the actual adverse impact of product mix on profit.
Chief financial "bear" Tina Klocke said the decline in merchandising margins "reflected positive consumer response" to the new value pricing strategy. Huh? This is corporate-speak for saying that new traffic walking through store doors was attracted by the lower prices.
Can management find the right balance of merchandise across the range of price points to deliver operating profits? The evidence is not encouraging, with operating profits falling from $29.4 million in 2006 to $4.5 million last year. Going forward, as this value-focused merchandising strategy gains traction and these cheaper products become a larger component of overall product mix, there is a growing danger that accessory add-on purchases (such as clothing) and cost-cutting efforts (which will result in $15 million in annual savings) will not be enough to offset lost income -- only one store opening is planned this year, too, down from 25 new stores in 2008.
With more than eight million registered users, the company is also leveraging its buildabearville virtual world to drive traffic to its brick-and-mortar stores. To date, online purchases of its furry friends remain immaterial.
Retail critics have expressed fears that Build-A-Bear is a "fad whose time has passed" ever since it began trading as a publicly-held company back in October 2004. Still, Curly Teddy is no Mickey Mouse. And, flagging sales do suggest that changing assortments on the floor with each holiday and engaging the kids with Hannah Montana Bear parties and 'heart ceremonies' are not enough to make the company's bear workshops an enduring brand. As for rebuilding growth through lower pricing, parents will likely value the price more than the brand.