BuildABear Workshop, Inc. Stock

Greetings, and welcome to the Build-A-Bear Workshop Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Gary Schnierow, Vice President, Investor Relations.

Thank you. Good morning, everyone, and welcome to Build-A-Bear's second quarter 2026 earnings conference call. With us today are Chris Hurt, Build-A-Bear's Chief Executive Officer, and Voin Todorovic, our Chief Financial Officer and Chief Administrative 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 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'll turn the call over to Chris.

Thank you, Gary, and good morning, everyone. I appreciate you joining us today for Build-A-Bear's second quarter fiscal 2026 earnings call. As we communicated earlier this year, we expected fiscal 2026 to be a tale of 2 halves, with more difficult comparisons impacting the first half, followed by less challenging comparisons and anticipated improved performance in the back half of the year.

Although we continue to expect a stronger second half than the first, second quarter results fell short of our projections, driven mainly by continued traffic challenges due to the performance of our summer trend collection and in addition to macroeconomic conditions.

As a result, we have moderated our direct-to-consumer expectations for the balance of the year, and together with our updated outlook for our commercial segment, we reduced our full-year guidance. Voin will discuss the updated guidance in more detail in his remarks.

Second quarter was up against a particularly strong performance last year, when DTC revenue increased 11% and web demand increased 15%. These results were driven by a number of strong summer collections, including trend products with our innovative fruit stand assortment, exclusive licensed offerings such as the Sanrio Sweet Shop, and a selection of movie-related items, highlighted by the How to Train Your Dragon launch featuring a new Toothless, which through the years has proven to be one of our most successful movie characters.

Following the success of Summer 2025, we used this year's assortment to push even further into product innovation, including novel designs such as Slushie Plushies and Beary Goods. While these less customizable concepts did not resonate as strongly as anticipated and contributed to weaker performance than last year, the quarter also reinforced an important insight.

Guests continue to respond positively to products that highlight Build-A-Bear's signature customization experience. For example, our dressable Chummy Shark, one of the key characters in our Make-Your-Own Summer collection, sold out during the quarter. And Promise Pets, our own intellectual property, continues to be a meaningful growth platform, driving higher than average dollars per transaction due to strong attachment rates of clothing and accessories.

These insights and learnings will help us strike a better balance between continued product innovation and the core elements of the Build-A-Bear experience that resonate most strongly with our guests. Even as DTC sales came in short of last year's record level, it's important to note they represented our second highest second quarter DTC sales performance in the history of the company.

Turning to the numbers. Second quarter revenue was $115.3 million, and pre-tax income was $11.6 million. For the first half of fiscal 2026, revenue was $240.6 million, pre-tax income was $35.5 million, and adjusted pre-tax income was $28.5 million, excluding the $7 million IEEPA tariff refund related to 2025.

Importantly, while our second quarter performance and revised guidance reflect near-term pressures, we remain confident in the strength of our brand, our long-term strategy, and our ability to execute against the opportunities ahead. Notably, our Halloween launch delivered the highest non-fourth quarter sales week in the company's history and the third highest U.S. e-commerce sales week behind only Black Friday weeks of 2020 and 2025. While August remains part of the difficult comparison period, our third quarter sales performance to date has improved over the first half.

These early third quarter results reinforce our view that guests continue to respond strongly to trend-right product offerings and beloved characters, such as our recently redesigned Harry Potter bear, that build on the customization and engagement inherent in the Build-A-Bear experience. With that as a backdrop, we remain focused on the four strategic pillars we have discussed over the past 2 quarters: one, drive organic growth; two, location expansion; three, wholesale and outbound brand licensing; and four, gifting and personalization. Together, these priorities are designed to evolve and extend the Build-A-Bear brand, including into large addressable markets beyond our traditional vertical retail channel.

Our first pillar is organic growth. We must continue to drive our core business through trend-right products and compelling experiences while remaining true to what makes Build-A-Bear unique. Guests continue to value the creativity, self-expression, and connection that comes from building and personalizing their own furry friend.

We remain focused on enhancing that experience across demographics and occasions. Just as importantly, our success has not been limited to core offerings. We have consistently demonstrated an ability to identify, create, and capitalize on powerful consumer trends, particularly those related to nostalgia, pop culture, collectability, and the adult market.

Products such as Spring Green Frog, Pink Axolotl, and Capybara began as trend-right offerings but have since become enduring parts of our assortment, illustrating our ability to transform emerging trends into evergreen products while maintaining the core elements of the Build-A-Bear experience.

The Halloween season has become another compelling example of our ability to identify, create, and capitalize on consumer trends, while also representing an increasingly important growth opportunity for the brand. This year's assortment featured trend-right products, including a reintroduction of our fan-favorite Poseable Bat, a new Jumping Spider, and Mini Beans of those respective products, all of which helped drive the record-breaking launch week of this seasonal collection.

As a reminder, these seasonal and trend-driven launches often generate significant user-created content, helping drive engagement, traffic, and ultimately sales. As we approach our 30th anniversary in 2027, we will kick off a year-long celebration commemorating 3 decades of memory-making experiences.

Throughout the coming year, we plan to continue to reintroduce some of our most popular nostalgic furry friends from our vault, reconnecting guests and fans with the Build-A-Bear characters from the past. As part of that celebration, beginning in October, we will also introduce a special version of our beloved mascot, Bearemy, one of our most recognizable characters, both to longtime fans as well as to a new generation of guests.

We also continue to see meaningful opportunities within licensed products and collector-driven engagement.

Today, we launch our new Sanrio Halloween collection, highlighted by the popular Lloromannic duo, Berry and Cherry. This launch establishes Build-A-Bear as the first retailer in the U.S., Canada, and the United Kingdom to offer Lloromannic in plush form, further strengthening our position as a destination for sought-after licensed characters for all ages.

Looking ahead, we continue to amplify the Build-A-Bear brand by leveraging the powerful combination of nostalgia, licensing, and innovation that differentiates us in the marketplace. Our upcoming collaboration with McDonald's is a great example.

Later this year, McDonald's will begin rolling out Build-A-Bear themed Happy Meals in the United Kingdom, bringing together 2 iconic brands in a way that introduces Build-A-Bear to new customers while reinforcing engagement with existing fans. We believe this collaboration represents a unique opportunity to increase brand awareness, create cultural relevance, and introduce Build-A-Bear to new customers through one of the world's most recognizable brands.

Turning to our second pillar, location expansion. During the second quarter, we added 5 net new locations, bringing total net new openings to 12 through the first half of fiscal 2026 and ending the second quarter with 674 locations across 37 countries. We remain on track to achieve our objective of opening at least 50 net new locations this year, with the majority expected to be international partner-operated locations. This expansion reflects the global appeal of the Build-A-Bear brand and enables us to extend our reach efficiently into new markets.

Turning to the third pillar, we remain committed to extending the reach of the Build-A-Bear brand through wholesale and licensing opportunities. As a reminder, our wholesale business remains largely program-driven and opportunistic, as we continue to make investments to grow our traditional wholesale channel and do not yet have broad replenishment capabilities. We are disappointed that this business has not developed at the pace we anticipated. We were unable to repeat the multimillion-dollar Walmart program, and other wholesale opportunities have progressed more slowly than expected.

However, our experience with Walmart, namely the successful sell-through of our Build-A-Bear branded non-licensed products, demonstrated that a brand can extend into large-scale third-party distribution and reach consumers beyond our traditional channel. We continue to view wholesale and outbound licensing as attractive opportunities to further leverage the strength of our intellectual property, generate incremental profitable revenue, and extend the Build-A-Bear brand to new customers.

Our fourth pillar focuses on enhancing gifting and personalization. Our new highly immersive, multi-level location at ICON Park in Orlando, which remains on track to open in the third quarter, will showcase an elevated expression of the Build-A-Bear experience and will debut a number of premium gifting and personalization offerings. Among them are our first-ever design studio, a high-touch, appointment-based experience where guests work one-on-one with a design consultant to create a truly one-of-a-kind furry friend by selecting elements such as the animal, fur type, eye color, and again, creating a truly one-of-a-kind design.

A new Personalize Me station, offering furry friend embroidery and clothing customization that creates lasting keepsakes. Enhancements to our Hear Me station that highlight our record-your-voice functionality, which is a critical differentiator for our brand. And a new Scent Bar, where guests can personalize a scent to be added to their furry friend.

And Build-A-Bear Bake Shop, featuring guided dessert experiences that extend the creativity and personalization of the workshop while providing guests with a unique way to celebrate special occasions. These are just some of the many features we are introducing to create a highly differentiated experience at our new location at ICON Park, allowing us to showcase the full breadth of the Build-A-Bear brand while creating new opportunities for personalization, gifting, celebration, and gift engagement in a premier tourism destination. We intend to apply relevant successes and learnings from our ICON Park location to evolve other offerings within our store portfolio.

In summary, our first half performance fell below our expectations. We have revised our fiscal 2026 outlook. Importantly, the early response to our Halloween launch and recent product introductions reinforces our confidence in the enduring strength of the Build-A-Bear brand, and we remain focused on our strategic growth initiatives.

With that, I will turn the call over to Voin to review our financial results and updated outlook in greater detail.

Thank you, Chris, and good morning, everyone. I will discuss the quarterly results and then share more about our updated full-year outlook. As we shared on our last call, we expected a year-over-year decline this quarter. However, results fell short of our projections, primarily due to underperformance from summer trend products, as well as ongoing macroeconomic challenges, both contributing to weaker traffic. Specifically, for the second quarter, total revenues were $115.3 million, a decrease of 7.2%, mainly driven by a decline in our direct-to-consumer business.

In the direct-to-consumer segment, transactions declined primarily due to lower store traffic. Average unit retail also decreased, partially offset by an increase in units per transaction. Domestic store traffic was down and lagged broader U.S. traffic trends. Last year's second quarter benefited from particularly strong traffic and robust demand for new collections, especially among teens and adults. Despite the year-over-year decline versus second quarter, total direct-to-consumer revenue grew 3% versus 2024. E-commerce demand declined 15.6% compared to last year as web traffic remained soft. However, demand improved sequentially from the first quarter, reflecting progress against our initiatives to strengthen the digital business. While year-to-date performance remained below last year, the team continues to make progress while returning this channel to growth.

Gross margin for the quarter was 54.2%, a decrease of 340 basis points compared to last year, reflecting occupancy cost deleverage and increased promotional activity. SG&A expenses were $51.4 million, or 44.6% of total revenues, compared to 45.4% last year. The 80 basis point decrease in SG&A was driven mainly by lower incentive compensation expense. Our pre-tax income was $11.6 million compared to $15.3 million last year, a decline of 24.1%.

Turning to the balance sheet. At the second quarter end, our cash balance was $14 million, representing a $25.1 million decrease versus last year, mainly driven by a higher level of stock repurchases compared to the same timeframe last year and the timing of capital expenditure activity that was more front-loaded in this year to support our strategic initiatives. Inventory at quarter end was $81.1 million, a decrease of $600,000 compared to the same period last year.

The company remains comfortable with the level and composition of its inventory, and we currently expect to finish the year at or below last year's level. We continue to deliver capital to shareholders as we returned $8.5 million to shareholders during the quarter. Over the past 12 months, we have reduced our share count by more than 5%, and we currently have $43.2 million remaining under the Board-authorized $100 million share repurchase program.

Turning to the outlook. We reduced our revenue and pre-tax income guidance, as well as our expectations for commercial segment growth. We continue to expect the addition of at least 50 net new experience locations, most of which will be operated by our international partners. We have lowered our revenue guidance to a range of $500 million to $525 million, down from our previous range of $530 million to $550 million.

This reflects second quarter results below our expectations, continuing traffic uncertainty, and no longer expecting to anniversary our multimillion-dollar Walmart order from last year. For the second half, we expect third quarter performance to improve sequentially, supported by a more favorable year-over-year comparison.

As Chris noted, we are seeing positive momentum in our stores and e-com at the beginning of our third quarter, but our performance is still slightly below our prior expectations. Looking ahead, as is typical, we expect the fourth quarter to be our strongest quarter, even with an anticipated year-over-year decline in commercial segment revenue.

Moving to our updated pre-tax income guidance. We have lowered our pre-tax income guidance range to a range of $60 million to $68 million, down from our previous range of $72 million to $78 million. Excluding the approximately $7 million of the tariff refund related to prior year costs, we expect adjusted pre-tax income to be in the range of $53 million to $61 million. The outlook also reflects $10 million to $11 million of ongoing traffic tariffs and related costs based on the current increased tariff rate of 12.5%, as well as approximately $3 million in longer-term investments.

In closing, we continue to see opportunities to expand our global footprint and to further develop our wholesale business. Even with our updated guidance, we expect 2026 to be one of the stronger years in Build-A-Bear history, and we are focused on working to build teams and strengthen our foundation for fiscal 2027 and beyond. With that, we 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 toward 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?

[Operator Instructions] And our first question today will come from Chris Moore with CJS Securities.

Maybe we'll start on the commercial side. So you lost 4 partners. Maybe talk a little bit about what happened there and what's behind the updated guide, assuming no commercial growth in '26?

Yes, thanks, Chris, and good morning. From our commercial segment, we had guided to a plus 20% for the full year. With the reduction of the Walmart multimillion-dollar that we now don't anticipate that, that will happen in the back half of the year, that was a reduction in that guidance. We do anticipate to still be close to our original guidance with our commercial segment with our international partners and our domestic partners. There is certainly a repositioning of some of those store locations, and we still have our guidance to open at least 50 net new locations this year.

Got you. And with respect to Walmart, I mean, it sounded like things were going pretty well there. Any other details you can provide on that front?

Yes, as we talked about, from the Walmart last year, that was an opportunistic opportunity for us with a direct program going into those locations. This year, we were unable to anniversary that particular program, and there has been some slowness in anticipation of other wholesale opportunities within the back half. We are continuing to work on those wholesale systems to be able to provide replenishment and to be able to work into those as we move forward.

We still see this as an important opportunity and growth strategy for Build-A-Bear. As we talked about with that Walmart last year, we did see a strong sell-through with the Build-A-Bear branded licensed products, and we believe that is the opportunity for us in the future to be able to take advantage of these opportunistic wholesale opportunities.

Got it. That's helpful. And just in thinking in terms of wild cards, kind of looking at what's going on in Iran and the potential China response. Is that one of the bigger potential negative wild cards? If the U.S. really presses China, China reacts unfavorably? Is there a potential there from a kind of Chinese tariff perspective that could have a meaningful negative impact on you guys later this year or '27?

I'll take that, Chris. So thank you for the question. It is very challenging to answer some of those things. Clearly, the geopolitical and macro environment do impact us in some cases more or less. But tariffs, even this quarter, have, or in the year, have changed from 10%, what we assumed, to 12.5%. Again, that's something that's outside of our control, and if and when it will happen, if it happens at all. But we continue to stay focused on what we can control. We are working with our partners around the world, really to find ways to mitigate some of those things and strengthen our supply chain to support our business across the globe.

And clearly, some of those challenges, especially if there is a hike in oil prices, will impact us directly or indirectly, but it is really challenging to think about what those impacts are. But in the past, we have a strong history and good history of finding ways to mitigate some of the challenges during those times of these unusual spikes, if you will.

And our next question, we'll hear from Eric Beder with SCC Research.

What are you seeing in terms of the consumer, what are you seeing in terms of their purchasing, in terms of imperative to purchase, and are they trading down for some of the other pieces now that you have the Mini Beans and some other pieces? Is that part of the issue too?

Thanks for the question, Eric. And as you know, we stated our second quarter performance was below our expectations, and we've seen a continuation of persistent traffic challenges throughout the quarter. We have seen, as we move into the first half of the third quarter, as I talked about with our Halloween launch, we have seen a change into those traffic patterns to the positive, and we've seen a change in our sales performance. While slightly still below our expectations, that performance of our Halloween product really demonstrates the ability of people to come in and go through the full experience.

We are seeing our 4 levers as far as DPT be above last year, and we've been able to take people through that, as we said, that entire experience. Those items are Halloween collection, or more back to our core items, where people are able to dress those, be able to go through the full experience. And that has given us the outlook of the third quarter as we move through. Although August is still a part of our difficult comparison period, we see this as a positive sign moving forward. But again, slightly below our prior expectations.

Great. And when you look at, are the inventories somewhat distorted? Are the inventory comparisons here somewhat also distorted here in Q2 by the tariffs being now part of the cost of goods, and last year they weren't? How should we think about the inventories going forward? I know you said at the end of the year, it's going to be flattish. Is that because in general, A, you do a good job, but B, it also has to do with the tariff kind of normalizing, too?

So I'll try to answer that, Eric. Tariffs have been really -- we've seen significant fluctuations since they were implemented, at least for our business, in April of last year. And they fluctuated from 50s to 20s, down to 10%, and again, they were increased to 12.5% recently. In addition to this really complicated story, we got some refunds from IEEPA tariffs that were enforced last year. That went through our P&L mostly in Q1, and a portion of that was in Q2. So we were really in this situation during the Q2 that our tariff impact with lower rates this year versus last year. And last year, they were starting late in the second quarter for us.

You know, we had about $1 million-dollar impact in both quarters, so that wasn't that much of an impact this time around. But as we go for the back half of the year and we go for assuming they stay at 12.5%, clearly that will have some smaller impact on our pre-tax projection for the remainder of the year that's reflected in our guidance. But we should see some benefit from the overall total inventory as the rate would be lower compared to where the rate was at the end of last year.

Got it. Okay. And kind of last question here. When you look at last year, the spring launch was a huge positive. And this year wasn't as strong, kind of what's the -- what are your takeaways from that as you look forward to what you're going to do for the next spring, summer launch for that going forward? Thank you.

Yes, thanks, Eric. And you're right. We talked about that. We were going up against very high comparisons in the second quarter for last year based on an innovation that I talked about of our fruit stand assortment, along with a licensed product of our Sanrio Sweet Shop. That drove us after 5 years of record-breaking results over 20 quarters, to take the summer as an opportunity to push our innovation, and we did do that. We pushed our innovation with a line of Slushie Plushies, Beary Goods, and even Mashimals in that time period.

Summer is a time when you would want to push that envelope. Other times of the season, there are products that consumers are really looking for, whether that's Valentine's, Easter, Halloween, as we've seen success, and holiday. So summer is when we traditionally push that innovation. The reality is we pushed it too far. That product did not resonate as well with our consumers. It wasn't as dressable. It didn't go through the full customization experience. And as a result, we saw weaker results from that product line.

As we move into Halloween, it's more into our core line that resonates with our guests, that gives them that full customization experience. We centered on a fan favorite from last year with the Poseable Bat, introducing a new trend item in there with the spider, both of those able to be dressable, stuffable, be able to record your voice in, along with others in that line. And that's what we see going forward. Our holiday collections are in that more core item, along with licensed characters and trend products. So we believe that, that going forward, we will still push trend. We have been very good at being able to get on emerging trends and look at those. But in the summer line, we did push it too far, in our opinion, and it did not resonate with our guests.

And next we'll move to Keegan Cox with D.A. Davidson.

I kind of wanted to get in on the commercial stores a little bit more, maybe just a follow-up. I know last quarter you talked about commercial partners closing smaller footprints to open larger stores. I was wondering if that dynamic played out in the store closures we saw this quarter or if anything has changed on that front?

Yes, thanks, Keegan. Again, we still expect to open at least 50 net new locations this year, and predominantly those being our partner-operated stores. And that did play out. There are partners that first opened in these smaller shop-in-shops and now have opened standalone stores. There is timing that is happening within that.

Historically, we've had a very small percent of store closures, and our partners are repositioning as they understand their business and what they understand where these locations should be in the country and in the cities.

So we are seeing some repositioning. And again, the majority of our openings will be in the back half of the year, and those will be with our international partners. It's actually, we're very early into our international expansion.

Over this two-year period, we've seen this growth and doubled the number of countries that we're in. So with new partners, they are looking at where the best opportunities are for them, as they have some test-and-learn abilities, and to be able to reposition their stores and now some of them move into higher volume standalone locations.

Got it. And my follow-up is on the gross margins. I know part of the decline was occupancy deleverage, but you did mention promotional activity. So I just wanted to kind of get an idea of what items you had to promote, sounds like the summer trend? And then, if you're seeing any trade-down aspects?

So, thank you for -- Yes, Keegan, yes, you are right about our margin was down and some of that's caused by the increased promotional activity. Really, that was more focused to drive our move through some of the summer trend product that missed our expectations. But as Chris pointed out, we had strength in our dollars per transaction. We still are. And I mentioned our units per transaction were up, so some of those things are helping out. But because of some of those, for us, heavier promotions, again, we still have very low discount rates that impacted our average unit retail. But still, dollar per transactions were up.

[Operator Instructions] We'll next move to Greg Gibas with Northland Securities.

Maybe to just follow up on your prepared remarks, I think you said early Q3 results have improved over the first half. Can you maybe clarify what metrics you're referring to and maybe what you attribute that to? Is that simply the Halloween launch versus just kind of the summer products? Any color there would be helpful.

Yes, Greg, thank you. Yes, as we talked about, we have seen some sequential improvement in both traffic and both in our early sales reads with the Halloween launch. We are going up against, as we talked about, early comparisons in the back half of the year. However, August is still part of that difficult comparison period. So these improvements in both our traffic and both in our sales performance are encouraging as we move forward into the back half of the year.

This is, as I talked about moving into that, Halloween. 2 years ago, we brought our Halloween product forward, this launch forward, and we saw great success. We did that again last year. So we're going up against 2 years of very successful Halloween launches. So to be able to come across that in the third year, is encouraging as we move forward. So yes, both the positivity in traffic and a sales increase, while not to our prior expectations, it has increased in both of those areas.

Got it. That's great to hear. And to maybe quickly follow up on kind of the Walmart program, not repeating there, what is your understanding of kind of the reasoning there, and are you able to quantify its impact to guidance?

So I'll start with that. That was a multimillion-dollar deal that we had with Walmart, and it did have an impact on guidance because we weren't able to anniversary that opportunistic program from last year. But at the same time, some of the other initiatives haven't panned out at the pace that we anticipated them. But when you think about that, we said our total commercial segment would grow at least 20%.

Now we are bringing it down to basically being flat. Pretty much all of that decline, it is tied back to our traditional wholesale business. As we think about the context of guidance, we also did miss our expectation in Q2, driven again by that summer trend product performance and persistent traffic pressures. And then as we talked about the rest of the year, even though we are seeing some positive momentum and we are positive, we are slightly behind our original expectations. So we are cautiously optimistic about the back half of the year, and that's reflected in our guidance.

There are no further questions at this time. I would like to turn the floor back to Chris Hurt for closing remarks.

Thank you for joining us today and your interest in Build-A-Bear. We appreciate your continued support and look forward to speaking with you again next quarter. Have a great day.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

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Greetings, and welcome to the Build-A-Bear Workshop First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Gary Schnierow from Build-A-Bear Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Build-A-Bear's First Quarter 2026 Earnings Conference Call. With us today are Sharon John, Build-A-Bear's Chief Executive Officer; Chris Hurt, our Chief Operating Officer and CEO-elect; and Voin Todorovic, our 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 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.

Now, I'll 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 2026 Earnings Call. Before reviewing the business, as I'm nearing in on 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 13 years.

Build-A-Bear is an exceptional organization, envisioned by an inspiring founder, 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've 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 and particularly over the last few years, 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 and that 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, and 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. Chris?

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 5 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've 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 know the likelihood of a slower start to fiscal 2026 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, traffic and the subsequent results fell below our expectations. While we're 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. And 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 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 and loyalty program acquisition tool, and can be a bellwether for future brand relevance. And 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 20,000 Birthday Treat Bears each week, which in turn drives guests to join our Bonus Club loyalty program. Importantly, even as we've seen some traffic challenges, we believe both of these consumer group insights as well as the ongoing interest around visiting Build-A-Bear Workshop 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; however, still representing the second best first quarter in the company's history and a 9% increase over 2024.

Commercial segment sales grew 34%, partially offsetting a decline in net retail sales. And while pretax income increased almost $24 million, with the $7 million tariff refund benefit related to 2025 is excluded, pretax income was almost $17 million.

While the first quarter results were an important factor, they were not the only factor that we contemplated when looking at our revenue expectations for the remainder of the year. And while we've 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've been evolving and diversifying our business model to better leverage the power of the Build-A-Bear brand. Simultaneously, we have had a disciplined approach to strengthening the business operationally and financially. And 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. We have opened 129 net new global locations over the past 2 years. Our retail fleet is essentially 100% profitable, and we made substantial progress on systems investments, not only to improve efficiencies, but to be 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 4 strategic pillars we discussed last quarter, which are all expected to drive revenue. As a reminder, the 4 pillars are: one, drive organic growth; two, location expansion; three, wholesale and outbound brand licensing; and four, 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 2 other 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 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 with 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, often referred to as kidults. These consumers tend to over-index on nostalgic concept.

As an example of this, our fresh frosted animal cookies collection, which harkens back the childhood, for this segment, was a top performer for Q1, with most products selling through in less than 2 weeks. Our public relations approach to this collection topped PR Newswire's published list of March's top 5 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 Promise Pets collection, which we recently relaunched with a new marketing campaign. As you may know, Promise Pets is one of Build-A-Bear's owned intellectual properties and is positioned as a product enabling kids to have an opportunity to demonstrate responsible pet ownership.

Promise Pets, including the launch of our first Promise Pets Mini Beans collection, more than doubled sales year-over-year in the first quarter, and we believe that this collection will continue to attract the core kid consumer back into our workshops.

Our pre-stuff collection of Mini Beans continued strong momentum in the first quarter, meeting last year's results by almost 30%, selling nearly 4 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 Promise Pets and the KABU characters based on our Kawaii-inspired animated series, which now has over 2 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 year-long 30th anniversary celebration, commemorating 3 decades of memory-making experiences, including opening up our vault to relaunch some of our 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 in markets both domestically and internationally through a mix of our 3 business models: corporately managed, partner-operated and franchise, which bring 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 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 7 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 2 years ago.

As we've shared, Build-A-Bear reentered Germany in the early part of fourth quarter with one of our existing European partners, Intersource. This has become our fastest expanding market, opening 4 standalone stores in the fourth quarter of last year with tremendous success, and 3 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 3 shop-in-shop locations, replacing them with 2 full standalone locations. And our Italian partner closed the 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 and Friends workshops we mentioned last quarter opened in Mall of America and American Dream. Early results are outpacing initial expectations to the light 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 base on wholesale, part of our third pillar of growth. The goal for wholesale is twofold: to, of course, increase revenue, but also 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 is partially based on the confidence from the recent launch into 1,500 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've discussed, we anticipate 2026 will be a tale of 2 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's been a privilege to work for and learn from her over the past decade. And I know that 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 her next chapter, and I'm excited to officially step into the CEO role in 2 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'd like to turn 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 the 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've 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 higher 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 650,000 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 90,000 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 $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 IEEPA tariffs we previously paid, partially offset by the impact from the reduction in our revenue guidance.

Excluding the approximately $7 million of the 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 122 tariffs and 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 2026. Given the current trends and 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 toward 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?

[Operator Instructions] And our first question comes from the line of Eric Beder with SCC Research.

Could you talk about -- as to the impact of the $7 million, is there going to be any further tariff impacts beyond what you said here from the remainder of the refund in Q2?

So thanks, Eric, for the question. So let me step back and like explain. The tariff situation has been very challenging over the last couple of -- since April of last year. And it does create a lot of noise, especially -- it did create a lot of noise last year, it's creating some noise this year.

On a positive note, it's good that tariff rates are coming down and it's beneficial to us. But at the same time, it creates this uncertainty from the forecasting and how the accounting works. So I'll try to explain a little bit more detail to help some of that. And so when we think about what we shared in our previous guidance, we expected to have about $16 million of total tariff impact. And this was about $5 million net increase versus $11 million that we experienced last year. So net $5 million.

However, since Supreme Court overruled the tariff decision, we are -- we booked $13 million in expected refunds. And that number, the way it's hitting our P&L, it's part of our GAAP guidance on a full year basis. However, 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's why we are adjusting the numbers as for modeling purposes, that's going to be a better comparison for 2027. The remaining $6 million of tariffs, it's for the inventory and product costs related to tariffs that was in inventory at the end of the year and early this year. And as that inventory sells through, it's going to be offset with this $6 million. So we are going to see a benefit versus our previous guidance of $6 million that relates to this year.

This $6 million is split up. There is a larger portion that's going to hit us in Q1 and smaller portion that's going to be released in Q2, again, just as it ties to inventory timing. So still, tariffs are going to be part of our forecast. As I mentioned earlier in our prepared remarks, we expect on a full year basis still impact of approximately $10 million that's related to tariff-related costs that we continue to see as well as our assumption is to have 10% from Section 122 tariffs that are in effect for the remainder of the fiscal year.

The $13 million refund, have you received any of it yet? And do you expect to receive it all in this year?

So we received a small portion of that. Again, we booked the receivable, and there are still some things that we'll have to work through. But again, that's going to come back to the treasury and people when they are going to pay us back. But that $13 million is part of our results. When the cash is going to come in, it's a little bit outside of our control.

Moving to Walmart. You ramped that up in Q4, came out in Q1. What are kind of the initial learnings from it? And why do you see it going kind of the rest of the year and longer term?

Yes. Thanks, Eric. And as we stated, we've had a relationship with Walmart in various forms over the past years. This was an actual trend pod placement as a -- in 1,500 locations to test the viability of some of our products and new collections such as our Micro Mini Beans, also to be on trend, as we discussed with Blind Bags and also different packs of these Mini Bean collections. So this is one of those areas where we're looking to expand our wholesale business. We're using this as an example of that. As I talked about, we also opened up a Los Angeles showroom to be able to have other accounts, to be able to view our new wholesale lines and grow this business. And we've added to our team to do that. As you know, there's a long cycle on the wholesale business. So we're putting plans in place to grow this pillar of our strategy.

Last question. Pokemon and the adult business, a lot of that drives itself through kind of new rollouts and new pieces. I know you're revamping the Pokemon outfit here. What should we think about the potential for either kind of movies-driven rights or other licensed products going forward to help drive that kind of kidult market even more?

Sorry, Eric, there was a little bit of a bell in there. Were you talking about movies?

I talked about -- okay. So one thing is that you're rolling out, relaunching kind of focusing on again with the evolution starting today. And I want to talk about how that kind of -- those kind of items drive the kidult market going forward? And kind of what do you see as kind of the focus on that in terms of potential new things going forward?

Yes. Thanks, Eric. Certainly, license is an important part of our overall omnichannel business. Our licensed products tend more into the tween, teen, and adult and are, as we talk about, the kidult section of our business. We've had a long-standing partnership with licenses such as you say, as Pokemon, and those provide us opportunities to bring out new characters for these collectors. So this is one of those go-forward licenses that we've had for several years and will continue to be an important part of our go-forward strategy with licensing.

Another one of those is Sanrio. Sanrio characters, we also have exclusive designs in our stores. And the success of that is what led to us being able to open up our first Hello Kitty store in Los Angeles in Century City. And then based on the success of that, as I mentioned in the script, we opened up a Hello Kitty and Friends workshop in Mall of America and also in American Dream. Those opened in the first quarter, and they have exceeded our expectations and have been well received by our Build-A-Bear guests and fans.

So licensing is a part of our overall collection. It's an important part of the consulting area that we have. But we combine that and make sure that we have all consumer segments covered in our workshops and in our online business because as I talked, we materially broadened our market size from kids to adults.

The next question comes from the line of Chris Moore with CJS Securities.

So maybe we'll 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 just maybe talk about what fiscal -- how you're looking at, fiscal '26 versus '25 from a gross margin perspective without the tariff benefits in there?

Yes. So we are definitely pleased with the progress that we made from the gross margin perspective and even excluding the impact of tariffs, as you mentioned, 140 basis points improvement year-over-year. Some of that stuff, it's related also to timing. As you know, later in the year as a result of higher tariff rates, we did some selective price increases. So we are seeing some of the benefit in the first quarter as a result of anniversarying lower prices last year. But gross margin and some of the things that are within our control, it's something that we are very focused on. We believe in really managing every chain within our supply chain link and -- every link within our supply chain. And this is an area that since I've been here like -- and Sharon has been here, like we got over like 1,000 basis points improvement in gross margin.

We continue to find ways with our teams to be more efficient from the sourcing perspective. We are really focused on how we are managing promotions and things that are within our control. And so all these things add up. And as we go through the year, it's going to be very important for us to continue to find the right pricing strategies and promotions to really help drive some of the traffic as well as to engage with our guests because even when people are coming to our stores, as we mentioned on the call, they continue to spend at higher levels and our dollars per transactions continue to go up.

You guys obviously have done a great job over the last 5 or 6 years. I'm just trying to put a little more kind of a framework around from a 3- to 5-year perspective, financial targets and how that plays into location mix. Obviously, commercial is the highest growth, highest margins, highest ROC. I think at the end of the quarter, commercial was 27% of your locations. Is there a 3- to 5-year target in terms of the percentage of pretax income that will come from commercial? Or just any help maybe you can give in terms of a bigger picture perspective on how we should be thinking about from a financial target perspective beyond '26.

Thank you for that question. As we step back and think strategically what our objectives are, it's really to continue to diversify our business streams. As we talked in our prepared remarks, we still believe there is big opportunity from the international store expansion. We are focused on the wholesale opportunities and some of the things that Chris talked about 4 different pillars. We haven't provided specific targets or numbers for out years at this point. But again, what's out there and what we talked about in the past, when you look at some of those things and how they may be accretive from the overall revenue and profitability perspective, it can be modeled and you guys can make some assumptions based on some of those rates, what we are able to do.

When we think about our store count and where we are, roughly half of our stores, like we have 350 locations in North America that we own and operate, but there is a lot more opportunities internationally. Chris mentioned that we are in about 37, 38 countries, and that's still a very small number because there is no reason that we can't have as many or more stores outside of U.S. than we have in our markets where we are currently operating. But again, when we think strategically, we are focused on some of those areas and these parts of diversification that could have significant addition to the top line, but at the same time that are very accretive to our bottom line.

The next question comes from the line of Steve Silver with Argus Research.

I was hoping you guys could provide a little color around the shift in the store traffic trends. It's been quite a while that Build-A-Bear has talked about really with the store traffic outpacing national trends really as a destination in and of itself beyond a regular mall visit. So I was hoping you could provide just a little color on what kind of trends you saw in Q1. And maybe just with the store traffic taking a dip in Q1, whether that has provided any opportunity to maybe just reinvigorate a focus on like in-store parties just to drive store traffic.

Thanks, Steve. Appreciate the question. And yes, as we talked about, our traffic was tougher as a comparison in our first half in Q1. This is coming off 5 years of record results and a double-digit increase in Q1 of last year. So there are some tougher comparisons as we talked about going into this first quarter and second quarter with easier comparisons in the back half of the year. We have looked at the timing of the success of some of our key stories and license launches, and there's movement in those as we move through quarters based on movies or different opportunities that we have when we launch those in store. So we did see some areas where we could improve in those key stories and license launches. But the macroeconomic environment also has played a part, we believe, in our traffic against national traffic there.

We will say, though, and Voin mentioned that, when our guests are engaged and are in the store, we are seeing the Build-A-Bear experience being of high value to them. They're going through the full experience. Our dollar per transaction is up. And yes, part of that is price increases, but it's also units per transaction. We are seeing our guests come into the store, and they are going and engaging through the full Build-A-Bear experience. So those are very good indicators of our brand health. And when people are entering, they're engaged, they're having fun. And they're going through our entire process.

Certainly, we're looking at all areas of our business to drive traffic into our stores, and parties is certainly one of those. As we look forward, I talked about our birthdays and celebrations with our Pay Your Age bear with over 20,000 Pay Your Age bears that we sell a week, and those are mainly for birthdays. So that's an opportunity. When those people come in, they do bring their family, and they do bring other children with them, and they're able to have that experience there as well. So we're looking at all different areas to drive traffic in the store and reverse this trend.

Great. And one more, if I may. Obviously, it's very dynamic and the macro environment is subject to change. But I'm curious as to your thoughts in terms of what you're seeing in terms of the tourism environment, particularly in Florida as you plan to really to open the Icon Park store in the second half.

Yes. Thanks for that question. Historically, our locations, our workshops and tourist areas certainly are some of our highest indexing locations and revenue areas. What we've seen and what we've heard, there's also this idea that people have booked their vacations, they book these ideas and those are happening.

Now as we talked about the emerging K economy, there are people that are trading down in some places. They may not be doing as big a vacation. So they may be driving to a destination such as Pigeon Forge, Tennessee, where we have one of our top-performing stores. And they may be then going to an Orlando and instead of spending 7 days there, they're spending 3 or 4 days there. We're seeing and hearing those ideas.

So there's a lot of different variations in that tourist traffic. But again, we over-index in these tourist areas. Build-A-Bear has traditionally been an experience of memory making. So we're one of the ultimate souvenirs when you go on that destination. You remember where you were, you remember going to Build-A-Bear, and you remember making that incredible furry friend. And for 50 years, Orlando is a top tourist destination and have 70 million tourists annually. So we're very excited about our Icon Park location. This multilevel location is right in the heart of Orlando. It's centered in Icon Park, which is an entertainment district that has a 0 price entry to go into this entertainment district, and we will be one of the anchors of this area.

[Operator Instructions] The next question comes from the line of Keegan Cox with D.A. Davidson.

Just want to congratulate you, Sharon, on your time at Build-A-Bear and good luck with future ventures and to Chris, excited to start working with you more closely.

My question is on your commercial and franchise stores, specifically internationally and how those are performing, kind of wondering how those openings compared with internal expectations. And what gives you confidence in the store opening pipeline for the rest of the year?

Yes. Thanks. Certainly, as we talked about, our commercial segment was up 34% in the first quarter. So those stores are performing very well. Now remember, there's a lot of different sizes of formats in those locations, from shop-in-shops that are much smaller, so those can sit inside of toy stores internationally or inside of other retail stores in those different countries. There's also standalone stores. Germany is what we talked about, where there're opening standalone stores. So those are larger formats that have the opportunity to have higher volume.

We also talked about in Norway, they reduced their shop-in-shops, but then opened 2 standalones because of the success that they were seeing in those locations. So we talked about that we are looking for a 20% increase in this commercial segment. As Voin said, we are in 37 countries. There's a whole world out there that we believe the Build-A-Bear experience is scalable and it's recognizable, and that we have an opportunity to grow that business.

Yes. And Keegan, just to add maybe a little bit more to that because when you think about sales to these partners and through the commercial segment, those are done through the wholesale model. So even whenever we recognize revenue when we sell that product to them, and so there is usually some timing between like when we sell products to them and when they sell the product to the final customer. So their performance and our performance may be a little bit out of sync.

Yes. As a reminder, we're working with partners in these other countries. So there's a lot of variables that can happen on the timing of when these particular stores open. We certainly have plans in place, and we work with our partners on the design of those locations, the inventory of those locations, but they're left in our control of when they actually open.

Now to that point, they're less risky because this is an asset-light model where they are putting in the capital to open those stores and then buying that inventory from us in a wholesale basis.

Then a follow-up is, I kind of just want to parse out what drove the sales in the retail business this quarter. You kind of talked about traffic down, but DPT and UPT up. I'm just wondering, what is conversion like both in-store and online? How big of a driver was online to the decline this quarter? I'm just trying to get a sense of that.

I mean, I'll try to answer that. As I mentioned, the traffic was down 7%. So -- and I think our net retail sales were down about 5%. So when you think about some of that stuff, Keegan, some of the products even that we had, some of the traffic last year when we talk about robust traffic last year and strong demand that we experienced in first quarter of '25 for these licenses, people are coming specifically. So there is some impact on conversion because you have that destination traffic. But at the end of the day, traffic was the biggest challenge, partially offset by DPT increase. And like we continue, as Chris said, like to focus on what we can do so when we get that traffic in the store to do the best job we can of converting them as well as upselling to drive sales and enhance the experience.

This concludes the question-and-answer session. And I'd like to 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 2026 call.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Greetings, and welcome to the Build-A-Bear Workshop Fourth Quarter 2025 Earnings Conference Call [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Investor Relations. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to Build-A-Bear's Fourth 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 Fourth Quarter Fiscal 2025 Earnings Call. In addition to our earnings release, you may have read this morning's announcement concerning my decision to retire as President and Chief Executive Officer of Build-A-Bear Workshop and that long-time Chief Operations Officer, Chris Hurt, has been appointed by the Board of Directors to assume the CEO role on June 11, 2026, in accordance with a multiyear planned succession process.

Given his instrumental impact on both the company's turnaround and current success, Chris has proven to be an invaluable partner over the last 10 years, and I am confident that his outstanding leadership skills, strategic insights, business acumen and intimate knowledge of the brand and culture of this iconic company underscores his ability to take the organization to new heights. With this news as a backdrop, after we provide the 2025 highlights, financial summary and the 2026 outlook, we plan to share more about Chris and the transition as well as an outline for the go-forward strategic framework before opening up the call for questions.

Fiscal 2025 was a dynamic year marked by our continued focus on strategic store and global brand expansion, while we also worked to manage and mitigate unexpected tariff and global supply chain disruptions. With gratitude to the team, I am pleased to share that we ultimately delivered a solid year with both pretax income and revenue within our guidance range. In fact, we hit an important milestone for the company by delivering more than $0.5 billion in annual revenue for the first time in Build-A-Bear's history.

However, we didn't just barely cross the mark on the top line. Specifically, revenue hit close to $530 million, which represents nearly 7% growth. While after accounting for $11 million in tariff and related costs, pretax income increased marginally to $67.2 million. We believe this performance not only reflects the company's proven tenacity and resilience, but even in disruption, our ability to continue to focus on the ongoing execution of Build-A-Bear's long-term strategic initiatives that we have shared over the past several years: one, expanding and evolving our experiential retail footprint; two, advancing our comprehensive digital transformation; and three, investing to leverage the powerful equity of the Build-A-Bear brand while continuing to return capital to shareholders.

With that, I'll turn our first initiative, expanding our experiential retail locations over to Chris. Over the past decade, Chris has been central to evolving and improving performance across our corporate store base while also building the capabilities and models that allow us to efficiently grow the Build-A-Bear experience around the world. Chris?

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 models. In the fourth quarter, we made significant progress, adding 11 net new experience locations across 4 continents, bringing our total to 64. For the year, we entered 8 new countries, following the 10 countries added in 2024. This doubles our international footprint to 36 countries in just 2 years.

Our entry into new markets and our expansion within established markets underscores the global appeal of the Build-A-Bear experience, the brand scalability and our ongoing international growth. We ended the fiscal year with 375 corporately managed stores, 109 franchise locations and 178 partner-operated locations. Since Q2 of 2023, we have more than doubled the number of asset-light partner-operated locations, which we have grown to nearly 30% of our total portfolio.

As we shared on our third quarter call, Build-A-Bear reentered Germany in the early part of the fourth quarter through one of our existing European partners, Intersource, opening 4 stand-alone stores in key markets with tremendous success as guests were thrilled to experience the brand once again in their home market. I am pleased to announce that this expansion continued in the first quarter with openings in Cologne and Hannover, marking an important step in our European growth strategy.

Shifting back to the U.S., we continue to expand our corporate store footprint, building on the momentum from the opening of the first Build-A-Bear Hello Kitty and Friends Workshop in the popular Century City Mall in Los Angeles in October 2024. In February, we opened 2 additional Build-A-Bear and Hello Kitty and Friends Workshops in high-traffic, tourist, premier malls at the Mall of America in Minneapolis and American Dream just outside New York City.

These co-branded experiential stores complement our already established Build-A-Bear workshops at both destinations. These locations opened strong traffic with early results outpacing initial expectations to the delight of enthusiastic Hello Kitty and Build-A-Bear fans of all ages. Looking ahead, we plan to continue expanding our corporate store footprint and to debut our new multilevel next-generation retail experience at Icon Park in Orlando, Florida later this year, a showcase for the brand's experiential innovation.

Exciting plans for this multilevel store include a new Build-A-Bear design studio, offering a high level of customization as guests collaborate directly with a personal consultant to create a truly one-of-a-kind furry friend. This location will also feature the Build-A-Bear Bake Shop, an outdoor rooftop entertainment and event space along with reimagined signature experience, including our Stuff Me and Hear Me stations plus our new scent bar. This will truly be a must-visit attraction in this epicenter of global tourism.

Overall, across our 3 business models, we expect to open at least 50 net new locations in 2026, with the majority of those openings in our partner-operated asset-light model. This continues our commitment to expanding all 3 of our business models and diversifying our location portfolio. As new Build-A-Bear workshop experience locations open around the globe, we're not only expanding our reach, we're adding a little more heart to life in more places for more people and positioning Build-A-Bear for sustained global growth. And I will now hand the call back over to Sharon.

Thank you, Chris. Brand expansion is critical to the long-term growth strategy and bringing the unique and memorable Build-A-Bear experience to more markets and more consumers worldwide is paramount to achieving that goal. For our second initiative, the digital transformation effort, while progress was made on select consumer-facing upgrades, including the online digitization of our Record Your Voice offering to make it easier and faster for e-commerce guests to add a special personalized message to a new furry friend, most of our focus last year was on evolving behind-the-scenes infrastructure.

This included continued IT work toward a necessary sweeping upgrade of legacy inventory management system to enable future growth. As a result, some of our previously planned e-commerce advancements, which are a key part of the overall digital initiative were delayed, contributing to disappointing online sales. Additionally, we believe the more aggressive rollout of AI-driven changes by Google late last year, which have altered traditional SEO and digital advertising dynamics and have been linked to broader traffic headwinds across a wide array of DTC websites contributed to suppressed traffic to buildabear.com as well.

Addressing this shift will require both strategic and tactical changes, including reducing our reliance on organic search, upgrading our product schema to better align with emerging AI-driven discovery criteria, increasing the use of direct e-mail and expanding our social media efforts with more engaging content designed to drive direct click-through. As the digital environment continues to evolve, it's important to note that we both recognize and strongly believe in the value of a true omnichannel strategy that includes a robust e-commerce business focused on collectors and gifting.

Looking ahead, we expect improved integration, stronger marketing and merchandising alignment, greater loyalty club engagement to extend lifetime value and continued enhanced personalization options, all designed to improve traffic conversion and revenue while rebuilding our online foundation to address this evolving digital dynamic. Our third strategic initiative has been investing in the company in a manner designed to leverage our powerful brand equity to expand business opportunities and create new revenue streams.

In short, these investments are intended not only to drive sales within our own retail space, but to also extend beyond it while still directly returning capital to shareholders. As an example, in 2024, we launched a new line of pre-stuffs branded Mini Beans, with the intention of first selling them in our own workshops to gauge popularity and gain momentum before introducing them to other retailers. Since launch, we have sold more than 3 million Mini Beans units. And as envisioned, this success led to product placement at a variety of independent retailers and more recently, to a multimillion dollar wholesale order in the fiscal fourth quarter of 2025, which is now hitting shelves in approximately 1,500 Walmart locations across the U.S.

In addition to returning nearly $40 million directly to shareholders via a combination of tax and dividends, another key investment has been in the expansion of Build-A-Bear's growing storytelling and intellectual property ecosystem with the launch of KABU. This fun new animated episodic series for kids about friendship and positivity is based on some of our original characters like Bernard, the Teddy Bear and Pawlette, the Bunny and has translated into a popular Kawaii aesthetic.

KABU launched on Build-A-Bear's very own YouTube channel toward the end of 2025, paired with a coordinated make your own product introduction of core characters. I'm pleased to report that the rollout of our KABU episodes has already driven over 1 million views, and our KABU's character Plush has already surpassed $1 million in sales. This marks an important step in building yet another proprietary IP concept intentionally designed to drive elevated consumer engagement through the strategic integration of content, product and experiential retail to create fandom.

Overall, even as we navigated unexpected and evolving supply chain disruptions with the financial impacts of tariffs, 2025 was a year of forward momentum from delivering record results for the fifth consecutive year with the highest revenue in our history to operating in the greatest number of countries we've ever reached to breaking ground on what will be our largest retail location ever, we continue to reinvent and reimagine what is possible for this beloved brand.

Turning to the first quarter. Thus far, we have seen mixed results ranging from challenging traffic trends to achieving a record Valentine's Day. In fact, Valentine's Day was the largest revenue day in our North American store history surpassing even last year's record-breaking Black Friday. We believe the Valentine's Day performance was achieved through a combination of factors, including trend-right product, impactful in-store execution and the evolved digital Record Your Voice technology, all brought together with a new marketing campaign entitled A Squeeze Away, which turned storytelling into outstanding results, earning recognition from Ad Age, who specifically noted our evolution into a multigenerational, highly customizable and emotional-driven gifting platform.

This serves as a proof point of what our brand can deliver when we effectively integrate product, marketing and digital capabilities. Conversely, we estimate that some of the challenging traffic trends are due to a combination of factors, including tough comparative timing, related to strong collector launches last year and the impact of severe weather across large portions of the country.

Importantly, the team is actively addressing the quarter-to-date traffic trends through targeted actions, including driving momentum around our Easter holiday collection, leveraging relationships tied to a slate of kid-focused entertainment and introducing new merchandise collections such as the innovative Frosted Animal Cookies Assortment, which debuted last week.

Although still early, boosted by the positive response to social marketing and UGC content, which has already generated nearly 0.25 billion media impressions in less than a week, I'm pleased to share that since the launch of this creative new collection, we have seen a trend change with incremental improvements across key metrics, including traffic, dollars per transaction and sales, both online and in stores. With that, I'll turn the call to Voin.

Thank you, Sharon, and good morning, everyone. It's good to speak with you again today and review our fiscal fourth quarter and full year 2025 results. Before turning to the financials, I'd like to highlight a few key takeaways from the year. First, we met our guidance and delivered our fifth consecutive year of record results, underscoring the durability of our business model. We grew across all segments, expanded gross margin and increased pretax income versus last year, even with the absorption of a negative tariff impact on our profitability.

Moving to a more detailed review of our performance. Total revenues for the quarter were $154.5 million, an increase of 2.7% year-over-year. And net retail sales for the fourth quarter were $139.5 million, essentially flat with last year. Looking more closely at our direct-to-consumer business. Although adverse January weather weakened our store traffic and caused select store closures in the quarter, overall, we saw a more significant challenge on a percentage basis than the national benchmark.

Specifically, we estimate that adverse weather conditions have resulted in approximately $2 million in lost revenue. The impact from traffic challenges was mostly offset by higher dollars per transaction as selective price increases and improved product mix contributed to growth in average unit retail. Our overall traffic for fiscal 2025 outperformed the fourth quarter and outpaced the national average, ending slightly down for the year. And on a 2-year stack, we were down less than 1% compared to the national benchmark, which was down about 5%. E-commerce demand decreased 13.6% for the quarter, primarily due to traffic declines and difficult comparisons from strong licensed product launches last year.

As a result, e-commerce demand was down 5.5% for the full year. Commercial revenue, which reflects wholesale sales to our partner operators as well as Walmart shipments late in the year, increased 42.2% for the quarter and 23.4% for the year. Gross margin for the quarter was 55.2%, down 140 basis points compared to last year, reflecting the negative impact of tariffs, partially offset by selective price increases. SG&A expense was $63.9 million or 41.4% of total revenues compared to 38.4% last year. The increase was driven by higher compensation costs, medical expenses, additional inflationary pressures and the timing of marketing expenses.

Pre-tax income was $21.5 million compared to $27.5 million last year. This reflects approximately $6 million in tariffs and related costs and over $1.2 million combined in increased medical expenses and labor costs related to minimum wage increases, which were previously shared as part of our full year estimate. Earnings per share was $1.26 compared to $1.62 last year, reflecting lower pre-tax income and higher effective tax rate, partially offset by a lower share count.

Now moving to select full year results. Fiscal 2025 was a record year with total revenues of $529.8 million, up 6.7% year-over-year. Pre-tax income of $67.2 million was also a record, though it was negatively impacted by approximately $11 million of tariff-related impacts and about $5 million of higher medical and labor expenses, which were previously shared. Earnings per share were $3.99, representing 5% growth for the year. Tariffs and related costs reduced full year EPS by approximately $0.65.

Turning to the balance sheet. Cash and cash equivalents totaled $26.8 million at year-end compared to $27.8 million last year. Inventory at year-end was $82.2 million, an increase of $12.4 million. This increase reflects the inclusion of tariffs in inventory costs and incremental investments to support our expected growth across different business channels. As a reminder, inventory held for our international corporate and partner-operated stores is not subject to tariffs.

Turning to the outlook. We expect total revenues to grow at a mid-single-digit rate, driven in part by the addition of at least 50 net new experience locations, the majority of which are expected to be international partner-operated. Revenue growth should accelerate as the year progresses with first quarter revenue roughly flat with last year. Retail segment revenue is also expected to build as the year progresses, supported by easier comparisons in the second half of the year and increased store count.

In the Commercial segment, we expect revenue growth of at least 20% for the year with significant back half weighting. Pre-tax income is expected to range from a mid-single-digit decline to low single-digit growth, reflecting a $16 million full estimated impact from tariffs and tariff-related costs and approximately $3 million in longer-range investments to support wholesale growth and international expansion as well as preopening costs for Icon Park location. This outlook includes approximately $5 million in incremental tariffs compared to last year.

Specifically, the first half of 2026 will have approximately $8 million of incremental tariff costs, while the second half based on current rates, should have approximately $3 million less of tariff costs. For purposes of this guidance, we are assuming the current 10% tariff rate will be in effect for the remainder of the fiscal year. The amount and timing of any potential tariff changes or refunds remain uncertain. However, any refunds received would create an incremental benefit. With that, I would like to thank all of our stores and warehouse associates and corporate team members for contributing to our record 2025 results, which have positioned us for a sixth consecutive successful year in 2026. I will now turn it back to Sharon.

Thank you, Voin. As I approach nearly 13 fulfilling years at the helm, I've made the decision to retire as President and CEO of Build-A-Bear Workshop. As noted, my departure follows a multiyear planned succession process, culminating with the transition of my responsibilities to our Chief Operations Officer, Chris Hurt, on June 11, after which I look forward to continuing to serve on the Board and as an adviser to Chris in his new role.

In preparation for today, my 51st earnings call, I couldn't help but reflect on the progress the company has made and thought it would be appropriate to share a few highlights comparing 2025 to the last pre-COVID year of 2019. Since then, the impact of our strategic execution has been striking, driven by deliberate investments that have reshaped our business model and potential long-term trajectory. Beyond expanding Build-A-Bear's addressable market and global footprint, the transformation is most evident in the significant operational and financial improvements we've achieved from store productivity to meaningful growth in revenue and margin, including delivering a more than 50% increase in total revenues, nearly doubling our store contribution margin to approximately 25% and expanding pre-tax margin from roughly 0 to almost 13%.

The combination of revenue growth and margin expansion since 2019 has generated materially higher free cash flow after strategic investment. Again, that free cash flow has enabled a combined $170 million in dividends and the repurchase of more than 4 million shares, reducing our share count by 25% from its peak and contributing to earnings per share growth from $0.02 to $3.99 as well as meaningful share price appreciation. We have built a robust infrastructure, supported by a clean balance sheet and a team that has demonstrated the ability to navigate challenges and deliver profitable growth.

Importantly, this strategy, including our investments in the brand, was designed to position the company to scale more rapidly over time. Simply put, we've been building a strong foundation while continuing to invest in the iconic brand status, diversifying and growing the business by reaching more consumers in more places with more products for more occasions. Against that backdrop and with Build-A-Bear positioned at the intersection of pop culture, nostalgia, kidulting, in-person experiences and personalization, we believe the timing is right for the next phase.

This step is intended to continue the company's success given Chris' instrumental role spanning from the multiyear turnaround to the current record results. Over the past decade, Chris has led the company's largest business unit, global retail operations, delivering top-tier economic performance while also overseeing the logistics, real estate and store development teams. He is also the architect of the recent successful international expansion with his focus on leveraging a unique asset-light partner-operated model to efficiently introduce the brand to more fans around the world in addition to applying his brand, operational and leadership expertise to other key areas of the organization, including merchandising, marketing and licensing.

Chris' broad company history and relevant experience have wholly prepared him to lead Build-A-Bear to its next great chapter of success. In preparation, over the past few years, Chris and the team have been identifying, vetting and researching a framework to establish a future-looking strategic construct designed to focus on scaling the company.

From that work, we have defined 4 strategic pillars, supported by 4 platform areas. These 4 pillars are intended to drive incremental revenue with pillars 1 and 2 continuing to leverage proven strategies with an expectation that they will help fund the expansion into the newer revenue streams represented by Pillars 3 and 4. With that, I will hand it over to Chris.

Thank you. I would first like to take a moment to express my appreciation to the Board for entrusting me with the opportunity to evolve and expand our successful strategy as the next CEO of Build-A-Bear and personally thank Sharon for her leadership, ongoing counsel and an arguable positive impact on this company. I'm very proud of my tenure and contribution to the success of this iconic business across multiple areas of the company, and I look forward to this opportunity to drive Build-A-Bear forward with the goal of continuing to create long-term shareholder value.

With that, I'd like to take you through our strategic pillars that Sharon just mentioned. Pillar 1 is organic growth. While we expect to add new and faster-growing revenue streams over time, we must also continue to drive our core business. We plan to do this by optimizing our omnichannel model via deeper integration, greater visibility and more meaningful engagement with guests to improve lifetime value. Our physical experience locations remain critical in building the strength of the Build-A-Bear brand with our core kid consumer. At the same time, our e-commerce business remains our single largest store, serving as a key information destination and a highly complementary channel that extends our reach beyond the core by over-indexing with teen and adult gifting and collectible consumers.

Pillar 2 is location expansion. We expect to continue growing our experiential location footprint across all 3 business models: corporately operated, partner-operated and franchise, with a particular focus on international growth through our asset-light partner-operated approach. We expect to continue opening across global locations in a broad range of formats, from smaller shop-in-shops to larger tourist destination locations, including ICON Park.

Pillar 3 is wholesale and out brand licensing. We are enhancing our capabilities from systems to sourcing to replenishment to being able to seamlessly sell branded pre-stuffed products based on a variety of form factors to traditional wholesale customers beyond our workshops. This effort is not only designed to drive incremental revenue, but also to extend the brand presence to tens of thousands of new points of sale. We also intend to leverage our nearly 30 years of multigenerational brand equity to access substantial white space and enter adjacent non-flash categories through outbound licensing relationships. Again, to bring Build-A-Bear branded items to more places. Importantly, we view this additional space as complementary to our workshops with the intention of ultimately serving as a mechanism for awareness and trial, driving more traffic to our stores for the full Build-A-Bear experience.

Pillar 4 is gifting and personalization and is designed to gain more share of those growing multibillion-dollar markets. Build-A-Bear is a beloved gift that creates memories for both the gift giver and recipients across multiple age groups and occasions with over 1/3 of our revenue currently driven by birthdays. We have already proven that the brand is associated with gifting occasions, but believe there is a robust opportunity to expand into gifts for more of life's special moments, ranging from baby showers to retirement parties with our powerful brand and personalization options serving as an important competitive point of difference. As noted, these 4 pillars will be supported by 4 platform areas, focusing on brand, content, digital and talent. I'm very proud of this organization and the contributions I've been able to make and support the success of this iconic business across multiple areas of the company. I look forward to continuing to create long-term shareholder value as we execute on these strategic pillars. Sharon?

Thank you for that, Chris. And again, your track record of success at the company is unmatched, not only clearly supported by the Board's stated confidence in you, but also the confidence of the entire leadership team and across the organization. Congratulations. I'm genuinely thrilled for you and for the future of this company, and I look forward to continuing to serve on the Board as an adviser. In closing, there's no way I could possibly capture the range of emotions I feel or properly acknowledge all of the people who have been a part of my Build-A-Bear journey. Even so, I would like to extend my sincere gratitude to Maxine Clark, our founder, the entire Build-A-Bear family from our stores to our warehouses to our Bear quarters and our Board of Directors, past and present, to hundreds of partners in our investor community. But most importantly, to the millions of incredible guests whose Build-A-Bear stories have never ceased to amaze and inspire me. Thank you for reminding me every day of the power of a Teddy Bear and the importance of our mission to add a little more heart to life.

Now I'll turn the call back to the operator for questions.

[Operator Instructions]

Our first question comes from the line of Eric Beder with SCC Research.

Congratulations, Sharon, on a great period of time here and look forward to the next venture. I want to talk about it very granular. We were at the FAO Schwartz store yesterday. And I want to talk about some, a, talk to us about how that kind of expansion flows in here. And I think the other piece here when you talk about personalization was the ability to do embroidery in the store. How should we be thinking about the opportunities to continue to expand that personalization like that by able to offering almost immediate kind of in-store personalization opportunities?

Yes. Thank you, Eric. First of all, we love that you go to our stores and that you shop. That's good. But yes, I mean, you know that we've been in FAO for many years. And what you did walk into is an entirely new and updated version of it. And we recently moved in the -- and expanded our square footage pretty dramatically just a few years ago. So that's an exciting new location. And I know a lot of you guys are in New York, feel free to stop by. What Eric is referring to is one of the pillars that Chris noted is that personalization, customization and gifting pillar. We already have embroidery online, but having that kind of in-store visible experience for consumers is important. And personalization, customization is a rising trend for consumers, and it's perfect for Build-A-Bear as we've already been in that space for many, many years. We see this as an opportunity to expand in key markets, more of these large tourist locations. Chris mentioned that it would be in our ICON store. But we'll be -- this is -- you can look at this as a test and learn, but absolutely something we want to roll out. Chris, I don't know if you want to add any additional color to that.

Yes. No, FAO Schwartz has been an important brand area for us as we've been able to, as Sharon said, expand that location and most recently, update the look of that store by adding the personalization of embroidery there. We also are able to do heat transfer to teachers to be able to even provide a more personalized experience in that location. As we said, this will provide us an opportunity to have an understanding of how we can incorporate that into more stores across our entire fleet. And in the ICON Park store, we will have an even more robust personalization and customization design shop where people can make a one-of-a-kind furry friend.

Great. Voin, could you talk a little bit about the inventory? I know that the tariffs are going to kind of skew the inventory flows. But how should we be thinking about inventory flows going forward for the rest of 2026?

Yes. So our inventory, we finished the year a little bit more elevated compared to last year. As I mentioned, a portion of that reflects the tariff cost. And as a reminder, the tariffs were at a much higher level second half of last year. That's reflected in our inventory. In addition to that, we are making investments in inventory to support the growth and expansion. We shared some things on the call earlier today about some of our new wholesale business as well, we continue to expand internationally. We provided guidance on the call that we expect to add net -- at least net 50 new locations this year. So Eric, again, as we are growing in different business channels, the flow of that inventory may be different than what we have had in the past, just managing more of our direct-to-consumer piece. But again, we are diligent in managing our inventory and our expenses. We will continue to monitor and adjust. But at the same time, we are keeping our options open because there is a lot of uncertainty around tariffs and tariff rates, and we are choosing to pull or push inventory really to mitigate some of those things that are outside of our control.

Our next question comes from the line of Keegan Cox with D.A. Davidson.

Congrats, Sharon, on the update and congrats, Chris, on the new role. My question is on the kind of $3 million in long-term investments you guys talked about. I think it was on the digital business and some operations bet in manufacturing. I guess, can you bucket how much you're spending in each area that you kind of talked about in the prepared remarks?

Yes, I'll take that. Thanks for the question. It's very important for us to continue to make strategic investments and longer-term investments to support the growth. Over the last 5 years, we delivered record results, record profitability, and we continue to make investments in our business. And we are trying really to maintain this ratio of SG&A and pretax and continue to really have high flow-through business. At the same time, as we are making some of these longer-term investments, and I'll pick on a couple of those that we highlighted. ICON Park and Chris shared like a lot more detail and specificity about that store. These are long-term investments, and there is just like elevated preopening expenses and things that we are trying to do around that store. Similarly, when we talk about growth of wholesale, international expansion, we are making these investments upfront and revenue is expected to come at a little bit later date. So we are just calling out some of those things specifically as -- especially around the uncertainty that's taking place in the international markets, considering the current geopolitical situation, understand impact of tariffs and how that may impact our wholesale order flow, there are investments that we are committed to because we believe in the future, we are guiding to a mid-single-digit growth in 2026. And we are going to continue to make investments. $3 million, just we wanted to help people out as we provide guidance for next year that our pretax margin is going to grow at a slower rate than our basically revenue growth.

Yes, Keegan, I mean, as Voin noted, we need to be able to make some investments where the return might be in a little more of a future date than in the quarter of the year or the year that we've been operating. And ICON, as he said, it's a great example. I mean even in these disruptions, we believe, and I think the numbers prove it that the underlying strength of the brand and the strategy are strong. So we can't operate just based on the constant disruptions of this tariff rate, this is happening or some situation overseas. We -- of course, we work on -- we think about that in the way we plan on numerous fronts on how we import, what we do, the choices that we're making on a global basis. But Build-A-Bear has been here 30 years, and we believe Build-A-Bear can be here 30 more, and we have to think like that.

Got it. And just a follow-up on kind of the momentum you guys are seeing in your commercial and franchise businesses. You talked about the kind of win with the Walmart wholesale orders. I was just wondering more so on like the partner-operated stores. Are there any new partners there? Which countries you opened in? And I guess, kind of how those stores are maturing at this point? I think you've been in Italy for a year or 2 now. So just kind of curious on that front.

Yes. Thank you. As we talked about, our strategy is to expand our global footprint in our 3 business models, our corporate-operated, our partner-operated and our franchise business. And this has certainly contributed to these record-breaking results. Last year, we did open in 8 countries: Estonia, Finland, Georgia, Germany, as I mentioned, which is a real key market for us in our European expansion, along with Panama, Peru, Uzbekistan and Venezuela. These are -- this is important as we move into these global markets that we not only, as I talked about in our pillars is our organic core business and growing the existing stores that we've opened over the last 2 years. Over the last 2 years, we've opened over 125 experienced locations. And as we said today, we'll open 50 new experience -- at least 50 new experience locations this year. And most of those will be in our international partner-operated asset-light formats. These provide us an opportunity to really expand the brand and be able to do it quickly and with established partners. Italy is our biggest area where we have 15 partner-operated locations right now and shows how there's a lot of white space in this area of global expansion.

[Operator Instructions] Our next question comes from the line of Chris Moore with CJS Securities.

Congrats to Sharon and Chris as well. Maybe just start with the guide on the pretax margins, mid-single-digit decline to low single-digit percentage increase. Can you maybe just walk through or talk about some of the key variables that will determine kind of where you wind up on that continuum?

Sure. As we mentioned, our full year guide reflects incremental $5 million of estimated tariff impact, assuming current rates. What I also shared in my remarks earlier, there is going to be a little bit of timing between first half and second half. That $5 million, we expect in the first half to see about $8 million negative impact of tariffs and it's going to be -- and we would expect to see a benefit of $3 million versus this year in the second half of the year. This is caused by the fluctuation in tariff rates and the inventory flow-through that we are seeing. In addition to that, as we just talked about, we are making investments for additional estimate about $3 million in these longer-range investments to support wholesale growth in our international expansion as well as costs related to preopening of our ICON Park location in Orlando. So when you think about -- we have about -- just between those 2 things, about $8 million of additional costs. So even though our mid-single-digit range revenue growth, it's a solid growth, but it's just from the pretax perspective, it is challenging to absorb in 1 year the level of impact that we are seeing and thus, the range that we have provided. And with some of the things kind of what we were trying to address in the previous question, some of those investments that we made, we are already committed because the store -- the ICON store is going to be opening in the early second half of this fiscal year and the investment to bring talent and support the wholesale organization and be -- have the opportunity to grow in that channel. It's important for us to make investments upfront and then the expectation is for revenues and growth to come in subsequent quarters and years.

Got it. Appreciate that. Very helpful. And maybe just as a follow-up, maybe a little bit longer term. So in terms of the current mix between North America, global locations, it had been 75-25. I'm guessing at the end of the year. It's -- we're getting closer to 70-30. Is that right?

Yes, that's accurate, 70% and 30% in our international business.

Is there a -- we have talked about kind of typical mix for a successful global store in the 60-40 or 50-50. Is that mix -- is that your goal? And is it a 5-year target? Or just trying to get a kind of a longer-term thought process in terms of where you might be driving this to?

Yes, I can take that for you. As we talked about, one of our pillars is obviously expanding our experience locations. As I said, over the last 2 years, we've been able to open at least over 125 of those locations. We look for opportunities in both our in our domestic business and also our international business. And we're going to look to see where those partners are located and where are the best opportunities for us to deliver the brand and be able to bring that experience to our guests. So there's not a particular area. There's not a particular exact that we're doing, but we're looking across the globe to be able to see where are the best places that our brand should be able to be.

And Chris, just to add a couple of more things to that. We don't have specific time, but like there is a lot of white space as we talk about some of those things. We are not trying to get to any specific numbers, 30,60. What we believe there is a big opportunity. We are only in 36 countries around the world. So Chris and team have done a terrific job expanding and driving some of those areas even in these existing markets, when we think about Germany, when we think about Italy, we are -- we have plenty of opportunities. Also, when we talk about these stores and the type of stores and formats that we have, they are not all the same. And when we think and we compare like our full line stores versus shop-in-shops, and there are different economics, there are different sites, but we believe there is growth. And previously, we said like there is no reason that we shouldn't have as many or more stores outside of the U.S. borders as we have within the U.S.

Our next question comes from the line of Steve Silver with Argus Research.

Sharon, congratulations and Chris as well. So my first question, I know you guys mentioned not managing inventory based on near-term movements. But I'm curious as to whether the expectations for changes in the tariff landscape this year have prompted any shifts in the product sourcing mix.

So I'll take that, Steve. Thank you for the question. Inventory management and supply chain disruptions over the last 12, 18 months have been really challenging to say the least. Some of those things have been really completely outside of our control, especially when you think about the fluctuations in tariff rates over the last couple of years. We have been as proactive and as aggressive in our decision-making to mitigate some of those impacts. And I think we have executed well considering the uncertainty. As we move forward, there is still a high level of uncertainty what may happen and how the administration will use tariffs to impact our business. We continue to work with our sourcing partners to manage things that are within our control, to manage flow. And as I mentioned on previous calls, the luxury that we have in our inventory, a lot of product that we sell all year long, it's core product. And it's the same or similar assortment that can be addressed in a variety of different outlets. So it gives us the flexibility to work with our factories from the production planning perspective, from the costing perspective as well as to support our international expansion. So we will continue to do things. Once things get hopefully back to normal or before we had these fluctuations in tariffs, we will clearly address some of the things. But again, it's also very important for us to continue to make investments as we are making and we are creating these goals to continue to grow our revenue, and we are expanding in different channels. And as I mentioned earlier, some of those channels have different inventory turn and timing and bringing in inventory to support wholesale business versus retail, it has a little bit of a different dynamic.

I'm just going to add a little bit there just for some more clarity. I just want to be clear that when Voin talks about the fluctuation in tariff rates, we're not talking about just tariff rates going up and down. We're talking about tariff rates changing from country to country on some monthly basis. And when I spoke about the -- my gratefulness to the team for delivering a strong 2025, that shout out is largely to this logistics and financial group for what they've been able to do with an ever-changing environment, from creating these core products with the ability for us to import those from multiple factories in multiple countries so we can kind of shift in the moment on the delays or pull forward of our products and inventory. And so when you look at that elevated inventory number and you think about how we've been managing it, I'm really proud of where we've landed for the year, frankly. And remember that toy prior to this situation were tariff-free. This was just not something that we really had to deal with. So I'm just incredibly proud of the way this company has worked through this disruption.

That's helpful. Great. And one more, if I may. You mentioned the expectation for there to be 50 new locations opened in 2026. And I'm curious as to whether there's any color coming from your discussions with your partners, just in terms of that mix of the international expansion, whether a majority of that will be new countries being entered versus penetration into some of the recent countries you've entered over the last couple of years?

Yes. As we said, we're going to -- we've guided to at least 50 net new experience locations, and those will be with some of our current partners, and we are looking at new countries and new partners that we can expand our global footprint. As Voin mentioned, we believe there's a lot of white space within our global opportunity to bring the brand to more places. As we talked about reentering Germany with 4 stores in the fourth quarter and 2 in the first quarter. Clearly, that country has a lot of opportunity for us to expand. We looked at Italy with 15. So we will look at both new countries for expansion, and we will look at partners that can expand within their territories and their areas over the course of this year and beyond.

Our final question comes from the line of Greg Gibas with Northland Securities.

Congrats, Chris. Congrats, Sharon. I think you addressed a lot of my tariff-related questions. I appreciate the color there. Maybe I wanted to follow up on your commentary around the SEO challenges and I guess, the headwinds there. To what maybe degree do you believe that impacted traffic in a way? Like what's kind of the level of the headwind that you're kind of looking to offset with those measures that you discussed?

Yes. Thank you. It's such an interesting dynamic of how quickly the digital environment is evolving and changing. And when we -- if you can like track this, what's going on in the digital world on this shift to AI-driven searches, right? So what's happening is that now when consumers search, the solution is in its full form versus providing just different websites for them to do an automatic click-through. And there's a new terminology apparently that's happening is called the [ Clickpocalypse. ] Like, you know, so where that direct click-through through organic search has significantly declined. And the reports are on a macro basis as we don't always share the specifics, but that's a double-digit impact to the direct click-through, which is very measurable from organic search to these consumer websites. And that shift that we -- that needs to happen for us, we're actually very well suited for what is expected to be the positive attributes of the brands and the companies that will be able to overcome this. One is that you're a strong branded company. So people are really looking for you and your brand. One is that you can create unique and engaging content. Another is that you have the ability to speak directly to your consumers, which we're able to do through -- I mean, we have like an 80% capture rate at our stores of people that shop at Build-A-Bear. So we can send them direct e-mails. So -- and we're also building this muscle, as you saw what I shared just about the animal cracker launch of social media and getting more people engaged and involved because every time we get a direct click through the PDP page or the product page, that is going out and around organic search. So that's going to have to be a bigger part of the way we market and the dollars and the spend that we market with to make sure that we're getting directly to the consumer versus relying on what was a growing aspect of driving sales online, organic search and SEO. So there will be a decrease in our SEO spend and an increase in direct marketing.

That's very helpful. Appreciate that. And I guess I wanted to follow up, and I apologize if I missed this, but just trends within the Mini Beans product line. Curious how that trended in the quarter.

Yes. Well, we mentioned we sold 3 million Mini Beans. I mean, not in the quarter, but maybe someday since its launch. And so we're still seeing positive trends on Mini Beans. And not now, we're not just launching the core products, we're launching Mini Beans with some of our licenses. We're launching them with our things that we know the collectors are going to love. We're launching them in contingent to our seasonal products. So we're using Mini Beans to drive our marketing stories as well as just the product sales of Mini Beans. And they're also, we're creating unique Mini Beans for some of our partners, like we mentioned Walmart with the 1,500 stores. So some of the early, again, UGC, it's fun to be a brand is all about the search for some of these unique Mini Beans at Walmart right now.

Got it. That's great. That's great to hear. I guess last one, are you able to kind of comment on the rough cadence of expectations for new unit growth throughout the year?

As we talked in our -- we talked back half weighted will be where you will see the most of our experience location growth for this year.

Most importantly, that's ICON store. Big, single location opening in the back half of the year.

Thank you. Mr. Hurt, I'd like to turn the floor back over to you for closing comments.

Thank you for joining us today. I look forward to sharing more details on the evolved strategic pillars and platform areas on upcoming calls as we usher in this exciting new chapter for the company. We look forward to you joining us for our first quarter 2026 call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Greetings. Welcome to Build-A-Bear Workshop Third Quarter 2025 Earnings Call. [Operator Instructions] 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 headwind. 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. Chris?

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 fan fare 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 a 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 strengthen 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 deserve 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-comm 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 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 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 animal.

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 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 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 comparison 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 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 the 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 tariffs 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 a 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. Operator?

[Operator Instructions] Our first question is from Eric Beder with SCC Research.

I'd like to button up on the tariff piece a little bit. So you [Technical Difficulty] tariffs is about $10 million and a little bit of that was in Q2. When we think about next year, what are the opportunities to reduce this? Because if I sit here and just kind of extrapolate it to kind of like about $18 million in tariff impact next year. How should we be thinking about this going forward and your ability to start mitigating this even further?

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 is going to be additional months. Clearly, first 5 months of next year, we'll have some tougher comparison 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 at 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 cost. We are looking at ways to selectively and 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.

Great. And I want to talk about something we can see in our store visits. So one of the things in 2025 has been kind of the, I guess, diversification in pricing in the sense that the Mini Beans continue to be a great part of the business and they're about $10 right now. And on the flip side, we've also seen some higher-priced items expand such as the Giant Furry Friends. And to your point about Glisten, Glisten is a limited edition. It's about -- correct me, it's $100. How -- where are you seeing kind of the gains from doing these pieces? And how is this diversification? Is it bringing in the different customers to the business? And where should we be thinking about that going forward?

Yes, Eric, I'll start. Yes. I mean we've talked about diversification across numerous fronts over the years and rethinking beyond just what had been the standard approach to Build-A-Bear Workshop because the brand equity is, in our opinion, and from a research perspective is bigger than just the location of Build-A-Bear Workshop. That's one thing.

But the second piece of the diversification is not just the global aspect that I mentioned, but yes, we have an enormous amount of opportunity, we believe, from the multigenerational aspect, which I noted in my comments, 40% of our sales are to teens and adults. That often, particularly when it is related to license, some of our key licensed products allows us a lot more pricing latitude. And then we have also had partnerships in the past where we've been up in the $100 range before like the Swarovski relationship that we have.

But that latitude, both on the lower end and the higher end, does bring in different types of gifts. And we reiterated that in that we believe that we have an opportunity to appeal to more people in more places for more products and more occasions.

So while we have Mini Beans at $10, which are meant to be and, in fact, are manifesting themselves as a collectible, so people tend to buy more than one of those, so in an individual is a $10 purchase, but you usually are buying more than one. But we also continue to offer at the lowest end, our birthday treat bear. So we have accessibility to consumers. But it is our -- we believe that it's an important aspect of our brand to stretch the limits on what makes sense and what that is still valuable to the consumer. People love Glisten. So we wanted to try our own collectibles this year in our own special limited edition, and thus far so good.

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 lower discount rate in the quarter as we have seen over the last couple of quarters. This is one of those things that we believe it's 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 to 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, doing a really good job managing the margin and expanding 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.

Yes. Well, we're really excited about Mini Beans for a number of reasons. And I did share in the comments that we were approaching $3 million in sales. And just in this last quarter, we saw a 60% increase. And we are now, and as I mentioned as well, in the early stages, but we're selling Mini Beans in different retailers outside of the workshop, but also to a lot of our partners where we have partner-operated relationships. So it's got the mask head of the Build-A-Bear, but it's like Great Wolf Lodge, for example, they offer so many also outside of the United States and some of our partnerships in Europe.

But we see this as it's a -- we create variety with the Mini Beans. They are collectible. They are seasonal. We bring out new characters. Some of them are based on our favorites from the Build-A-Bear historical collection. We also bring out what we call takedown of some of the seasonal products that we're doing and people like to buy those together. But we're also just recently created things with partners. So we're starting to have Mini Beans with some of our licenses which has been extremely successful and very exciting.

So Sanrio, as an example, which we mentioned a number of times in the prepared remarks, with Hello Kitty and Friends, just again, a tremendous multidimensional partnership for us, whether that's us creating seasonal products with them or Mini Beans with them or even new locations with that partnership. It's been wonderful and they have such great fans and the fan base overlaps tremendously with Build-A-Bear. So it makes a lot of sense.

But we see Mini Beans as just -- it's a proof point in many ways of how we can extend beyond the make your own plush. And while we will never remove the destination aspect from the centerpiece and the heart of our company, it's how people are often introduced to our brand, and it's where that halo effect comes from. It is important for us to recognize that there is potential beyond that.

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?

Yes. Thank you. Yes. So this is actually our second year of Wicked. We had Wicked with the original movie and because we knew, as did many of the partners that, that would be a 2-year event, successive years. So it's been great because Wicked was more successful than we expected in the first year so we were able to prepare a little bit better for this year. And while it is the tremendous partnership, I really can't look at it and say that's the reason why we drove Black Friday or that's the reason why we're seeing this increase. Our November trend is based on a much broader assortment than that.

But of course, all of these licenses and everything that we do to appeal to different consumer groups for different purposes, and even our growth outside the United States is helpful in the achievement of those objectives and Black Friday. In fact, one of the interesting things about Black Friday is, I believe, Eric mentioned earlier, is these jumbos. We had a really great -- we did do a promotion. We just walked through like last week, but we don't. But I mean, clearly, you have to participate in what the consumer expects on the Black Friday. But very limited promotion on that on the -- in some ways to introduce people to the aspect of these jumbos, and that was a big success for us on Black Friday.

But the tail to your question of licensed products, particularly related to film. I'm going to apologize upfront. It's such a wide variety. They're almost like snowflakes. I mean it is a -- there isn't that much of a predictability on exactly how the consumer will react. Now we have a lot more information when it's a sequel like we did with Wicked because -- and that's a known entity. So that one we expect we had a little more latitude and those are a little more stretchy. But literally, unless the film is a big hit, if it's an unknown, it's -- you try to calculate and manage your risk on that. We do a pretty good job.

Okay. I appreciate the color. And one more, if I may. It was a very interesting concept, the idea of expanding to a second Build-A-Bear location in these initial malls. I think you mentioned American Dream and Mall of America. So given the fact that Build-A-Bear would then have a multiple presence in some of these large malls, I'm curious as to whether that plays into any leverage from Build-A-Bear just in terms of lease terms given the existing presence and the contribution that Build-A-Bear is already making to some of these locations?

Yes, that's a great question. I mean, obviously, the more revenue you're driving and the more foot traffic you participate or create with any of our great mall partners, it does create another bullet point of communication and possible leverage, if you want to call it that.

But our biggest, I would say, opportunity there is just continuing to work with these partners, particularly given that 60%, 70%, up to 80%, depending on how you think about it or some of our research, of our guests are coming to Build-A-Bear that happens to be in the mall or just coming to the mall and like stumbling into a Build-A-Bear. That destination-driven marketing and the experience that we provide is now the hallmark of what most retailers are looking for. We are often credited with being a pioneer in that space. And that's a big asset for us as an organization, as a company, and we realize that and so do our partners.

So that's probably our largest contribution in many of the discussions that we have with malls is that we believe we're part of the solution of people returning to in-person shopping and mall shopping and as do our partners, which is why we are getting a second location in 2 of the biggest destination-based retail concepts in the United States.

[Operator Instructions] Our next question is from Keegan Cox with D.A. Davidson.

Yes. I was just curious on what you guys said with respect to the slowdown you saw with the government shutdown. I'm just wondering, did you see a trade down from your customer, like a mix shift towards lower price point products like Mini Beans? And then kind of continuing on that theme, how that spend shapes on kids versus kind of your adult customer?

Yes. So thanks, Keegan, for the question. And as I mentioned in my prepared remarks, definitely, we saw some strength in our business in the first 2 months of the quarter. Then October, we had a little bit of a slowdown in traffic. And there are a few things that were happening at that time. Definitely, there was some noise related by the government shutdown. In addition to that, last year, we had an introduction of -- for us at that time, we licensed Bluey, that performed really well for us and did help drive traffic last year. So that compounded some of the traffic challenges that we were facing this time around.

And as we talked about, we had softer finish to the Q3, but we rebounded in November, and we are seeing some positive momentum. We, as Sharon talked about, best Black Friday in our history. So some of those things, it is really difficult to point out specifically what's happening. But we are seeing growth in Mini Beans, as Sharon told, over 3 million units sold -- or sorry, approaching 3 million units sold with that particular property. But in addition to that, we are selling these giants to our consumer like over $100 price point. So we are getting like to a lot of different consumers.

And I don't think that's necessarily impacting us in a negative way. Our dollar per transactions continue to grow and we are pleased with that. Our conversion is strong. So those are things that we believe are within our control. But definitely, there are concerns and challenges when we think from the macro environment and things that we always say, things that are outside of our control. We are trying to mitigate. We are trying to manage our expenses. And we still feel good about the guidance that we have provided on the full year basis to deliver fifth consecutive record year in our history.

Got it. And then listening to just some of your competitor calls and some Black Friday store checks, they mentioned they're taking share in plush, and I saw that in some stores. I know you guys mostly benchmark against yourself. But as we think about the Mini Beans opportunity, I mean, what interests you about fulfilling that product in other retailers and taking on that competition.

Yes. So definitely, that's one of those areas that when we think about what's happening with our stores, what's happening with Mini Beans, as I mentioned that we are approaching 3 million units sold in our stores. And that portion of those sales are also in other retail channels. So we are selling some of that to wholesale account, that's definitely an area of opportunity for us. And we believe there is a little white space as we move forward.

But as we think about the overall plush sales and everything, I can't comment on how other people and what their performance is, but I'll again reiterate, it's a fifth consecutive year of record results for us. So year after year, yes, we continue to beat our revenue goals, margin goals, so we are pleased with the progress that we are making. But there is still some white space for us as we look to the future, especially in the wholesale channel.

And I'll just add a little bit to that. I mean, while we're really pleased with our growth from experiential retail location expansion, and I think Chris mentioned to 651 locations around the globe now, the expansion into new retail environments, that offers up literally thousands of doors that Build-A-Bear would otherwise not have a presence in, where it's not necessary to go through the experience that created us, but because that experience is so emotional and sell memorable, it creates a halo effect. It's that brand and the brand equity stretches beyond the workshop walls. And Mini Beans is an example of that in that they are -- people understand that this is going to be a quality product. They think of it as it has the branded equity with it. So it's not just another plush on the shelf, it's Build-A-Bear.

So when you think about what is the essence of the competition, we believe that the Mini Beans carry that branded aspect that benefits it in that space. And we are seeing that from early sales, both, of course, inside the Build-A-Bear Workshop, as I noted, but in some of the early stages of outside of the workshops as well.

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.

Greetings, and welcome to the Build-A-Bear Workshop's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gary Schnierow, Build-A-Bear's Investor Relations. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to Build-A-Bear's Second 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 Second Quarter Fiscal 2025 Earnings Call. Today, we are pleased to report the best second quarter and first half results in Build-A-Bear's history, achieving record revenue while simultaneously expanding pretax margin and earnings per share. This unprecedented start to the year is largely a result of a long-term focus on monetizing Build-A-Bear's unique position in the marketplace, multigenerational appeal and exceptional brand recognition to scale the business with innovative initiatives across 3 strategic pillars.

For example, the use of our unique capital-light partner-operated retail model to accelerate our global expansion strategy, the focused effort on developing social media initiatives to drive omnichannel sales with a broadened consumer base as a part of our digital transformation strategy and the introduction of new concepts like our Mini Beans collection as a representation of our strategy to invest in leveraging our powerful brand equity to evolve beyond our traditional retail and product space. Simply put, we are building on the iconic status of the brand to introduce it to more people in more places with more types of product for more purposes, all with a strategic vision to drive profitable growth.

Before I provide more information regarding these ongoing initiatives, let's review some financial highlights from the second quarter and first half of 2025. all of which set new records for the company. Specifically, in the second quarter, revenues grew 11% to over $124 million. Pretax income increased by 33% to over $15 million, and EPS rose by 47% to $0.94. For the first half, revenues grew more than 11% to over $252 million. Pretax income increased over 31% to almost $35 million, and EPS rose approximately 45% to $2.11. Additionally, during the first half of the fiscal year, we returned more than $13 million in capital to shareholders.

After posting multiple quarters of record results over the past 4.5 years, Build-A-Bear's most recent performance clearly supports the benefits of our very purposely evolved and diversified business model and executional discipline. As an example of our progress from a profitability perspective, our first half EBITDA margin rate of nearly 17% more than tripled versus the first half of 2019, the last pre-COVID year, driven by annual store contribution margins of over 25%, combined with the growth of our higher-margin commercial segment. When considering these results were achieved amid a wide variety of economic challenges and geopolitical shifts, they serve as a valuable source of confidence in our team, our brand, our plans and the company's future.

With that in mind, while we understand a meaningful portion of the year remains and acknowledge the potential for some economic uncertainty ahead, we also believe it is appropriate to increase our 2025 guidance at this juncture. Specifically, we shared in today's press release our increased revenue and pretax income guidance based on the current tariff rates as well as higher expectations for net new unit growth. Therefore, when considering our business momentum, historical ability to respond to shifting marketing conditions, solid balance sheet, strong cash flow and a focus on controlling the controllables, we remain confident in our continued efforts to drive our 3 strategic pillars of: one, the expansion and evolution of our experiential retail footprint; two, the advancement of our comprehensive digital transformation; and three, the continued investment to leverage the powerful equity of the Build-A-Bear brand while simultaneously returning capital to shareholders.

Now Chris Hurt, Build-A-Bear's Chief Operations Officer, will provide some additional information about our first strategic pillar, the expansion of our retail footprint. Chris?

Thanks, Sharon. We are committed to bringing our signature workshop experience, the cornerstone of the Build-A-Bear brand to new markets through 3 retail business models: corporately managed, partner-operated and franchise. In the quarter, 14 net new experience locations were opened, of which 86% were international, expanding the brand experience to 32 countries across North America, South America, Europe, Australia, Asia and Africa.

As a testament to the enthusiasm for the brand, specifically, our domestic partners continue to expand their Build-A-Bear presence as Girl Scouts introduced 2 new locations, bringing their total to 33. And Great Wolf Lodge opened a workshop in their new Connecticut location, which brings our experience to all 22 of their U.S. lodges. Our international partners and franchisees also continue to expand by entering 2 new countries, Georgia and Uzbekistan and opening locations in Colombia, Mexico, Australia, [ BG, ] Denmark, Qatar, Kuwait and the UAE.

We are also thrilled to announce that the Build-A-Bear brand will be returning to Germany in the third quarter, operated by one of our current partners, [ Inner Stores ]. Additionally, we have both continued to grow and have plans for future evolution of our corporately operated footprint ranging from more traditional formats in select mall-based locations, tourist-focused workshops, innovative concepts like November's successful debut of our Hello Kitty and Friends workshop, the remodel and significant expansion of our Powerhouse FAO Schwartz location in Rockefeller Plaza and the recently announced plans for a multilevel one-of-a-kind Build-A-Bear workshop at ICON Park in Orlando, Florida, which is scheduled to open in the second half of 2026.

We are pleased to say we kicked off this remarkable adventure with a groundbreaking ceremony last month. As noted, given that our 2025 expansion plans are exceeding expectations, we are increasing our net new unit growth guidance for the year to at least 60 locations from the previous 50. We continue to expect the majority of the new unit growth to be driven by our partner-operated model, mainly with international partners. In fact, we ended the quarter with 157 partner-operated units now totaling 25% of our total location count. As these new experience locations continue to open around the globe, there's no question that we are adding a little more heart to life in more places and for more people.

Now I will turn the call back over to Sharon.

Thank you, Chris. Our experience locations are truly the crux of our brand essence. For our second strategic pillar, as noted, our ongoing digital transformation includes the advancement of social media initiatives across platforms like Instagram, TikTok, Facebook and YouTube as well as the amplification of an impressive amount of user-generated content for the brand. With social media having an increasingly critical role in the broader media landscape, it is now a key element in the way we showcase products, tell brand stories and spark trends for our teen and adult consumers, now often referred to as [ Kidult ].

As an example, our effective marketing campaign to support this summer's Fruit Stand assortment created a fully integrated launch of a non-holiday, non-licensed collection that drove triple-digit growth in media impressions and was a significant contributor to our second quarter success. We efficiently generated awareness and sales for the entire offering, including our Make Your Own Watermelon Frog, Dragon Fruit Dragon and Pineapple Axolotl. We further enhanced the Fruit Stand with Mini Beans, including [ fan fazed ] Kiwi Koala which contributed to the 80% year-on-year revenue increase for the Mini Beans collection. Importantly, we see the continued investment in social listening tools, super fan research, AI, influencers, algorithms and trend watching to inform and create comprehensive dialed-in product stories supported by engaging shareable content, especially for the growing [ Kidults ] market, who often tend to be higher-value collectors, gift givers and viral product purchasers.

The third pillar is to invest in ideas and opportunities to leverage our brand power to drive incremental growth, notably because of our more sustainable and more consistent revenue and cash flow, Build-A-Bear has been able to make concerted efforts and longer-term initiatives over the past few years, including the scalable reinterpretation of the Build-A-Bear workshop experience with meaningful license partners, like our successful Hello Kitty and Friends Los Angeles location, the multichannel expansion of the brand into potentially thousands of additional points of sale across geographies through a wholesale business model, leveraging new product types like Mini Beans and the evolution of our organizational structure and the elevation of talent to enable these and other strategic growth initiatives.

You may recall that during our third quarter 2024 earnings call, we noted that we enjoyed the best Halloween performance in our history. Today, we are pleased to announce positive comparisons for Halloween 2025 and quarter-to-date sales as our Q2 momentum continues. Key contributors thus far include the return of Vault favorite, Pumpkin Kitty, the Scary cute Zombie Axolotl and our new on-trend Posable Bat, which currently looks like it may be a surprise early sell-out. And yes, we also expanded the collection with fun Halloween-themed Mini Beans, including a candy corn Longhorn.

Looking ahead, we believe we have a robust pipeline for the remainder of 2025, kicking off with special plans for National Teddy Bear Day on September 9, an October launch tied to the upcoming sequel for last year's blockbuster Wicked for Good, and of course, a strong holiday lineup, including the tenth anniversary version of our famous Glisten, The Magical Snow Deer.

In closing, to reiterate, for the full year, assuming tariffs hold at current levels and the economic environment remains relatively stable. Our updated guidance reflects increased expectations for fiscal 2025, and we anticipate record results for the fifth consecutive year. Voin will provide more details in his remarks.

With that, I would like to thank the entire Build-A-Bear family, our hundreds of partners and millions of amazing guests for helping us achieve a record first half for fiscal 2025, as we strive to continue delivering on our corporate mission of adding a little more heart to life. Voin?

Thank you, Sharon, and good morning, everyone. I will discuss the quarterly results and then share more about our updated full year outlook. This was the most profitable second quarter and first half in the company's history. For the first half, both our retail and commercial segments grew double digits, 11% and 22%, respectively. Both segments delivered improved gross profit margins and with disciplined expense management, we achieved higher pretax income margins. These results underscore the effectiveness of our strategic initiatives implemented over the past several years. We remain committed to returning capital to shareholders. During the quarter, we returned $6 million through dividends and share repurchases, bringing our year-to-date total to $13.1 million.

We also maintained significant flexibility with about $80 million remaining under our Board-approved repurchase authorization. Moving to a more detailed review of our second quarter results. Total revenues were $124.2 million, an increase of 11.1%. Net retail sales were $114.6 million, an increase of 10.8%.

Our stores delivered strong performance in the quarter, with transaction growth driven by continued positive traffic trends. Domestic store traffic rose 3%, significantly outperforming the national benchmark, which saw a 3% decline. Dollars per transaction were up, supported by higher average unit retail, mostly benefiting from reduced promotional activity and selective price increases, partially offset by a decline in units per transaction. E-commerce demand increased 15.1%, driven by strong consumer response to key product launches.

The timing of these launches was more favorable compared to last year when similar releases occurred at the beginning of the third quarter, allowing us to capture demand earlier and contribute meaningfully to second quarter performance. Commercial revenue, which primarily represents wholesale sales to our partner operators continues to be the fastest-growing segment of our business with 18.3% growth in the quarter. Gross margin was 57.6%, an improvement of 340 basis points compared to last year, reflecting margin strength across both retail and commercial segments. Retail gross margin expansion was primarily driven by improved merchandise margin, supported by reduced promotional activity and selective price increases as well as the fact that we saw significant leverage of our fixed costs with strong revenue growth.

While tariffs started to impact our cost of goods sold during the quarter, last year's strategic decision to pull forward inventory reduced our tariff exposure to about $1 million. SG&A expenses were $56.4 million or 45.4% of total revenues compared to 44% last year. Higher store level compensation, corporate costs and general inflationary pressures, partially offset by the timing of marketing expenses contributed to the 140 basis point increase. Pretax income grew 32.7% to a second quarter record of $15.3 million and 12.3% of total revenues. EPS was $0.94, an increase of 46.9%, reflecting higher pretax income, a lower income tax rate and a reduced share count. The lower income tax rate in the quarter reflects the benefit of discrete items.

Our EPS for the first half of the year was $2.11, up 44.5% year-over-year. Turning to the balance sheet. At second quarter end, cash and cash equivalents totaled $39.1 million, an increase of 55.4% compared to the same period last year. This was after returning $31 million to shareholders over the past 12 months. The company finished the quarter with no borrowings under its revolving credit facility. Inventory at quarter end was $81.8 million, an increase of $14.8 million. About half of the dollar increase is attributable to tariffs, with the remainder driven by accelerated purchase of our core products and investments to support elevated Commercial segment sales, in line with our expectations.

We remain comfortable in both the level and composition of our inventory, which positions us well to meet demand and execute our growth strategy for the balance of the year. Turning to the outlook. We have increased our revenue and pretax income guidance, and we raised our net new unit growth expectations. Specifically, following double-digit first half growth and a solid start to the third quarter, we have increased our guidance for revenue growth to be in the range of mid-single to high single digits. However, as a reminder, we have more challenging comparisons for the second half of the year. Also, we have increased the pretax income guidance to be in the range of $62 million to $70 million, which assumes the current tariff rates to be in effect for the rest of our fiscal year. Let me add some more commentary on tariffs as they relate to Build-A-Bear. While the current U.S. tariff policy is impacting our North American business, the tariffs should not directly affect the cost of products sold outside of North America.

Also, please note that our retail cost of goods include merchandise, rent, warehousing and distribution expenses. However, the merchandise portion is the only cost directly impacted by tariffs. As a reminder, the current 30% U.S. tariff on Chinese imports was in place at the time of our Q1 '25 call. was recently extended through November 10. Since the first quarter call, the tariff on Vietnamese imports have increased to 20%, doubling the rate that had taken effect on April 5. Because we had already expanded our sourcing capabilities to include both Vietnam and China, many of our products are dual sourced, providing production and global distribution flexibility.

Accordingly, we now expect tariffs and the associated cost impact on our fiscal 2025 income statement, net of mitigation to be less than $11 million, of which about $1 million was reflected in our Q2 results, as previously noted. Also, our pretax guidance continues to include approximately $5 million of additional medical and labor costs, as previously mentioned on our last call. Of note, these costs collectively create a headwind of almost $16 million for the year. In closing, we are pleased with our strong performance on a year-to-date basis. As we look ahead, our focus remains on executing our strategy, expanding our global footprint, accelerating our digital transformation and investing in high-return capital projects 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 half results, and they continue to be the driving force behind our success.

This concludes our prepared remarks. We will now turn the call back over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from the line of Eric Beder with SCC Research.

Congratulations on the quarter and the guidance. You talk a little bit -- I know you have a number of different ways to handle the issues with tariffs. Could you talk a little bit about kind of the response when you raise prices to what you're seeing from the consumer when they do that? Can you do that?

Thanks, Eric. Well, as Voin mentioned in his remarks, our price increases that we have taken very selective, very strategic, something that we've done for many years. And our objective with that is to find the right price value for the consumer. And what we tend to do when we do choose to increase those prices selectively, it's related to when we reset the stores. So on a seasonal reset for products that aren't directly comparative, we might raise slightly versus what would have been sort of the slot equivalent of the previous season. And that provides a little more latitude in the way we think about it. But the key to what we're doing is always managing both the entry-level price point with our birthday treat there.

So that's still -- as a reminder, for those on the call that might not know, we provide a product that is -- it's called the Count Your Candles program, where you can come in on the month of your birthday and pay your age that you're about to become. And we use that as a very valuable tool for us to acquire new consumers. It's necessary for you to be in the loyalty program to get that discount. So that levels out some of the -- what might be considered price increases for an average consumer has a broad array of different prices that they can participate in.

We're very focused on maintaining our core animals. There is some pricing changes on some of our core animals, but not to the degree that you might expect given what we would intend -- would believe some of this tariff impact is going to be over time. But we want those to be attainable for our consumers. And where you might see some of the larger price increases is generally where we have greater latitude with the consumers like our collectors, for example, or some of our more select licensed product partnerships where that makes sense. I'm going to add one little piece too here is that we have been in the business of telling stories, not just selling items. So we drive our dollars per transaction on more than just the unit cost. And that's an important change in our entire strategy of the way we're building our business. Voin may want to add some color on that.

Yes. And as I mentioned in my remarks, also our transactions were up, driven by traffic. We significantly outperformed national traffic numbers that were down 3%. They were up 3%. So our traffic to our stores and transactions were up. Our conversion numbers were slightly up versus last year in the quarter 2. So we really haven't seen negative impact of some of the selective price changes that Sharon talked about. But again, as we are telling these more comprehensive stories and our marketing activities are working and we are driving more traffic to stores, we have been able to capture some of that traffic effectively and really drive additional business. And this also is a testament to some of the new product launches and collections like Mini Beans that we introduced as we drive more people to our stores. It drives higher ticket price. And like -- and we have those at relatively low price points because they are selling at about $10 a piece.

That's very true. And you've also gone the other way with a super large giant product also. Third party, how should we be thinking about how these mature? I know that last year, the third-party stores went up by about 40 plus -- this year, they're going to go up by 50- 60. How long does it -- I know there's an initial ramp. And then how long -- what's kind of -- how should we be thinking about the maturity of those and how they can provide even -- how they will end up impacting you?

I'll start, and I'll hand it over to Chris. That's his area. So -- but I just want to clarify, Eric, I know we used to call that third party. We now refer to that as partner operated. So just for -- to be specific about what that's referring to, yes, our partner-operated is a big focus of our 3-pronged strategy for store evolution and expansion for our experienced location footprint. And it's been very successful for us. And we are starting to see it accelerate as we've gotten more focused on that and this cap-light model has proven to be an incredibly successful approach for us to expand the brand outside -- particularly outside North America and the U.K. Chris, do you want to add some color on that?

Yes. Thanks, Sharon. Thanks, Eric. As these stores start to mature, we've seen very great response from our partners as they are adding more locations. There is an incredible amount of runway in all of our international areas and with our partners as we continue to add countries, as we continue to add partners going forward, the expansion of these locations, as you remember, a lot of these are shop-in-shops. There are many more toy store locations in the rest of the world versus the United States, where the Build-A-Bear brand can go in as a shop-in-shop location fully branded. So the opportunity for our partners to go into actually toy stores that they already own and operate and Build-A-Bear is an incredibly additive brand experience. They recognize that Build-A-Bear is the originator of retail experiential, and they want that in their locations. So this is an excellent opportunity for them to expand, and we're seeing that as these stores comp upon themselves.

Yes. We've seen it also Yes. Thank you, and good luck with Halloween, it looks great.

Our next question comes from the line of Greg Gibas with Northland Securities.

Congrats on the results. As it relates to Mini Beans, wondering if we could get kind of an update there in terms of maybe how sales compared year-over-year? Anything else you can share in terms of metrics or like units sold? And along those lines, too, how has maybe progress trended on opportunities to get broader wholesale distribution of Mini Beans? How are discussions with retailers going?

Yes. So great question. I appreciate it. Well, Mini Beans collection, first of all, as a little bit of a background on that, we launched that in February of 2024. And we provide waves of collectible assortments. We're trying -- we are driving the collectibility of Mini Beans. People are seeking them out, the different styles and a lot of guests engagement on this particular line. Some of them are takedowns, as we would say, of our most beloved characters and a lot of them are unique to themselves.

So -- and they are priced around $10, as Voin said. But we -- as I mentioned in my remarks, we've seen an 80% increase of Mini Beans on a year-on-year basis, and we are seeing some continued -- ramp I mean, the momentum is continuing. It's very exciting, particularly as we are now launching them in conjunction with big stories that are part of our overarching workshop story, like I mentioned, Fruit Stand or with our holidays.

So with all of those as opportunities ahead of us, we do expect to continue to see that growth. We have had many discussions, and we are having success with selling Mini Beans in wholesale channels. We had mentioned on our previous call that, that's happening already outside the United States with some of the partners that Chris alluded to, who have toy stories of their own, where they are then putting Build-A-Bear inside of the toy stores. So they're selling those in their toy store, not necessarily associated -- well, they are associated with Build-A-Bear, but not inside the Build-A-Bear experience. So that's very positive for us. And we also have already placed Mini Beans in a number of locations and are in some very robust conversations with other wholesalers. Another exciting -- and Chris, do you want to mention some of those wholesalers, Applegreen?

Yes. That's exactly. We've had a relationship with Hudson that are in our airport locations. They've started to expand their Mini Bean collections in those locations. We mentioned Applegreen is a convenience an upscale convenience type of store that we have over 50 locations where Mini Beans have been placed. And as Sharon mentioned, our international partners, they have stores -- toy stores where they don't have a Build-A-Bear Workshop shop in shop yet, and they're able to do Mini Beans in those locations. So we're starting to see expansion internationally of our Mini Beans collection on a wholesale basis.

Yes. That's very helpful. Yes, sorry, go ahead.

Well, we just wanted to add that some Mini Beans news is that we are now -- will be -- actually are introducing our first licensed version of Mini Beans with the Mini Bean Sanrio launch.

Great. And yes, really nice to hear. That's impressive growth out of that unit. Appreciate that. And I guess I would just -- noting kind of the improved e-commerce demand or that certainly accelerated kind of quarter-over-quarter. Anything worth calling out there in terms of the success you're seeing with that? Any particular drivers of the strong growth within that channel?

Well, as I mentioned, Greg, in my remarks, we saw over 15% strong demand in the quarter. There was some softer comps with last year as product launches year-over-year, there was some shift between Q2 and Q3. But nonetheless, we are seeing an improvement in this portion of our business. We are focused on improving and growing this business. as well as similar to what we have seen in our brick-and-mortar locations, online, our discounts have been lower. And like our promotional cadence has been changing, we still continue to be very optimistic about our future plans and gifting initiatives that are going to be associated with our website. We continue to evolve in this area of the business.

We are making some talent acquisitions really to help us create a new chapter in this particular portion of our business. And I think with some of the stuff that we have seen, there's still in the short run, there may be some choppiness, but over the longer haul, we feel good about the wholesale business and what we are trying to do. And again, as we said many times in the past, we are agnostic to how consumers choose to shop in our stores or online, but we would love to see positive growth in all of our segments.

I think it's also really critical to understand that we see our web business as a big piece and a strategic pillar as the digital transformation, but also more importantly, as a critical element in our omnichannel approach to business. While buildabear.com does drive sales and it also, as you know, drives some of those sales through the store -- through our stores is these mini warehouses, which is great for our sales associates at that level for us to distribute for the last mile.

But it's important that you recognize that it also serves as an important communication and information tool for our guests. Most of our guests from what we can tell, hard to -- this is directional information, they have a tendency to go online first. Our find the store, plan a visit, plan a party web pages are our largest visited web pages. So we know that the guests are using our buildabear.com as a source of information and planning for their store visits. And we love to see that engagement across both of our key channels of in-store and online. And that's the big ecosystem that we're working on for the omnichannel solution.

Our next question comes from the line of Keegan Cox with D.A. Davidson.

Congrats on the great quarter. My question is on the implied second half guidance. Just kind of throwing it together and looking at the midpoint calls for a slowdown. Does that imply weaker margins in the back half? And if so, why?

So thanks for the question, Keegan. First, I want to mention that our previous revenue guidance was in mid-single digits that we initiated several months ago. We raised that guidance now and expanded the higher end of the range to high single digits. We had a strong first half results, plus 11% or so that we saw in total revenue growth. But as we mentioned, last year, second half, we had some really strong results, especially driven by best ever Halloween. So we had some -- so as we are going to have some tougher comps, that was implied in our initial guidance that the year is going to be at that level.

Now we are excited about the progress that we are making. Clearly, there are some macroeconomic uncertainties that we are facing like every other company that are related to -- in particular to tariffs, and I'll cover that in a second to talk a little bit about challenges on the profitability side of the guidance. But as we think about revenue with some of the things that we have put in place, we believe we have inventory. We have believed that we have momentum that's currently taking us through first month of third quarter. And we are going to stay focused on things that are within our control. We have managed our promotional cadence. We have managed excellent customer service. Our conversion numbers, as I mentioned earlier, are up. So we are doing things that's within our control.

Now there are a lot of things that are outside of our control. One of those things are tariffs. Tariffs are a real cost that we are facing. Even though we are expecting to see additional negative impact of tariffs, as I mentioned, the Vietnamese tariffs have gone -- have doubled from 10% to 20%. That's going to impact us even more in the second half of the year. And when you think about $11 million or just a little bit less than $11 million negative impact of tariffs, plus additional $5 million that we called out from medical and minimum wage labor cost at the beginning of the year, we have nearly $16 million that we are overcoming of headwinds. So when you look at our guidance and like even like if you think about mid- to high end of that guidance, we are still close or slightly beating our last year full year profitability despite the $16 million headwind.

Got it. That's helpful. And then my next question is on the partner-operated locations. I know you mentioned earlier that the existing partners keep adding new stores. And I know you mentioned a new partner in Germany. I was just wondering how much momentum you're seeing with those new partners? And within your partner stores, do you find that your customer is different than maybe your corporate stores in America?

Yes, thanks. In talking to that, just one clarification. Our partner that will be opening our German locations is Inner Stores, which is a current partner that has opened stores in the Nordics. So we're excited for them to be able to open those locations in Germany. They recently, in this quarter, also opened a stand-alone store in Copenhagen, which was very successful. So they are really seeing -- the great thing that we always said that Teddy Bear Hug is understood in every language, and that is totally true. The guests really recognize the brand. The power of the brand has really grown globally through our franchise model originally and through our corporate models in the U.K.

And specifically in Regent Street Hamleys, where we've seen incredible success where we expanded that location. Along with our social media reach of our partners, our own social media and our marketing of our brand, our experience and our stories are then delivered to our partners who then put their own country-specific take on those social media outreaches. The other part of this that has really been incredible is that our guests are the ones that are driving this as well.

Our user generated content is just incredible. When guests themselves are coming into the stores, and they have such an incredible experience around the world that they want to showcase that experience to all of their friends and followers. So this just a combination of all these things happening and this incredible momentum with the brand based on the experience, and that's really the key part of this. This unique Build-A-Bear experience that we're able to replicate in all of these locations. And we look at partners that we believe and know and determine that they can deliver this experience has allowed them to grow and be able to have this momentum.

[Operator Instructions] Our next question comes from the line of Steve Silver with Argus Research.

Congratulations on the results as well. My question is, I guess, given the fact that the balance sheet remains in great shape even with the tariff considerations and the company already initiating a dividend policy and returning capital to shareholders through buybacks. Even though the company is navigating multiple challenges across the global economy, if the global dynamics remain on the stable side, curious as to how that might play into any decision to expand company-operated stores outside the U.S. during a time where partners are aggressively expanding the brand across multiple markets?

So thank you for the question. It's an interesting question as it relates to capital allocation and our investments in growth on a global basis. We are definitely open in considering operating stores. We are operating stores in Canada and U.K., in different international markets. There are some challenges with some of those things, setting up teams and the accounting implications. But at the end of the day, we want to have the highest ROI for a company.

And if there are some opportunities down the road really to have different type of relationships with our partners in those respective markets, to accelerate growth or to make additional investments at the appropriate time, especially as you mentioned, with a solid balance sheet and healthy cash flows, we may consider some of those options.

But we are still in early stages. And as Chris mentioned, we are in 32 countries. There are plenty of countries around the world that we are still not present in. So this is a big opportunity, and we will definitely be looking at ways to help our partners accelerate. But if there are some things to continue to make investments in markets that we are not currently present outside of U.S., it would be on a case-by-case decision that would be made.

I'd just add to that, that it is well within the realm of normal that a U.S.-based company operates in countries that tend to -- where the market tends to act like the U.S. So we're in Canada and the U.K., which is a very typical approach for a U.S.-based organization. And while we may have opportunities, as Voin said, and we -- we've talked about this many times to make some strategic investment in some of those partners, I would stop short of saying that we would want to be the unique operator in said countries because it's important. The reason you have partners is because they know the market better than you. They know the mall operators better than you. Are the tourist locations better than you.

And they also know the marketplace and the consumer insights better than you. In most of the cases of the partners that we're operating with right now, in fact, they already are big operators in that space. And as Chris alluded to, they have stores there. Many times their toy stores that we then automatically, and I put that in quotation are considered to be put in those toy stores. So we -- they have their 4 walls that allows us to get up and running quickly. And then they look at independent Build-A-Bear workshop locations as another growth engine for their companies. So it's a working model right now. And I expect that we have a lot of runway in front of us on that working model. But as partnerships evolve, absolutely. There may be a different type of relationship that we want to consider, but we have a foreseeable future in as is.

We have no further questions at this time. Ms. John, I'd like to turn the floor back over to you for closing comments.

Well, thank you so much, and we appreciate everyone joining us today to hear more details regarding our breaking -- record-breaking fiscal second quarter 2025 results and look forward to the third quarter call. Have a wonderful day and a great Labor Day weekend.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.