Build-A-Bear Workshop is discontinuing its short-lived partnership with Zhu Zhu Pets and will reduce its prices on the robotic hamsters to move the inventory out of its stores, company officials said Thursday.
The Overland retailer of stuffed animals also said it was stepping up other promotions to steer more sales to its stores during the back-to-school season after a disappointing second quarter in which the company reported a loss of $8.5 million.
John Haugh, the company's president, said the introduction of Zhu Zhu Pets into Build-A-Bear stores tested well in a handful of markets in late December and January. So the company decided to quickly roll them out to all stores. Zhu Zhu Pets are made by Clayton-based Cepia LLC.
But he said the market was quickly saturated with the toys, leading many retailers to discount them.
"The line overall is under significant competitive pricing pressures that is somewhat unprecedented for a hot toy so early in its life cycle," Haugh said on Thursday in a conference call with investors.
He added that the company hoped to offset the costs of discounting Zhu Zhu Pets with profits from other Build-A-Bear products. The company hopes to exit from the Zhu Zhu line by the end of the year and does not plan to buy into the line again, he said.
"From our perspective, it has been a good complementary business that we will work to exit profitably," he said.
Sean McGowan, an analyst with Needham & Co., said he was surprised by Build-A-Bear's initial decision to carry Zhu Zhu Pets.
"The product was simply too broadly distributed for (Build-A-Bear) to be able to benefit from its lapsed scarcity," he wrote in an e-mail. "And there is no chance tiny Build-A-Bear can buy, land and stock Zhu Zhu at as low a cost as giants such as Walmart, Target and Toys R Us. And the drug chains carrying it have the advantage of convenient locations. Once it became available everywhere at discounted prices, (Build-A-Bear) had no edge."
A product line introduction such as this would have worked only if it was sold only at limited channels, McGowan said.
Still, he said, Build-A-Bear won't be hurt too much by the foray into Zhu Zhu. "It's probably more a case of lack of benefit than real harm."
Build-A-Bear executives said the company would have a new promotion or product in its stores every two weeks to help lure more shoppers into its stores.
"We are not a promotional business, but we do have to be cognizant of what is going on in the world," Haugh said, noting that many Build-A-Bear stores are in shopping malls where sale signs abound. "We do need to be able to offer the consumer a reason to make a purchase with us that day."
Build-A-Bear promotions have led to higher average transaction amounts and to an uptick in customer traffic, Haugh added.
While it is pulling out of Zhu Zhu, Build-A-Bear continues to add other new products to its mix. In September, the company will launch a new 'smallfrys" line of already-stuffed animals. The animals will retail for $12, and can be dressed in outfits that will sell for $7.
It will initially be a limited-edition, two-month run that company officials hope will spur impulse buying, Haugh said.
Company executives blamed the company's lower-than-expected second-quarter results in part on the shift of Easter to the first quarter.
The company had a net loss of $8.5 million, or 45 cents a share, for the quarter ended July 3, compared to a loss of $6 million, 32 cents a share, a year earlier. Net sales fell 10.5 percent to $74.1 million.
