BBW - Build-A-Bear Is Betting On Movies To Boost Results

2023-06-09 14:52:07 ET

Summary

• Build-A-Bear Workshop stock has been on a rollercoaster ride since my initial write-up.
• E-commerce sales were weak in Q1, but the company expects an acceleration in sales throughout the year, with new product launches, store openings, and growth initiatives.
• With uncertainty in consumer discretionary spending, I remain on the sidelines.

Back in February , I wrote that the management of Build-A-Bear Workshop ( BBW ) had done a great job of turning the company around and that it was attractively valued if management could continue to executive. However, I also thought a lot of the low-hanging fruit had been picked in turning around the company and that it would become more difficult moving forward. Let's check in on the name.

Company Profile

As a quick reminder, BBW is a specialty retailer that allows customers to build their own plush toys by stuffing, dressing, and accessorizing them. While seemingly aimed at little children, about 40% of sales are to teens and adults.

The bulk of its company-owned stores are in North America, with some in the U.S. and Ireland as well. It also has some international franchises and locations it sells to on a wholesale basis. Traditionally a mall-based retailer, it now has 35% of its stores located outside of traditional malls.

Earnings Rollercoaster

Following my initial write-up, BBW saw its stock surge following its March fiscal Q4 earnings, with the stock up 19.4% the following session. However, the stock gave up -7.6% following its Q1 earnings report, and now trades right around where it did during my February write-up - albeit it paid out a $1.50 special dividend, so its total return is up about 7%, pretty similar to the S&P's return over the same period.

The March surge came on the back of a strong earnings beat, solid guidance, and a special dividend announcement of $1.50, which it paid out in April. However, despite a solid Q1 earnings report, it came up short of even higher analyst expectations.

The consensus for Q1 was for the company to record revenue of $124.2 million and adjusted EPS of $1.01. BBW came up a bit short, reporting revenue of $120.1 million and adjusted EPS of 98 cents.

The company did reiterate its annual guidance for revenue of between 5-7%. A 53-week will add about $7 million in revenue.

One of the drivers I discussed in my original write-up was e-commerce, and the company had just updated its site to make it mobile first. It had also recently begun to use Salesforce ( CRM ) technology to help improve its loyalty, analytics, and marking efforts. However, in Q1, e-commerce was surprisingly weak, with web demand down -19.6% in the quarter.

The company noted that e-commerce sales tend to be more impacted by product launches than in-store sales, which are often planned out. As such, it blamed the decline on its lack of new product launches, and notes that Q2 e-commerce sales so far in the quarter were back to being up double digits following recent product launches such as Hello Kitty. It also noted it had more product launches tied to new movie releases later in the year.

As I noted in my original line-up, BBW has historically seen its sales impacted by blockbuster children's movies. On that front, the company is looking to ride the wave of the live action release of Disney's ( DIS ) Little Mermaid . While the movie has had struggles in some international markets, it has been very strong domestically, which is what matters the most for BBW. We'll still have to see how that translates into related BBW sales, but it should be a good sign.

Opening new stores outside of traditional mall locations was another opportunity I discussed in my prior article. On that front, the company plans to open 20-30 new stores this year. Along with earnings, it also announced an agreement with Kalahari Resorts to open up locations at all 4 Kalahari Resorts. At the midpoint, 25 store openings would be a 7% increase in its store count, which should be a nice growth driver if the stores do well.

Going forward, the company thinks it should see an acceleration in sales as the year goes on. It also pointed to two of its own movies it created, as well as a Roblox game to help drive marketing.

On its Q1 earnings call , CEO Sharon John said:

"We continue to expect accelerating sales trends as the year progresses driven by the phasing of new product launches and other growth initiatives. This includes 20 to 30 new stores inclusive of the Kalahari Resorts openings in tourist locations that was announced in a press release this morning. As well as new marketing and media introductions, including the Build-A-Bear documentary and Merry Mission movies later this year. We are particularly excited about these 2 film releases as they represent Build-A-Bear's continued expansion into content creation, which includes books, through our recently announced relationship with Macmillan Publishing and digital initiatives, which includes the launch of our Roblox Tycoon game that has more than 9 million users. ... And the second film slated for release this holiday season is our first animated feature highlighting Glisten and the Merry Mission based on our successful seasonal collection that was originally launched in 2014."

The Merry Mission film has some big-time actors to do the voices, including Chevy Chase, Billy Ray Cyrus, and Freddie Prinze Jr., as well as Julia Michaels and Dionne Warwick. It would be interesting to know the cost and where the movie is going to be released. Its Honey Girls movie wasn't that expensive to make on BBW's end, but this is a pretty big-name cast. This movie is being co-produced with Foundation Media.

Valuation

BBW trades at an EV/EBITDA multiple of 4.2x the FY24 (ending in January) consensus of $81.5 million. Based on FY 25 estimates of $88.8 million, it trades at 3.9x. Adding 7x rent costs to its EV, it trades at 8.1x and 7.4x, respectively.

On a P/E basis, it trades at 6x the consensus calling for an EPS of $3.46 in FY24.

When BBW is generating profits, which isn't always the case, it has been able to garner a P/E ratio of nearly 20x in the past. On an EBITDA basis, it generally has been between 4-8x.

Conclusion

BBW management continues to do the right things under CEO Sharon John. However, Q1 did see some weakness in e-commerce, and the current macro-environment remains uncertain. New store openings should help results moving forward, as long as they are profitable. The strategy of having locations near tourist areas makes sense, although we'll still have to see how that plays out, as it exposes the company a bit more to travel and vacation trends.

Right now, there is a little too much uncertainty with consumer discretionary spending to get on board a stock like BBW. I like management, but still think some of the easier turnaround efforts have already been completed and now it faces tougher comps. While the company didn't report same-store results, they do appear to have been down slightly in Q1, when adjusting for FX and new stores (which basically cancel each other out).

As such, I remain neutral on the name.

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