BBW - Build-A-Bear Workshop: Back On Track For Now

Summary

• Build-A-Bear Workshop's management has done a great job turning the company around.
• The stock is attractively valued if management can continue to execute.
• However, a lot of the low-hanging fruit has been picked in this turnaround story.

Build-A-Bear Workshop's ( BBW ) management has done a terrific job helping turn the retailer around, and BBW stock is trading at a relatively modest valuation if the company can continue to grow. However, a lot of the low-hanging fruit appears to have been picked, and upcoming comps are difficult.

Company Profile

BBW is a specialty retailer where customers can create their own stuffed animal by stuffing, dressing, and accessorizing their own teddy bear or other plush toy animal.

The company sells its own branded plush toys, as well as licensed characters from Disney ( DIS ), DreamWorks, and others. Over 50% of its sales are from non-licensed toys, according to the company.

At the end of January, the company operated nearly 500 stores. It corporately owns 346 stores, with 305 in the U.S. and Canada and 41 in the U.K. and Ireland. It also has 72 international franchised stores, as well as 61 locations where it sells to the stores on a wholesale basis.

About 65% of its retail portfolio is mall-based, with 35% of its locations outside of a traditional mall. These include place like theme parks, cruises, and other vacation spots. E-commerce, meanwhile, makes up about 20% of its sales.

While seemingly a concept for children, 40% of sales are to teens and adults. Meanwhile, the company estimates that about 60% of the visits to its store are planned ahead of time, often for a special occasion like a birthday.

Opportunities

One of BBW's biggest opportunities is to continue to diversify its store base away from malls and into other locations. The company has done a good job of closing unprofitable mall-based stores, and now says that all of its North American mall locations are EBITDA positive. This has allowed the company to go into unit growth mode in nontraditional areas.

It opened about 20 new locations in 2022. These include places such as on Carnival Cruise Lines ( CCL ), Six Flags ( SIX ), Great World Lodge, and even the Pro Football Hall of Fame. The company is also experimenting with new formats, including one that has an arcade and party rooms.

In addition to new store openings, BBW is also expanding its offerings into other adjacent categories. The company has recently launched a pajama shop as well as edgier products in an age-gated shop. The company also continues to push the narratives of its products as gifts and collectibles.

E-commerce remains a big driver, with over 160% growth in digital in 2022 compared to 2019. The company recently updated its e-commerce site in Q3 to make it mobile first, which makes sense given that most people purchase online items through their smartphones these days. In late 2022, it also introduced new shop-in-shop landing pages to appeal to different consumers and purchase occasions. BBW has also begun to employ Salesforce ( CRM ) technology to help improve its loyalty, marketing, and analytics capabilities.

Finally, the company is also pursuing outbound licensing, given the recognition of its brand.

Downside Risks

BBW had a very strong 2022 coming out of the pandemic; however, it now faces difficult comps, especially in Q1 of 2023, which saw a 28% increase in sales. How the company performs in a more normalized environment, or even possibly a recessionary one, will be a pretty telling tale.

While the company has done a good job of closing unprofitable mall stores, that leg of the BBW story is largely over in North America. With all its North American mall-based store profitable, it won't have that earnings uplift from closing stores. Meanwhile, it's easier to close unprofitable stores than to grow profits at existing stores.

The company is also now more exposed to tourist traffic given its push into theme parks, cruise ships, and other vacation spots. This isn't necessarily a bad thing, and in fact, BBW should be benefiting from increased leisure travel coming out of the pandemic and consumers' desire to travel after being cooped up during the pandemic. However, if there has been some pull forward in leisure travel and the economy weakens, these locations would take a sales hit.

BBW has also historically seen its sales impacted by blockbuster children's movies or hit children's TV shows. A popular movie like Frozen tends to help drive sales as customers swarm to get an Elsa Bear, which sells at a higher price than your non-licensed merchandise. The movie slate can also positively or negatively impact it sales of more collectible bears as well.

Valuation

BBW trades at an EV/EBITDA multiple of 4.3x the FY24 (ending in January) consensus of $76 million. For retailers, I like to add 7x rent (about $44 million a year) to their enterprise values, which would put the multiple at 8.3x

On a P/E basis, it trades at 7.5x the consensus calling for EPS of $3.21 in FY24.

When BBW is generating profits, which isn't always the case, it has been able to garner a P/E ratio of near 20x in the past. On an EBITDA basis, it generally has been between 3-8x.

Given its uneven history, I think the stock looks appropriately valued at the moment.

Updated Guidance

BBW management has been doing a lot of things right, which have shown up in its strong results and solid stock performance. In January, the company raised its full-year guidance ahead of ICR. It now projects revenue of $460.0 - $465.0 million, versus prior sales guidance of $455.0-$465.0 million. That's 12% growth at the midpoint, as it had sales of $411.5 million in FY22.

The company also bolstered its EBITDA outlook. It now expects EBITDA of between $57.0-$63.0 million. It previously guided for EBITDA of $56.0- $63.0 million. The new forecast represents growth of 18% at the midpoint.

Commenting on the guidance increase, CEO Sharon Price John said:

"We have continued to see positive momentum in our business throughout the current fourth quarter and combined with our record-breaking profit in the first nine-month period, we expect fiscal 2022 to deliver a double-digit increase in profitability compared to the prior year which would be the most profitable in our 25 years of operations, which comes on top of the previous record set in fiscal 2021. Our company has evolved to become a multi-channel, site-based experience and entertainment entity with diverse categories that appeal to a broad addressable demographic and market. Our disciplined execution of our strategic model and key initiatives has allowed us to build a foundation that we believe can be leveraged for further profitable growth in 2023 and beyond."

Conclusion

BBW has been doing a lot of things right under CEO Sharon Price John. Meanwhile, the stock is pretty attractively valued if you think it can continue to execute and grow same-store sales and units from here.

However, I think a lot of the lower-hanging fruit has now been picked, and the company is going to have to do some pretty heavy lifting to grow. Meanwhile, it faces some tough comps, especially for Q1.

Weighing the companies opportunities and risks, I think the stock looks pretty appropriately valued at the moment. As such, I'd consider it a "Hold."

However, I would become more interested in the name if BBW could strike a deal with a place like Chuck E Cheese. A shop-in-shop in a popular children's party franchise seems like a natural fit that could create meaningful growth for years to come. The pizza party and arcade restaurant has over 550 locations across the U.S.

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