BBW - Build-A-Bear Workshop: Financial Fortitude Priced At 6x Operating Profits

2023-09-25 13:48:27 ET

Summary

• Build-A-Bear Workshop, Inc.'s unique value proposition builds strong emotional connections with customers through its brand and stuffed animals.
• The company is diversifying its consumer base by targeting not only children but also teens and adults through entertainment and collectibles.
• Strong cash flows, a healthy net cash position, and share repurchases make Build-A-Bear Workshop, Inc. an appealing investment.

Investment Thesis

Build-A-Bear Workshop, Inc.'s ( BBW ) strategic initiatives underpin its growth trajectory. These include recent initiatives to diversify its consumer base, expand into new product categories, and sustainably increase profitability as it moves forward.

Admittedly, BBW's financials aren't the most alluring, particularly for investors who are looking for something somewhat more racy . However, oftentimes, the most attractive investments are not necessarily the ones with the best story.

Here's why I'm bullish on BBW.

Rapid Recall,

In my previous bullish analysis , I said:

By expanding its digital marketing capabilities, BBW aims to reach a broader consumer base, including teens and adults, who now represent approximately 40% of its end users.

[...] BBW creates an emotional bond with guests spanning different age groups. Therein lies the value of this investment thesis and why the stock is less cyclical than many investors realize.

This is the core of the bull case. BBW is about much more than just a cheap stock. It's a company that has staying power and a diverse consumer base. It's about building experiences with customers from young ages, for instance, via birthday parties, to adults seeking to provide a similar experience to their own children.

Since I penned my last analysis, the stock has been on a tear, see below.

And as it stands right now, I continue to believe that BBW's investment prospects are alluring.

In the next section, I'm going to discuss BBW's prospects, then, I'll discuss its financials, and then tie my analysis together by discussing its capital allocation and valuation. There's a lot to be excited about here, so let's get to it.

Build-A-Bear Workshop's Near-Term Prospects

Build-A-Bear Workshop offers a unique value proposition built on a strong brand. BBW believes that its success comes from its brand delivering a strong emotional connection to customers, by selling stuffed animals.

Its strategy includes expanding physical stores beyond traditional malls. But its real opportunity is in targeting not only children but also teens and adults through entertainment and collectibles.

Furthermore, as I previously discussed, BBW has embraced a digital transformation, enhancing its e-commerce and personalized marketing efforts to engage a wider audience, particularly tweens, teens, and adults.

The company's multi-generational appeal and commitment to pop culture make it are what will continue to propel its revenue growth rates into fiscal 2024.

Recent developments include its ambition to expand its store footprint. By recognizing that its workshop locations are seen as destinations, with up to 80% of customer visits being preplanned, Build-A-Bear capitalizes on this trend. As a consequence, BBW has consistently outperformed industry averages for 114 consecutive weeks, with all its stores being profitable, boasting over 25% store-level contribution margins.

Moreover, Q2 2023 saw nearly 8% growth in retail sales, driven by increased traffic and unit growth.

As touched on already, BBW believes its attempts to remain relevant are about expanding beyond children. Indeed, BBW declares that approximately 40% of total sales come from teens and adults seeking gifts and collectibles. Here's a quote from the earnings call echoing this aspect,

Our ongoing website evolution is a large part of Build-A-Bear addressing these purchase occasions, enlarging our addressable market from predominantly kids at our inception 25 years ago to include teens and adults who now generate approximately 40% of total sales.

Next, we'll discuss BBW's financials.

Revenue Growth Rates Are Reasonable

As you can see above, its growth rates leave a lot to be desired. There's no denying that its topline is barely ticking along. That's without a doubt the bear case that's holding back investors from getting involved with the name.

But as we look beyond its top line, its strong cash flows allow investors to find its bull case.

Capital Allocation Discussed

In my previous analysis, I said,

Build-A-Bear Workshop, Inc. holds more than $20 million of net cash on its balance sheet. This means that after BBW has rolled out and integrated these new shops, perhaps in fiscal 2024, yet another special dividend could be declared.

As fiscal 2024 approaches, I continue to believe that this is a very real possibility. In fact, since I wrote those insights, BBW's net cash position has increased to just over $30 million or 7% of its market cap.

Furthermore, over the past seven quarters, BBW has distributed special dividends and repurchased more than one million shares, amounting to $81 million returned to shareholders, or just over 20% of its market cap. It's not unimaginable that BBW could embrace a similar strategy over the next 7 quarters.

With all this in mind, I believe that paying just 6x this year's operating profits makes BBW a very rewarding investment.

Risk Factors You Need to Know About

To be clear, I'm not saying that there aren't important risk factors, including sensitivity to the macroeconomy as well as consistently shifting consumer preferences, and the vulnerability of its retail locations, with this last one being particularly important for its future growth.

Furthermore, Build-A-Bear Workshop operates in a highly competitive retail environment, contending with various rivals including traditional toy stores and specialty shops offering plush toys.

Separately, Build-A-Bear Workshop faces competition from amusement parks and other distractions, which vie for consumers' discretionary spending and leisure time.

At its core, there's a key challenge in how BBW differentiates itself from its competitors by making its interactive shopping experience unique. But BBW believes that the investments it's making right now to expand its customer base, will to a significant extent mitigate a portion of these risks.

The Bottom Line

I'm bullish on Build-A-Bear Workshop because it offers a unique value proposition with a strong emotional connection to customers through its brand. BBW is diversifying its consumer base by targeting not only children but also teens and adults through entertainment and collectibles.

The company's digital transformation and personalized marketing efforts are engaging a wider audience, particularly tweens, teens, and adults. BBW's commitment to pop culture and its status as a destination location have consistently driven profitability and growth.

While its revenue growth rates may not be stellar, its strong cash flows, net cash position, special dividends, and share repurchases make it an appealing investment. Despite some risks, Build-A-Bear Workshop, Inc.'s efforts to expand its customer base and unique shopping experience position it well for the future.

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