BBW - Build-A-Bear Workshop: Potent Growth Levers In Play

Summary

• Discretionary firms had a rough FY 2022 as consumers cut back on discretionary spending in response to rising prices.
• Build-A-Bear Workshop has shown resilience in the face of adversity, as seen by its impressive growth and competitive profit margins.
• Since January, consumer confidence has been rising due to China's reopening, which is great news for Build-A-Bear Workshop and the sector as a whole.

Investment Thesis

The international economy of 2022 was fraught with difficulties. Economic growth slowed across the board, and GDP fell for most countries. Rising prices and interest rates are to blame for these challenges. China, a major world economy, had implemented strict lockdowns to slow the spread of the CoV19 pandemic. The global economy felt the effects of these shutdowns.

Constraints on consumer spending and a decline in consumer confidence resulted from economic downturns and rising inflation rates. Because of these, consumers cut back dramatically on discretionary spending, sending most discretionary companies tumbling. While most discretionary companies were tumbling, Build-A-Bear Workshop, Inc. ( BBW ) showed remarkable resilience and reported great performance, highlighted by significant increases in both profitability and revenues.

The company's success can be traced back to its strategic plan to increase brand recognition and customer loyalty over the long term. I see a bright future for BBW as consumer confidence rises in the wake of China's reopening. These new growth strategies are implemented when the corporation uses its financial strength to fund long-term growth projects. That's why I'm putting an optimistic outlook on this stock.

Company Overview

Build-A-Bear Workshop, Inc. sells stuffed animals and other items through several channels. The business is split into three parts: "Direct-to-Consumer," "Commercial," and "International Franchising." It sells different kinds of plush products that need to be stuffed and plush products that are already stuffed. It also sells sounds and scents that can be added to stuffed animals, clothes, shoes, accessories, toys, and novelty items. The company operates its stores under Build-A-Bear Workshop and distributes its products via e-commerce websites.

Build-A-Bear Workshop's Resilience

Despite the challenges of 2022, BBW has shown remarkable resilience, achieving excellent outcomes. This is readily apparent from reviewing the company's Q3 2022 conference call transcript, which reflects a historic year. Particular quarter highlights include total revenues of $104.5 million, an increase of almost 10% over the third quarter of fiscal 2021, even though foreign exchange had a negative effect of over $2.5 million.

Pre-tax income of around $10 million, up more than 25% from the fiscal 2021 Q3's third quarter. They ended the reporting period with no borrowings against their revolving credit facility, demonstrating that their financial condition and balance sheet remain robust. SG&A costs were $44.4 million, which was 130 basis points better than the previous year compared to total sales. Significant achievements during the third quarter demonstrate the company's strength in the current economic climate. As we'll see in the following sections, inflation has recently slowed, and consumer confidence is rising, which should help the company continue its recent upswing.

Rising Consumer Confidence: A Boost To Discretionary Spending

In most of the world's major economies, January's consumer confidence rose due to slowing inflation and solid economic growth. The Index of Consumer Sentiment rose by an average of 2.2% month over a month across all 43 nations tracked by Morning Consult in January on the back of easing inflation and robust economic growth. In the wake of China's COVID limitations being lifted, the Morning Consult China Index of Consumer Sentiment has seen a significant uptick, which has helped boost global sentiment, especially when GDP is considered. A confidence boost brought on by China's reopening may signal a time of increased demand and economic activity for Asia's largest economy. Young people in China are mostly responsible for improving their attitude since they are ready to leave COVID behind.

As inflation falls and a winter energy crisis fails to materialize, consumer confidence in parts of Europe is rising swiftly. Since November, Germany and the UK have witnessed confidence surges. In January, inflation and pension reform demonstrations in France lowered sentiment. Europe may avoid a recession this year due to rapidly improving consumer confidence.

With consumer confidence rising, as reported by the morning consult, I anticipate a rise in consumer spending power as inflation moderates. Because of this, consumers will have more money available for discretionary purchases. Considering BBW's robustness during the recession, I am confident they will flourish as the challenges diminish.

Appealing Profitability

Build-A-Bear Workshop, Inc. registered robust YoY growth in its top and bottom lines following its resilience. As a result of that strong growth, the company reported excellent profitability in relative metrics. The figure below shows the company's growth compared to its peers.

As a result of this exceptional growth, the firm's profit margins grew significantly higher than industry medians, as shown below.

Based on these indicators, Build-A-Bear Workshop, Inc. stands out as a top choice among its competitors. I anticipate these margins to improve even further in the subsequent FYs as the industry reaps the rewards of rising customer confidence.

Sustaining The Trend In The Long run

In response to the company's success, top executives are formulating strategies to maintain or perhaps improve the company's present performance level through various new programs. For instance, They are speeding up a far-reaching and comprehensive digital transformation, adapting their retail experience and footprint in light of their increased omnichannel capability, and investing in initiatives meant to drive growth and return value to shareholders by leveraging their solid financial position. In light of the company's already stellar reputation and widespread popularity among consumers, top management is confident that this new venture will be successful.

According to Sharon John :

"First, we are confident that the digital transformation of our company is providing benefits throughout our organization and to our business model. Today's consumers want to engage with brands that offer experiences and emotional connection…"

Concerning the e-commerce platform, they have implemented measures to expand membership in the omnichannel loyalty program and boost customers' lifetime value. As a result of these initiatives, the program's active membership increased during the third quarter compared to the same period last year. This company has various initiatives, but the main one is the digitization plan, which will help it maintain its current performance in the long run. Considering how customer-focused and value-enhancing the initiatives are, I am confident they will pay off.

Conclusion

As a result of the Build-A-Bear Workshop, Inc.'s fortitude in the face of a harsh economic climate, it has reported above-average growth relative to its competitors, leading to good profit margins. I anticipate Build-A-Bear Workshop's growth to improve going forward as consumer confidence improves in the face of moderating inflation. Additionally, by the end of the third quarter of 2022, Build-A-Bear Workshop, Inc. had begun to see the fruits of its various measures designed to maintain its growth. With consumer confidence on the rise, companies should expect a stronger investment return. Based on this information, I believe Build-A-Bear Workshop, Inc. stock is attractive and recommend it to investors searching for a growth investment in the consumer discretionary sector.

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