Build-A-Bear Workshop: A 'Sure Thing?'

On the surface, Build-A-Bear (BBW) appears to offer great value for the value investor. The stock has a market cap of just $75 million, but has earned an average of about $25 million in each of the last four years. Furthermore, its balance sheet shows a book value of $175 million, with $27 million of that in the form of cash.

As with many companies that sell non-essential items (and teddy bears, even the cutest among them, do fall in this category), this year has been a rough one. In the last two quarters, the company has lost a combined $11 million dollars. However, if the company can outlast this downturn, it looks like a great deal for the long-term value investor. After all, if earnings ever return to pre-recession levels, buying in at this price would be a steal!

But the question is, how sure are you that the company can outlast this downturn of unknown length and magnitude? This is not an easy question to answer. The company's balance sheet shows no debt, but this is deceiving! After capitalizing operating leases, this company's debt to equity jumps to a staggering 167%. These represent fixed obligations owed to landlords. If revenues drop for several years, these fixed costs cannot be reduced (unlike variable costs).

If the economy rebounds in the next year, this company's stock will shoot up dramatically. But it is not set up to outlast a long and protracted downturn, and so it doesn't represent the "sure things" we usually like to swing for.

Disclosure: None

Comments

[bleonard:]

Saj,

You are missing a few points.
1-The cash balance will be much higher after Q4, probably 60-70mm. Remember the have spent about 20mm in capex so far this year, 13mm on buybacks and another 3mm invested in Ridemakerz.

2- Capx going foward will be much less than D&A. Probably at least 20mm less for the next few years.

This means the company could essentially operate at a negative 20mm in EBIT and still throw off cash.

EBIT (20)
TAX 7.5
W/C No change
D&A 30
Capx (10)

FCF 7.5mm

They could do this for the next 2 years and still grow the cash balance. The stock is nearly trading for year end cash balance. Nowhere to go but up.

2008 Dec 22 08:47 PM