Build A Bear Constructs New Opportunity

| About: Build-A-Bear Workshop, (BBW)

Summary

Build a Bear's strong fourth quarter boosted shares earlier this week.

Despite the double digit gain, more upside ahead.

Store expansion coming back and new avenues like cruise lines should create future growth.

Shares of Build a Bear Workshop (NYSE:BBW) rallied Tuesday by double digits after reporting strong fourth quarter sales. This performance was predicted by my earlier piece calling the retailer my retail turnaround pick for 2016. Build a Bear turned in a great quarter and also provided some updates for an exciting 2016 year. If you haven't bought shares yet, here's an updated guide on why Build a Bear might be perfect for your portfolio.

Strong Quarter and Fiscal Year

Make no doubt about it, the fiscal year reported for the company was a strong one. This marked the third straight year of growing profitability.

Same store sales fell 5.6% in the fourth quarter, due to disappointing sales in both North America (-4.2% SSS) and Europe (-10.0% SSS). Adjusted earnings per share were $0.62 for the fourth quarter. Total revenue fell to $117.7 million from $131.5 million. Investors need to remember that this year's fourth quarter had one less week than the prior year.

While the fourth quarter wasn't amazing for the company, as I predicted, it capped off a very strong year for this undervalued retailer. The fiscal year marked the highest units per transaction the company has seen since 2008 and also marked the highest average transaction value ($44.10) in company history. Total revenue for the fiscal year was $377.7 million. That is a decline from $392.4 million, but comes with one less week in the year and the closing of stores, and downtime for remodels at several high profile locations. Same store sales grew 1.0% for the fiscal year. Earnings per share for the year grew to $1.14 (from $0.98).

Expansion Coming Back

After years of scaling back the number of Build a Bear stores, the company is once again in growth mode. In fiscal 2015, Build a Bear closed 20 stores and opened 25 for a net gain of 5. Unit growth was made clear during the January presentation and also on the fourth quarter earnings call. This includes company owned stores, international franchises, and new non-traditional formats. One big future store will be the Build a Bear at the new Disneyland in Shanghai, China, which will be owned by the company, not franchised.

Build a Bear plans on continuing to rebuild its relationship with Rainforest Café and T-Rex Café to increase its presence in these heavy tourist restaurants. The big item many investors heard for the first time on the earnings call was Build a Bear's deal with Carnival Cruise Lines (NYSE:CCL). The company has not said how many ships this deal will include or broken down the financials, but it is expected to launch in the second half of 2016. This was actually first reported during the January presentation.

The other big key to expansion is the remodeling of stores to the new "Discovery Store" format. These stores are performing exceptionally well. In 2015, these stores performed with double digit same store sales increases and had much higher transaction and traffic counts. Build a Bear also experimented with opening outlet locations in 2015 with the opening of six stores. The company plans on opening 5 additional outlet locations in 2016.

The company believes it will open 20 to 25 new franchise stores internationally. A total of 45 to 55 new and remodeled stores are also expected to open in 2016. At the end of the fiscal year, Build a Bear had 329 company owned locations (269 North America, 60 Europe) and 77 franchise locations (11 countries).

Strong Product Line-Up

I highlighted Build a Bear's strong licensed portfolio as a key to the company's growth and transaction increase. The company saw strong sales of Star Wars items in the fourth quarter, as it was the number one boys business brand. In the second quarter, a line of Marvel Civil War bears will be released, which should again sell well with boys and help boost the quarter the company thinks will be the weakest comparatively.

Currently, Build a Bear is offering Paw Patrol dogs in its store. The catch here is only Marshall and Chase are offered, with the rest coming later in the year. This is a genius move by the company to bring traffic back throughout the year and also make it more reasonable for kids to own the entire collection.

Build a Bear will also release a new proprietary Horses & Hearts brand this year to its girls market. The company's proprietary branded merchandise has sold well in the last two years and improves overall margins.

2016 Guidance

Build a Bear believes revenue will come in the low single digit to mid-single digit growth range. This is a slight revision from the mid-single digit growth called for back in January. The company also believes it will see continued profit growth. Guidance calls for same store sales to be up in the first, third, and fourth quarters, with the second quarter being the weak one.

From the earnings release, Build a Bear listed several key strategic initiatives for 2016:

· Expanding more places

· Developing more products

· Attracting more people

· Driving more profitability

On Yahoo Finance, guidance for 2016 and 2017 is slightly bullish. Analysts see revenue hitting $390.9 million for fiscal 2016, a gain of 3.5%. In fiscal 2017, revenue is expected to rise 4.8% to $409.7 million. Earnings per share are forecasted to drop to $0.96 for fiscal 2016 and hit $1.12 in fiscal 2017. Both of these numbers would be backwards movement for the company that just grew profits each of the last three years. That is where I differ with analysts. I see the company growing its earnings per share and coming closer to revenue growth of 5%.

Valuation

On Wednesday, shares of Build a Bear hit a high of $14.10. That came on the heels of Tuesday, which saw shares up double digits thanks to the strong earnings report. Shares have traded between $10.74 and $22.25 over the last 52 weeks.

Remember, Build a Bear still trades debt free with $45 million in cash to end the fiscal year. Investors should remember that the company has around $2.75 per share in cash. The no debt factor also continues to make Build a Bear an attractive buyout candidate. Strip out the cash and Build a Bear has an enterprise value of $189 million. That is significantly lower than the near $400 million the company does in sales each year.

In 2016, shares of Build a Bear are up 12%. Since my November article, shares are up 6%. In that article, I called for 47% upside in shares with a price target of $23.28. That was based as a middle point for a price to earnings and price to sales ratio. I stand behind that target and think the company is significantly undervalued with a strong back half of the year coming for 2017.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BBW over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.