Build-A-Bear: Can A New Board Fix This Small-Cap?

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

The small-cap activist Cannell Capital is planning to wage a board battle at Build-A-Bear Workshop (NYSE:BBW), nominating two members for the board. Cannell went activist on Build-A-Bear last quarter, revealing an 8% stake.

There's a number of seemingly undervalued companies struggling to adapt to fundamental changes in the retail space. Nonetheless, Build-A-Bear is a prime target for Cannell Capital - a Wyoming-based hedge fund with approximately $350 million in assets under management. The market has been unfavorable to Build-A-Bear as retail shoppers move toward more online purchases, and the company's partnerships with media providers has dwindled.

In Build-A-Bear's most recent 4Q earnings, the company reported sales from its retail stores down 10% at $117 million, with total sales down 11% at $118 million. Revenue for the quarter also missed analysts' estimates by $120,000, and earnings per share were down 16% to $0.62.

The suffering of traditional mall traffic has been a key catalyst for the company's revenue downturn. However, a lack of abundant media partnerships and licensing deals has also led to flatlining sales. Revenue from licensing of Disney's (NYSE:DIS) Frozen was a strong selling point for the firm, but licensing since then has yet to produce as strong of results, with only Star Wars as the firm's frontline media attraction.

With Cannell's recent board nominees announcement, it seems the firm could be interested in guiding BBW toward a buyout given the lack of success in generating value through its recent stock buyback plan, and the difficult market conditions thanks to shifting retail market purchase activity.

In its most recent earnings report, the company further reported on its stock repurchase plan which has helped boost shareholder value this year, with the stock up year to date. However, the shares are still in the red over the last year.

Doubling Down On Brick-and-Mortar

The current retail market movement away from onsite visitors will raise greater need for partnerships with larger department store chains, such as Macy's (NYSE:M). Department store chain partnerships have recently been a firm initiative for BBW, as the opportunity provides for a broader customer experience, thus bringing more traffic to the Build-A-Bear brand through department store integration.

Overall, it seems that Cannell Capital and other shareholders aren't satisfied with the company's current initiatives and repurchase plan with $9 million available for 2016.

As BBW's annual meeting looms ahead in May, it seems that Cannell Capital's strategic interest in board nominations will likely be impactful for the company. With limited options available given the high expense of new marketing initiatives and store remodeling, Cannell Capital will most likely seek to initiate a search for buyout opportunities that would improve store sales with minimized expenses.

Cannell's board nominees, Gus Halas and Timothy Brog, bring extensive specialty retail and valuation experience, and could potentially guide the company toward a successful buyout search.

And with the current circumstances, a strategic buyout will likely be the best and most realistic option for shareholders looking to see any return of their capital. It seems numerous interested retail department store buyers would likely exist given the company has managed successful marketing initiatives and partnerships with large department stores, such as Costco (NASDAQ:COST) and Macy's.

Disclosure: None.