Snuggling up to a New Position in Build a Bear Workshops

I have followed Build a Bear Workshop (BBW) since it first went public in late 2004, and I have owned it profitably for a brief period after the IPO. However, I had last sold shares in late 2005 and had lost track of the company during the past year. BBW first came public around $25 per share and had traded as high as $37 in the early days, so I was amazed to learn that the stock had dropped below $11 per share. At those prices, I snapped up 400 shares late last week. BBW is a retail concept with 375 Build a Bear Workshops worldwide. Parents bring their kids for an interactive make-your-own stuffed animal experience. My two girls love the place, and I constantly hear about how long it has been since we have last been to BBW. They have been branching into other similar concepts, including make-your-own Major League Baseball mascot in-stadium locations, Build a Dino stores and a virtual world, www.buildabearville.com.

Earnings were down about 18% in the first quarter to $0.32 per share, but the drop was less than analysts expected. For the year, the Company is expected to earn about $1.13 per share which would be about 10% growth from 2007. However, even if earnings are flat this year those would be decent results in the face of this recession.. The real growth for the Company will come internationally as they currently have 271 stores in the US with a total potential US market of 375-400 stores.

But while this is a decent growth story, the real story here is a ridiculously low valuation. At around $11 per share, the Company's enterprise value (market cap plus debt less cash) is around $180 million because the company has no debt and about $41 million of cash. Trailing 12 month EBITDA is $56 million, so the Company trades at less than 3.5x EBITDA.

As a private equity investor, I can tell you that it is very hard to find any companies trading for less than 4.0x EBITDA, let alone a company with $480 million in annual revenue and a branded retail concept. Even if this company was not going to grow revenue at all over the next 5 years, buyout groups will eventually start circling.

But coupled with its potential for store opening growth, once the current recession passes, I would venture to guess that someone will make an unsolicited offer for BBW during the next 12 months. I love companies with net cash (more cash than debt) because of the flexibility that it creates for management. In BBW's case, they have $41 million of net cash and are currently using that cash to buy back shares. What's more, if management used all $41 million of that cash plus borrowed debt equal to 1.0x EBITDA (a very conservative amount of debt), they could retire almost 50% of the outstanding shares. That is powerful flexibility and frankly a good defensive move by management (assuming they do not want to be acquired.

BBW is a perfect example of a pricing anomaly arising out of a recessionary bear market. The growth has evaporated because discretionary spending has disappeared. Institutional investors all pulled their money, and are searching for near-term returns. This exodus created a vacuum in BBW shares. Now the market has overcorrected to the downside and that smells like opportunity to me.

Disclosure: Author owns shares in Build a Bear Workshops

Comments

[CrossProfit:]

"so I was amazed to learn that the stock had dropped below $11 per share"

You mean to say below $9 per share. BBW hasn't had a weekly close above $11 since early March of this year. See www.crossprofit.com/vi...

As for your EBITDA calculations, like P/E multiples, this could get ugly very quickly as BBW is a 'one trick pony'. At $9 PPS you should make a profit within the next 12 months, but we are not so sure how much profit you can book flipping this stock if you did indeed get in at $11.

CrossProfit

2008 May 20 06:20 AM

[user 2lakes:]

I recently ate at the mall and watched the BBW store like I did almost 2 years ago. The traffic was waaay down. Smells more to me like a tired faddy concept.

2008 May 20 10:05 AM

[WeezieBenobi:]

Put a fork in the business. It has several strikes against it: 1) positioning exclusively in malls. Malls are becoming the ghetto of retail. 2) as user 2lakes noted - it's a one trick pony. I have a 9 year old daughter and even she can get tired of bears, ponies, bunnies, etc. ad nausem 3) consumer discretionary spending is down and is only going to head south and buying fluffy teddy bears is about as 'discretionary' of a purchase as one can get.

2008 May 20 10:59 PM

[Chandler Lutz:]

Build a bear is a nice place to take your 6 year old daughter for her birthday, but there is no re-occurring revenue with this firm. That's why I neglected to seriously the company for investment since its IPO. After all, how many teddy bear birthday parties does one child want? And it's not like a teddy bear ever goes out of style so a kid wants a new one...if anything, children become attached to their teddy bears

2008 May 20 11:21 PM

[Doug Boom B...:]

BBW's secret value is their developing RideMakerz division. It is awesome, we just had my 4 year-old son's Birthday party there. Same concept as building a teddy bear, but for model or radio controlled vehicles - Hummers, Vipers, Minis, Porsches, etc. Jack 'em up to make a monster truck or lower 'em for street rods. Pick out the rims, tires, chrome, lights, etc. Fun place that draws crowds. Buy BBW now before word gets out...

2008 May 21 06:52 PM

[jacosa:]

The company has marketing and merchandising problems. There appear to be 3 distinct "kids" markets: very young (around 3-7), boys (say 6-11) and girls (maybe 7-13). The name appeals to boys, the store concept tilts to girls and the "mom appeal" is more toward very young. This gets sorted out at each location, but it has a lot to do with the reason second year sales tend to trail first year and third to be lower yet (and this annoys stock analysts). The company appears to be recognizing the problems, but not being real nimble in their response. Until it's clear that they can get a growing share of toy dollars, a buy-out doesn't look likely; even stock price gains are tricky (although I agreee that the present stock price is illogically low).

2008 Jun 04 12:20 PM