Build-A-Bear On Its Deathbed?

Build-A-Bear's (NYSE: BBW) stock has come crashing down to its current level of $6.51, down fully 66% from its level just one year ago. Analysts cite a large drop in same store sales, and there is a fear out there that Build-A-Bear is a fad whose time has now passed. In fact, same store sales have been declining for all but one of its last eight years, as seen from the chart below:

Same store sales is Wall Street's favorite metric for evaluating retailers. Wall Street will take one look at this trend, punish the stock, and move on in search of the next big thing. But could it be that a business still has value despite the pressure on same store sales that we see above? After all, same store sales is but one metric.

For example, if costs are dropping faster than sales, there are still profits to be made. Unfortunately, Build-A-Bear's full-year operating margins as a percentage of sales have actually been in decline for the last three years.

But consider the level of sales a Build-A-Bear store achieves in its first year. If that number is ridiculously high, then there is room to allow for declines in the next several years while still making comfortable profits. For the sake of comparison, here are Build-A-Bear's sales per square foot compared with an assortment of successful American retailers:

Clearly, Build-A-Bear has some leeway to still make profits despite the turbulent same store sales. Indeed, as reported by CEO Maxine Clark on the Q2 conference call, a Build-A-Bear store generally pays for itself after its first 12-15 months.

Does this make the stock an automatic buy? Certainly not, as one still has to evaluate whether the stock is low enough to make the purchase worthwhile. But with a P/E of 9 and no debt on the balance sheet, Build-A-Bear could offer just the type of value we're looking for, as discussed here.

Disclosure: No positions

Comments

[consumerguy:]

I'm pulling for BBW. The company almost looks like a private equity wet-dream: tons of potential cash flow (once store building is curtailed and advertising is pared back), a solid balance sheet, and a unique brand proposition. I think BBW could actually renegotiate store leases too, given the sorry state of the American mall.
That said, that comp trend is terrifying. Labor and leases are the same, so assume a store loses a third of its business in 3 years - it's tough to make any money.
Your point on initial sales per store is a bit of a stretch. I agree that BBW still does nice sales/foot, but comparing that to HD, WMT, LOW, ODP doesn't work. Those stores are off the mall and have rents (or rent equivalents) far, far lower than that of BBW, which is in plenty of upscale malls.
I'd love to own it, but the results just continue to worsen.

2008 Aug 07 11:43 AM

[Saj Karsan:]

Hi Consumer,

You're right that BBW's rents are higher, so my point is not to compare it to the other retailers on a cost for cost basis. It is simply to illustrate that same store sales does not tell the full story.

In BBW's case, a lot of their leases are coming due in the next 1-2 years, which should help them lower costs as you mentioned.

2008 Aug 07 04:12 PM

[Looking For...:]

I just bought into BBW at $6/share. I am hoping to see some return to double-digit prices w/n the next 6-9 months. It has no debt and strong cash flow. Doesn't that count for anything anymore. Also, they aren't they going full scale with the customized radio controlled cars for boys thing soon??

2008 Aug 09 09:53 AM

[Looking For...:]

I think its a great buy at $6/share!

2008 Aug 09 09:54 AM

[Saj Karsan:]

Hi Leverage,

According to company info, trials of the store for boys you mentioned are indeed going well, but we have no separate financial data on which to gauge that assertion further.

2008 Aug 09 12:27 PM

[User 241824:]

The problem is that if they are not in a Mall or Shopping center that has a lot of tourists , at some point they have to have another product or category to offer the repeat customers. How many Build a Bears can the locals buy.

2008 Aug 11 10:32 AM

[cavalier14:]

Your article brings up some interesting points. I am “bearish” on the stock and indeed believe that BBW is likely on its deathbed and will continue a gradual decline into bankruptcy. After listening to the Q2 earnings call one thing struck me as interesting, the growth expected from Buildabearville. In a climate of declining same store sales Clark seems enthused about the growth potential from the website. When asked by an analyst to elaborate on the monetization of the website she responded “I think that we could say that we are already monetizing.” Just found it odd that the growth was already baked into declining sales. And besides, at 216 yrs, don’t you think the NYSE is a little too old for teddy bears?

2008 Aug 12 09:05 PM

[splangy boy:]

NO way is BBW on its deathbed. Same store sales are declining in the teeth of a horrible economy. Who else has declining same store sales? Look at the graph, everyone is facing the same struggles, and those other brands/retailers are much more established but still BBW compares favorably. BBW is not just retail, its entertainment. You don't just buy things there, you entertain yourself, so BBW already has it in the fabric of its customers, the concept of being an entertainment company. Bearville just came online I wouldn't get to crazy with the expectations there at this early stage. Look at it as an expansion into the "entertainment" realm. Too me, this is a very innovative company for being a small time toy retail store, I think you can expect some big things from this company down the road...

2008 Sep 16 01:19 PM