Seeking Alpha

Elizabeth Montg...'s  Instablog

Elizabeth Montgomery
Send Message
I am a former sell-side equity research analyst with +12 years experience covering apparel and footwear brands, specialty retailers, and consumer goods companies. I worked at Cowen, Robbie Stephens, Lazard and Longbow Research. I'm now a stay-at-home mom, but I continue to follow and trade... More
  • BBW: Early Signs Of Progress With Turnaround; Adding To Position 0 comments
    Feb 15, 2013 12:21 PM | about stocks: BBW

    BBW shares sold off roughly 4% yesterday after the company reported Q4 results. I'm taking advantage of this sell-off to add to my existing position and believe there's significant upside in the stock over the next few years.

    First, let me state that I KNOW the company has been a train-wreck. Specifically,

    · Since the beginning of 2005, BBW has reported only 7 quarters of comp-store sales gains (meaning 23 quarters of comp declines)

    · Revenue has fallen from a peak of $475 MM in 2001 to $380 MM in the just-reported 2012

    · Sales per square foot (not surprisingly) have fallen from a peak of $615 in 2005 to $350 in 2012

    · The EBT margin has fallen from a peak of 12.3% in 2005 to -12.7% in 2012

    · BBW hasn't made a profit on earnings before tax since 2008 and cash flow has cratered

    Clearly, operating performance has been a disaster since the economy tanked in 2008. The stock has also been a disaster: from a peak share price of over $36 in January 2005, BBW shares are now $4.90. The stock has retraced 65% since 1/1/2008, far under-performing the still pathetic 3.5% return of the SP500 (pre-dividend) over the same period.

    However, there are some really positive changes happening at BBW that nobody seems to be paying attention to. In short:

    New store format generating significant comp gains: BBW has opened 6 stores under a new, updated design and these stores have been and continue to comp up over 30% vs. prior year sales. Though I haven't shopped in a new format store yet, I have called a few of them and asked what is new and updated about the store. Each time I was told that the new design features more technology and graphics-including an X-ray machine that the kids can put their animal under (when they're done making it) that then projects all the gadgets/features that they put into the animal on a big screen and prints out an X-ray that the kid can take home. With only 6 stores sporting this new design, but plans to remodel 20-25 stores in 2013 and an additional 30-35 in 2014, I believe BBW can drive a steady improvement in comp-store sales-the first step to restore sales productivity and profitability.

    Right-sizing the footprint = getting rid of unprofitable stores: Hindsight is always 20-20, of course, but BBW mgmt admits that they simply over-expanded the store base, particularly in light of the 2008 economic crisis and collapse in consumer spending. After closing 22 stores in 2011 and 2012, BBW plans to close another 35 under-performing doors in 2013 and at least an additional 25-30 in 2014, with a target of operating 225-250 stores in North America (down from the 291 in operation at 2012 year-end). With the top 200 stores in the company averaging a +20% unit-level EBITDA, these closures of under-performing stores should drive a really meaningful improvement in profitability.

    New, more effective marketing strategy: BBW also has a new marketing strategy, which, as the Mom of a five year old, I personally attest is effective. Previously, BBW's marketing targeted the Mom with a message about product and promotion. The company's newer marketing targets the child with a focus on the experience ("you get to make your own friend") and product ("and these are the little friends you can make"). While this new TV marketing strategy wasn't used in all markets, it was used in the NYC area-which is how I came to learn that Rudolph actually has a reindeer girlfriend whose name is Clarice. ("Mommy, Rudolph has a girlfriend name Clarice and you can make her at Build-a-Bear today!") My guess is that this type of a marketing strategy is going to be far more effective at driving more frequent store visits.

    Something can be done about European operations: BBW acquired its former franchisee in the UK in April 2006, when the 11 stores then operating became company-owned. Since 2006, the company-owned store base in Europe has expanded to 58 stores, with Europe now generating roughly 20% of total company revenue. The European business has been extremely challenging for the past two years and BBW mgmt has publicly stated that BBW doesn't plan to open more stores there until the economy stabilizes and store performance improves. However, given BBW's focus on closing under-performing doors in the US, I would not be surprised to see a significant reduction in the number of doors in UK/Europe which have also been a serious drag on comps (ie, US comps in 4Q-12 were +1.5% but European comps were -11.4%).

    New CEO, new perspective, new ideas: BBW founder and CEO Maxine Clark announced in late January that she plans to step-down and retire as soon as the Board finds a CEO to replace her. Given the potential for the company (and the possible upside in the share price if the turnaround succeeds), I think a very capable CEO can be found. I expect the stock to react very favorably to the appointment of the new CEO, which is likely to serve as the first catalyst.

    Now, I don't think a turnaround at BBW is going to be a teddy bear's picnic in the park by any means. First, in Q1-13 the company faces a tough comparison to a marketing promotion held with McDonalds in Q1 last year, which will switch to 4Q this year, and which will make already tough store traffic trends even tougher. However, I think that can be offset by the benefit of an earlier Easter holiday this year, and by the launch of a new, first ever make-your-own "My Little Pony" product launch post-Easter. Second, while BBW has done a good job controlling expenses over the past year, it's always challenging to bring down corporate overhead costs, which BBW will need to achieve to drive higher profitability on the smaller store and revenue base once the store closures are completed. Finally, longer-term, I think BBW will need to expand the product assortment within its units to include more ancillary items associated with the animals-something that would likely drive more frequent and regular store traffic, which I think the next CEO is likely to focus on once taking over.

    At $4.90, BBW shares are trading at an extremely beat-up valuation of 2.2 trailing 12-month EV/EBITDA with $2.60 per share in cash and no debt, and with a share repurchase authorization that amounts to 8% of the float. Given this valuation and signs of early traction on the turnaround with the new store design and improved marketing, I see limited downside. Instead, I think BBW shares could double or triple over the next two years for patient investors who can stay in the stock to watch the turnaround play out and profitability and cash flow improve.

    Disclosure: I am long BBW.

    Stocks: BBW
Back To Elizabeth Montgomery's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.