Here's Why I Am Staying Away From Build-A-Bear Workshop

Summary

• Build-A-Bear Workshop provides customers with a way to customize their own product.
• Build-A-Bear represents a company that sells a product that people shy away from during difficult times.
• Build-A-Bear sports relatively heavy inside ownership.

It's important for long-term investors to develop a guide for doing their investment research. Over the years I have developed questions to guide me in my thinking when researching the publicly traded universe. Today's let talk about Build-A-Bear Workshop (NYSE: NYSE:BBW).

1.) What does the company do?

When you buy shares in a company you effectively become part owner of that company. Therefore, it's important for an investor to understand what a company sells. Build-A-Bear operates an interesting business, customized assembly of stuffed animals. This certainly represents an interesting way to engage the consumer and provide a unique experience. Customers can come in and build their very own stuffed animal.

2.) What do the fundamentals look like?

However, just because a company provides an interesting product and experience, that doesn't necessarily translate into expanding fundamentals and superior returns for shareholders. Investors should also look for companies that grow revenue and free cash flow over the long-term, retaining some of that cash for reinvestment back into the business and for economic hard times. Excellent revenue and free cash flow growth serve as catalysts for superior long-term gains.

Over the past 10 years, Build-A-Bear only expanded its revenue 8%. Its net income declined 47%, while free cash flow increased a mere 9% vs. where it was a decade ago (see chart below). The reason behind these declines is simple. People don't spend money on luxury items, such as customized teddy bears during a recession. Consumers worry more about putting food on the table.

BBW Revenue (Annual) data by YCharts

On the plus side Build-A-Bear actually possesses an excellent balance sheet. In the most recent quarter, Build-A-Bear possessed $55 million in cash, which equated to a whopping 54% of stockholder's equity. I like to see companies possess cash amounting to 50% or greater of stockholder's equity. The company possesses no long-term debt. I prefer companies with long-term amounting to 50% or less of stockholder's equity.

However, in spite a few positives, the company's stock price actually declined 20% during the past 10 years, making Build-A-Bear Workshop a long-term loser on the stock market (see chart below).

BBW Total Return Price data by YCharts

3.) How much management-employee ownership is there?

Investors should always look for businesses where the managers and/or employees own a lot of stock in the company. Managers with a great deal of stock in the company will take better care to maximize company profits, which will enhance share price and their personal wealth along with the wealth of shareholders.

According to, Build-A-Bear Workshop's latest proxy, board member, Braden Leonard, controls 9.5% of the company's stock through his investment company BML Investment Partners L.P. Board member Maxine Clark, who founded the company in 1997, and her affiliated parties control 3.8% of the company's stock. The company's CEO, Sharon John, owns 1.1% of the company's stock.

Eric Fencl, the Chief Administrative Officer, General Counsel and Secretary owns 1% of the company's common stock. Clearly, the interests of the senior management are aligned with shareholders at large. On a cautionary note, investors should take note of the huge amount of insider selling over the past year with the company. This may foretell of bad things to come for investors.

4.) How does its "Report of Independent Registered Public Accounting Firm" stack up?

Every year a company employs external auditors to audit financial statements and evaluate whether it maintains adequate financial controls. At the conclusion of the audit, you want to see a letter from auditors with the language "unqualified" or "fairly presents", which generally means that the financial statements and internal systems in constructing them were clean or adequate. If you see "qualified" or "adverse" in the auditing letter's language then deeper issues in a company's financial statements may exist. Build-A-Bear Workshop's most recent audit gave the company's financial statements an unqualified opinion and indicated that the company maintained adequate internal controls.

5.) What types of risk does it have?

It's always important for investors to weigh the various risks, such as exposure to political risk in parts of the world where war is the norm, competitive positioning, and market price risk. Build-A-Bear Workshop operates globally, which means some political risk is involved. Build-A-Bear Workshop, while offering a fairly unique customer service experience, competes with other sellers of teddy bears and dolls. The company's market price risk is slightly above the S&P 500. According to Morningstar, Build-A-Bear Workshop trades at a P/E ratio of 20 vs. 19 for the S&P 500.

6.) What does its forward analysis look like?

Build-A-Bear sells an item of trend and luxury. As a result, the company's fundamentals are choppy. If people tire of its products, or the economy starts to suffer in any significant way, people will simply stop buying in favor of purchasing the basic necessities. I am staying away from this company as an investor.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.