Build-A-Bear Workshop (BBW), small cap company commited to shareholders.
-Market capitalization: 356 million dollars
-P/E ratio: 7.25
-Div yield: 3.16%
Key points:
● International Expansion: Plans to open at least 50 new locations in fiscal 2024, focusing on non-traditional and high-traffic areas.
● Management Commitment to Shareholder Returns: Significant capital returns through share repurchases and a new quarterly dividend, in combination more than 30 million over the last 12 months.
● Improving Gross Margins: Achieved record gross margins of 54.2% in Q1, demonstrating effective cost management and pricing strategies.
1. Introduction:
Build-A-Bear Workshop (NYSE: BBW) has had an impressive start to the year, with its stock price surging over 40%. Despite this strong performance, the first quarter results showed a slight decline, with revenues down 4.4% year-over-year and pre-tax income dropping by 22.3%, this numbers were lower than those expected by Wall Street, this caused the stock to plunge over 20%. However, the management remains confident in their full-year outlook, projecting total revenue growth in the low-to-mid single-digit percentage range and pre-tax income growth in the low single digits. This optimism is supported by plans for at least 50 new experience locations.
Importantly, Build-A-Bear is experiencing record gross margins, demonstrating effective cost management, and pricing strategies. The company’s gross margin for Q1 was 54.2%. Management has shown a strong commitment to shareholder returns, with over $30 million returned through share repurchases and a new dividend in the past 12 months. Despite the short-term disappointment, Build-A-Bear remains a compelling investment opportunity with solid growth strategies, robust financial health, and ongoing shareholder rewards. According to my DCF valuation the stock should be worth around 41.65 dollars, representing a 60% upside potential from current prices.
2. Business model:
Build-A-Bear Workshop, Inc. (NYSE: BBW) is a global retail brand that offers a unique, interactive shopping experience focused on the creation of customizable plush toys. Founded in 1997 and headquartered in St. Louis, Missouri, BBW has evolved into a beloved brand that sells to a diverse customer base, including children, adults, and collectors. The company operates through various retail formats, including corporately managed stores, partner-operated locations, and international franchises.
2.1 Unique Selling Proposition
BBW's core business model revolves around providing a highly interactive and personalized experience where customers can create their own plush toys. This involves choosing the toy, stuffing it, adding sounds and scents, dressing it in various outfits, and completing the creation with a personalized birth certificate. This hands-on experience differentiates BBW from other toy retailers.
2.2 Retail Stores:
- Corporately-Managed Locations: These stores are directly operated by BBW and are primarily located in high-traffic shopping malls and tourist destinations. As of May 2024, BBW operates 357 corporately managed stores globally.
- Partner-Operated Stores: These stores are operated by third-party partners who bear the cost of setting up and running the stores. BBW supplies the inventory at wholesale prices, receiving revenue without significant capital investment. There are 97 partner-operated stores worldwide.
- Franchise Locations: BBW franchises its brand to international partners who operate the stores under the BBW brand, paying royalties based on sales. There are 77 franchise stores in various international markets.
3. Operating strategies:
Management continues to believe in the initiatives that were put in place prior to the pandemic and the intend to continue pursuing them. There are three main operating strategies:
3.1 Global expansion:
Build-A-Bear Workshop is expanding its unique experience locations globally. In fiscal 2023, the company opened a net 37 new locations, including corporately managed, third-party operated, and franchise models. For fiscal 2024, Build-A-Bear plans at least 50 new units in North America and internationally. The company is focusing on non-traditional locations such as family-centric tourist sites and partner-operated venues, with over 35% of its stores now in these settings. Additionally, Build-A-Bear is innovating with vending machines, known as automatic teddy machines, to further extend its brand reach.
3.2 E-Commerce and Digital Channels:
BBW has a robust e-commerce platform that complements its physical store presence. The website allows customers to design and purchase customized plush toys online. This channel has grown significantly, especially during the COVID-19 pandemic. The company has been investing in their digital presence and it starts paying off, online sales have tripled since 2018.
3.3 Driving growth while returning capital to shareholders:
Build-A-Bear Workshop is driving profitable growth through new shop openings while maintaining a commitment to returning capital to shareholders. Despite inflationary pressures, wage increases, and supply chain challenges, the company's disciplined expense management and higher revenue levels have kept corporate store operating margins robust. Improved cash flows have supported key growth initiatives and enabled capital returns to shareholders. This includes two special dividends totaling $42 million, share repurchases from a $25 million program initiated in November 2021, a $50 million program announced in August 2022, and a new quarterly dividend of $0.20 per share announced in March 2024.
4. Sharon Price John CEO
Sharon Price John has been the CEO of Build-A-Bear Workshop since June 2013. She has a background in leadership roles in places such as Stride Rite Children's Group, Hasbro. Under her guidance, Build-A-Bear has expanded globally and enhanced its digital presence.
Importantly, Sharon Price John holds approximately 4% of Build-A-Bear's shares, valued at around $15 million. This significant ownership aligns her interests with those of the shareholders, ensuring a strong commitment to driving long-term value and maintaining robust financial performance.
5. Financials:
5.1 Revenue and gross margin:
As we can see earnings have been growing at a rapid pace during the last year, % of COGS as revenue is the lowest it has ever been, representing that the company is able to charge a premium for their products even during an inflationary environment, cost cutting and an increase in online sales has also helped.
5.2 Profitability:
The company has been able to turnaround their business model after the pandemic, increasing net margins drastically and bringing EBITDA from 4.49 million dollars in 2018 to 79.18 million dollars in 2023. Net margin is around 10% and I expect it to remain there for my forecast.
6. Thesis:
My thesis is based on three main assumptions:
Low Capex requirements:
In projecting the company's financials, I anticipate depreciation and amortization to represent approximately 3.5% of revenues, aligning with historical trends. I expect capital expenditures to represent about 3.3% of the company's revenue, supporting its expansion and modernization initiatives while leaving a good amount of cash to give back to shareholders.
Slight margin contraction:
To remain conservative, I foresee a slight contraction in margins over the next decade. This expectation accounts for potential challenges such as inflationary pressures, increased wages, and supply chain disruptions. Despite these headwinds, Build-A-Bear's robust operational efficiency and cost management strategies should help mitigate significant margin erosion.
Management’s focus on producing shareholder value:
A key aspect of Build-A-Bear's investment appeal is its management's focus on returning capital to shareholders. The company is starting to build a track record of doing so through dividends and share buybacks. As Build-A-Bear continues to demonstrate its ability to sustain and grow its dividend while effectively executing share repurchase programs, I believe the market will recognize this stability and commitment, resulting in a higher valuation multiple for the stock.
Valuation:
I expect the company’s revenue to grow 3% this following year and continue growing at a conservative 4%. I expect that gross margins will fall by 2% over the following 10 years and the same will happen to net margins.
On a P/E basis I think the company will be worth 54.67 dollars in 2023 not considering any possible buybacks.
For a more accurate valuation I will make a DCF model following my D&A and Capex expectations. I expect the exit FCF yield to be 7.5%.
According to my DCF model and using a discount rate of 12% this stock is worth 41,65, Thanks to the recent decline, we are able to buy the stock with a big margin of safety.
7. Risks:
Smaller competitors wining over market share: even though it is highly unlikely that other competitors will be able to take market share from them because they offer a unique experience, and they have a strong brand image.
Hyper-inflation: if inflation comes back to high levels, it is possible that we see an increase in costs and lower demand on the consumer side.
8. Conclusion:
Build-A-Bear Workshop (NYSE: BBW) is a compelling investment opportunity despite recent short-term setbacks. The company's strategic international expansion, robust e-commerce growth, and strong focus on returning capital to shareholders position it well for sustained growth.
With conservative financial projections indicating a 4% CAGR in revenue and prudent margin management, Build-A-Bear remains resilient against economic challenges. Current valuations suggest the stock is undervalued, providing a significant margin of safety.
Investing in Build-A-Bear Workshop is recommended to diversify your portfolio beyond tech, offering stability and growth potential backed by solid fundamentals and shareholder-friendly policies.