February 9, 2025
Build-A-Bear Workship (BBW) runs a “make-your-own stuffed animal” business and also licenses its brand. The company is transitioning to being primarily a brand monetization business that continues also to be a retailer.
(h/t HiddenInSight, Value Investors Club. Please see the following (you may have to register but its free): https://www.valueinvestorsclub.com/idea/BUILD-A-BEAR_WORKSHOP_INC/3416620533)
BBW’s licensed store business entails BBW licensing its brand and store concepts to third parties (theme parks, hotels, etc). This business is a franchise model: BBW has zero capital commitment or operating risk, but has the same profit per unit for BBW as running a store themselves. This business is expanding quickly. It’s already exceeded 130 units and could more than triple by 2028. Licensing/Franchising is 7.5% of today’s revenues but ~36% of profits.
There’s plenty of space for U.S. growth, but the international opportunity is even larger. Over half of new third-party stores will be opened internationally including new partners in Colombia and France. It’s also noteworthy that international partners are established toy/kid retailers whereas U.S. partners tend to be hospitality-based operators. As a result, international partners are typically multi-unit operators whereas some U.S. partners are single-unit operators.
There have been zero third-party closures in 21+ months even as other licensed/franchised retail establishments have been seeing significant closures. Also, the ROI for partners often exceeds 100%.
There are several reasons investors have overlooked Build-A-Bear:
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- Investors who invested in BBW at the Covid lows have seen 2500%+ gains already, and they assume the story is over
- Licensed/franchised sales add little to total revenue, and so its earnings potential is overlooked
- Build-A-Bear investors lost significant money in 2007 and again in 2015, and so they don’t look at the stock anymore and therefore don’t see the transformation
Because BBW is becoming primarily a licensing company, its earnings quality should continue to improve. Investors are likely to realize this eventually, causing the stock to move much higher.
Because the company produces roughly $50 million in free cash flow per year, it will continue to buy back more stock, recently announcing a new $100 million buyback program (20% of the market cap).
Build-A-Bear has trademarks that legally prevent competitors from using a similar “build your own stuffed animal” retail concept. As for other toy/entertainment options, customers seem to like BBW for the unique experience of building one’s own bear. Also, the company has continued to sell ~8 million bears per year for over 25 years despite the collapse of mall foot traffic.
By 2028: Third-party stores may exceed 400, producing a net income of $52 million. Meanwhile, retail net income should hit $30 million. So net income for 2028 should be at least $82 million. EBITDA should hit $126.3 million. Cash flow will be roughly $105 million.
The current market cap is $526.4 million while enterprise value is $595.8 million.
And here are the metrics of cheapness based on 2028 estimates (except for P/B, which is current):
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- EV/EBITDA = 4.72
- P/E = 6.42
- P/B = 4.09
- P/CF = 5.01
- P/S = 0.81
ROE is 42.9%, which is excellent.
The Piotroski F_Score is 6, which is decent.
Insider ownership is OK at 6.2%. Cash is $25.2 million while debt is $102.1 million. TL/TA (total liabilities / total assets) is reasonable at 55.0%. The dividend yield is 2.1%.
Intrinsic value scenarios:
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- Low case: If there’s a bear market or a recession and/or if consumer spending declines and/or if there’s a decrease in mall traffic, earnings could drop and so could the stock.
- Mid case: By 2028, Build-A-Bear should have a P/E of at least 15. That would mean the stock is worth $88.36, which is over 130% higher than today’s $37.82.
- High case: Arguably, by 2028, due to its capital-light licensing business, the company should have a P/E of 20. That would mean the stock is worth $117.82, which is over 210% higher than today’s $37.82.
RISKS
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- If there’s a bear market or a recession, the stock would probably decline.
- A drop in consumer spending would cause earnings to drop.
- Mall traffic continuing to decrease would hurt earnings.
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