Original Recommendation

Build-A-Bear Workshop, Inc.

Build-A-Bear Workshop, Inc. (BBW)

our opinion

sell

current price

$5.54

target price

$4.50

market cap

$82M

div yield

0%

  • The fickle nature of kids taste in toys creates a never-ending cycle for BBW to stay on top of kids' minds. If you have children, nieces, nephews, or been anywhere near kids... it's that they jump from toy to toy frequently
  • BBW is a net-adder of physical retail stores. There have been more retail store closures so far this year than all of 2018. That trend won't slow down. BBW is heading the wrong way.
  • The catalysts for BBW - growing online sales, franchising, emerging markets - are solid growth areas. But they won't offset the U.S. consumer spending less on its products.
  • BBW leaves nothing left for investors to get excited. SG&A expenses eat up 100% of gross profit. There's nothing in the financials that really excite a long term investor buying a teddy-bear company.

trade details

You’re familiar with the singing bears if you’ve stepped foot in a mall within the past 10 years.

There used to be lines. Long lines.

Kids would get any pre-recorded message put inside their bear to take home to play over and over again.

But if you’ve spent any time with kids, you know two things: Their interest in toys are fickle; They want what’s cool (mainly what their friends have).

We were surprised to see Build-A-Bear Workshop (NYSE: BBW) publicly traded in the first place. Who knew a teddy-bear company would once be “loved” enough by investors who’d want to buy its shares.

Anyone who’s owned BBW shares in the past found out the hard way… kids just don’t buy as many teddy bears as they used to. Revenues are down 14% over the past four and a half years – during a time when the consumer has been spending and spending.

Things don’t get better if we look deeper into the numbers.

For starters, BBW spends all of its gross profits on SG&A expenses. (Executives are just making sure they get paid while investors are left holding the bag).

Let’s look at 2018 for example. BBW generated $336 million in sales. Its gross profit was $138 million – good for a 41% margin.

The only problem was SG&A expenses cam out to $157 million.- what the C-Suite pays itself along with other administrative costs.

Sorry shareholders… none leftover for you. BBW has been operating that way for years. (We identified three other companies who operate this way too. Each have seen their shares crushed).

Second – BBW runs a very intriguing promotion called “Pay Your Age” – where the cost of the bear is equal to the age of the kid. This was a massive promotion that worked out well for BBW. But we know what happens to companies who rely on discounts to generate sales long term (Blue Apron and Bed, Bath, and Beyond come to mind..

This got customers to buy during the promotion that might not have otherwise bought. BBW didn’t disclose the revenue it generated from the promotion, but it was marked as a massive success. Yet revenues were still down 7% year/year (yr/yr).

Third – BBW shareholders can look at “customer deposits” to see other signs of potential revenue growth. Customer deposits are just gift cards. But they’re held on the company’s liability side of the balance sheet (because it’s a future obligation to the consumer). Customer deposits are down 36% yr/yr. Not a great sign that customers aren’t even buying gift cards anymore.

Fourth – CEO Sharon Price John seemed to find every excuse in the book for the poor year. She used the new consumer privacy law (GDPR), tax policy, and closure of retail stores as reasons for declining sales. Meanwhile, the Toys-R-Us bankruptcy was a big blow to their sales too.

We don’t see Amazon complaining about GDPR or Best Buy complaining about retail store closures. Those that do complain about physical retail closures are the ones going bankrupt.

We can see what’s happened to BBW’s share price over time. It’s been in a perpetual downtrend since it first went public – down 84% since 2005.

Finally, just a little math to put things in perspective.

BBW did $65 million in revenue last year. With 312 stores, that comes out to $208,000 per store per year… or just $570 per day. Gross profits come out to $234/day at 41% gross margins.

Who on this planet is getting excited about those numbers?

Grant said it best on our phone call the other day: “It’s even too small for a private equity firm. $63 million in revenue for a teddy bear business? No chance.”

Sell shares short of Build-A-Bear Workshop, Inc. (NYSE: BBW) down to $5.25.

Our target price is $4.50 as BBW dies a slow death. We’ll place a volatility based trailing stop on the position. And will alert you on any updates.

(Please place no more than 1% of your portfolio into this position).