If you have children, you understand that stuffed animals are huge part of every day life. Build-A-Bear Workshop Inc. (BBW, Financial) is a retail entertainment company that specializes in allowing customers to create and customize their own stuffed animals.
Founded by Maxine Clark in 1997, it has since become a popular destination for children and teddy bear enthusiasts of all ages with over 400 stores around the world. I think it could still have an even better future ahead, but even if it does not, the value is likely much higher than its current market price based solely on another small player, American Girl. Mattel (MAT, Financial) bought that brand for $700 million 1998 and it generated north of $60 million in revenue during 2022.
In comparison, Build-A-Bear is closing in on $500 million in revenue per year, yet has a market capitalization of just $300 million. The company also carries zero long-term debt and $32 million in cash.
Build-A-Bear's business model
The concept behind Build-A-Bear is to provide a unique and interactive experience for customers to design and personalize their stuffed animals. When you visit one of its workshop stores, you are greeted with an array of unstuffed animal shells, ranging from teddy bears to other animals like dogs, cats, bunnies and more. These shells are high-quality plush toys that are soft and cuddly.
The process of building your bear typically involves several steps. First, you select an unstuffed animal of your choice. Once you have made your selection, you move to the stuffing station, where you can help bring your bear to life. There is a pedal-operated stuffing machine that allows you to fill your bear with soft, fluffy stuffing. You can even customize the amount of stuffing to make your bear extra huggable.
After the bear is stuffed, you can add special touches to make it truly unique. Build-A-Bear Workshop offers a wide range of clothing, accessories, sounds and scents that you can choose from. These accessories include outfits, shoes, hats, glasses and even miniature musical instruments. There are also sound chips that can be inserted into the bear's paw that play different pre-recorded sounds or personalized voice messages.
Another popular feature is the heart ceremony. Before the bear is sealed, you have the opportunity to select a small heart and make a wish or give it a special meaning. The heart is placed inside the bear, and it becomes an integral part of your new furry friend.
In 2022, the United States had more than 3.6 million babies born. In the last decade, north of 40 million babies were born in America. With roughly 18% of people under 15 years of age, and many adults loving a stuffed animal every now and then, Build-A-Bear remains in a good position despite retail challenges.
Brand and competitive advantages
Build-A-Bear Workshop is also known for its collaborations with popular characters and brands. It often releases limited-edition bears and accessories featuring characters from movies, TV shows and books. This allows fans to create their own versions of beloved characters or animals associated with a particular franchise. The company has also expanded globally with stores in a number of foreign countries, bringing the joy of creating personalized stuffed animals to people around the world. It has become a well-known brand that emphasizes creativity, imagination and the joy of giving and receiving personalized gifts.
In addition to its physical stores, Build-A-Bear Workshop has an online presence where customers can explore and customize their bears virtually. This is a huge point for the future, especially if the company can figure out how to make this interactive with augmented reality or virtual reality. Imagine a kid building a bear with an Apple VisionPro and then receiving it the next day. To that note, taking your kids to the mall is one of the best ways to keep them occupied and the tactile experience of building a teddy bear is a great way to spend a little time. So while Build-A-Bear does offer an interactive website that allows you to select and personalize your stuffed animal, similar to the in-store experience, doing it in person is still likely the best way to do it.
Financial overview
Build-A-Bear’s gross margin stands at 53% currently and 47% historically. It has also improved asset turnover and cash from operations, which now stand at $61 million. More importantly, the company seems more focused on shareholder value than ever. In the last decade, Build-A-Bear has bought back nearly 19% of its shares, boosting earnings per share.
On June 15, Build-A-Bear Workshop reaffirmed its guidance. The company anticipates a revenue growth range of 5% to 7% year over year in 2023, with growth expected across all three segments. This guidance translates to approximately $492 million to $501 million in revenue, with the current consensus estimate at $496 million. Build-A-Bear also projects a 10% to 15% increase in pre-tax income for the full year as it plans to open 20 to 30 new stores and allocated $15 million to $20 million in capital expenditures.
There are still real risks for retail operators, but management has improved Build-A-Bear to have significantly higher profit margins than the sector median, plus it has already navigated three big economic crises. Since the company carries zero long-term debt outside of capital leases, it will likely withstand the next one too. Of course, this has not stopped short sellers from building a position equal to 11.44% of the company's float.
Valuation
From a valuation standpoint, despite the massive adjustment since the pandemic lows, the company still looks like a bargain. In the last 12 months, Build-A-Bear has generated $32.02 per share in revenue and $3.30 per share in earnings. The current price is north of $22 per share, and the company is expected to earn slightly more per share over each of the next two years.
As a private business, it would be incredible to generate a this kind of earnings yield on your investment. Even if retail goes away entirely (not likely anytime soon) the brand is strong enought to adjust.
