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Build-A-Bear: Cutting Cost in Bear Market of Business

March 08, 2010 | About:
Inoculated Investor

Saj Karsan

20 followers
We've discussed a couple of times now how same-store sales, Wall Street's most beloved retail metric, can be misleading. This is because it doesn't consider the company's cost structure, which may or may not be flexible. Sometimes, a company can do such an extraordinary job cutting costs that the effects of drops in revenue can be completely reversed.


As an example, consider Build-A-Bear (BBW), the make-your-own-stuffed-animal store. As the recession has reduced the ability of consumers to spend big money on little bears, revenues at Build-A-Bear have reduced. But costs have been reduced at an even higher rate, which has allowed the company to maintain its pristine balance sheet and return to profitability.


Build-A-Bear has done such a good job cutting costs, that they have done so in an area which is normally impossible: its operating leases. If operating lease commitments should be considered debt (something we have often advocated), Build-A-Bear's renegotiation of its leases is akin to having miraculously removed a bunch of debt from its books: the company reduced its leases by $140 million in the aggregate, which is more than the market cap of the entire company!


How was the company able to pull off such an enormous feat? Perhaps it is a desired tenant by the majority of the malls in which it operates. Or, perhaps the company overpaid for locations when they were opened. Whatever the case may be, considering changes in revenue without considering the corresponding changes in cost (or vice-versa), which is something Wall Street does often, is a mistake. Investors who avoid focusing on misleading metrics just because the rest of the market does, put themselves in a position to profit from market inefficiencies.



Disclosure: None

Saj Karsan

http://www.barelkarsan.com

About the author:

Saj Karsan

My name is Ben C. and I am 2nd year MBA candidate at the Anderson School of Business at the University of California- Los Angeles. I have a BS in Economics from the Wharton School of Business at the University of Pennsylvania. Before coming to Anderson I worked as a generalist equity research analyst for Right Wall Capital, a long-short equity hedge fund located in New York City. Prior to working at Right Wall I worked as an analyst at Blue Ram Capital, another long-short equity hedge fund located in Rye Brook, NY. This past summer, I worked for West Coast Asset Management as a research analyst. West Coast, which was co-founded by Kinko’s founder Paul Orfalea, is run by well-known value investors Lance Helfert and Atticus Lowe.



Rating: 3.5/5 (4 votes)

Comments

adamcz
Adamcz - 4 years ago
"As the recession has reduced the ability of consumers to spend big money on little bears, revenues at Build-A-Bear have reduced. But costs have been reduced at an even higher rate"

This sentence leaves me with the impression that profitability is rising, but then I click on the 10-year financials and find:

2006 EPS: $1.44

2007 EPS: $1.09

2008 EPS: $0.24

2009 EPS: ($0.61)

How can I reconcile these two pieces of information?

Please leave your comment:


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