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.
About the author:
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.
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