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Saj Karsan
Saj Karsan
Articles (5983) 

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

March 08, 2010 | About:

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 (NYSE: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


About the author:

Saj Karsan
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.

Rating: 3.5/5 (4 votes)


Adamcz - 7 years ago    Report SPAM
"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?

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