Internet Proof Retailer Trading at a Distressed Price Creates Opportunity.

Build-A-Bear Workshop (NYSE: BBW) is an Amazon resistant hands-on interactive retailer offering "make your own stuffed animal" and related products. The company is managed into three segments: direct-to-consumer, international franchising, and commercial. BBW operates 371 stores globally and 104 franchise locations. Also, products sold on the company, third-party, and franchisee e-commerce sites, including retail locations under wholesale agreements. The hands on interactive experience makes Build A Bear Amazon/internet resistant.

Summary

Build a Bear is moving the correct levers (productivity+ profitability+ capital structure)to drive a higher future ROE and stock price.

Historical and relative extreme deep value discounts for sales, book value, and gross profit coupled with an oversold -82% mean-reverting price drop from year end 2016 and -39% over the prior 52 weeks.

A continued successful business strategy push toward lower capital requirements and revenue diversification by leveraging the brand. This profitable plan to be fully realized during 2020 includes the sizable addressable market, growing commercial segment, international and domestic franchising, Walmart expansion, store within a store concept, vacation spots, eCommerce, and others.

Lower future lease costs and impact on EBITDA expansion is material. The opportunity is driven by a 70% expiration of existing store leases over the next three years. Further, negotiating strength is from BBW as a marquee tenant, Walmart expansion, and store within store strategy all reduce or eliminate many lease expenses.

Year-end tax-loss selling and temporary pressure from opportunistic shorts create buying opportunity.

A Yelp search shows countless detailed positive reviews from fanatical fans. Parents and kids love their BBW experience. Build-A-Bear brand awareness is in line with much larger companies without the same market value. A staggering over 90% of the BBW brand recognized by Mothers.


Fundamentals are improving from their evolving strategy. Fiscal 2020 should recognize returns from investments and strategy focus versus current extreme negative valuation. The current value is priced for near term death. 


Motivated shareholder-oriented owners, David Kanen filed 13D reporting a 9.70% ownership and now sits on the board. Multiple years of favorable insider activity. Point72 reduced its 14% position to 6%.

Capital structure was improved, reducing the share count by 12.50% from December 2014 balance of 17.37 million to the most recent quarter, 15.22 million. Total liabilities during the same period declined by 26.30% or 114.43 million as of December 2014 to 84.34 million (excluding long-term leases) for the most recent quarter.

Valuation:

The current stock price is $2.69, with an enterprise value of 189.30 million or 58.90 million excluding lease obligations. Market capitalization is 40.94 million.

Summary comments on the table above include the obvious fifteen-year low valuations. The current market capitalization of 40.90 million compares favorably to 142.20 million in trailing twelve months of gross profit, 335 million in sales, 81.90 million in equity, 6.20 million in cash, no debt or credit line borrowings. The current tangible and intangible value does not reconcile with negative -43.01% twelve-month stock return trading near a 52-week low for a successful differentiated brand name retailer.Also note the negative attributes of the Z and F score. 

Third Quarter 2019 and related valuation commentary:

The third quarter of 2019 reported sales growth in direct consumer and commercial segments, coupled with improved gross margins. Operating loss improved by 2.3 million, zero debt, no credit line borrowings, and six million in cash.

The Build-A-Bear brand has remarkable brand recognition, with over 90% of Mothers. Further, over eight million joined their email club, and four million active loyalty members represent 20 million customers. Retail locations attracted 45 million visitors and have an added 110 million digital connections.

The profitability strategy includes diversification beyond the traditional retail model. Commercial revenue from third parties requires no startup store capital, rent, and labor, coupled with the opportunity to leverage retail in tourist locations. Additional diversification includes shops inside shops,select Walmart locations. These business moves supports leveraging real estate plans and expands the brand to a broader consumer base, with approximately 60% of the shoppers newly registered to the bonus clubs. Walmart has 22 locations in operation, with additional locations planned during the next fiscal year.

 The company's goals are to continue building revenue beyond the traditional retail model, diversify retail locations to broaden consumer accessibility, outbound licensing, wholesale, and entertainment. Nearly 70% of store leases expire over the next three years, providing additional negotiating leverage is the Walmart and store within a store relationship.

For the current third quarter ended, 54 locations with third-party retail relationships include Carnival Cruise Lines, Great Wolf Lodge Resorts, Landry's Inc., and Beaches Family Resorts, first two locations within a military base, among others. Only the portion paid for the products, supplies, and fixtures reported as revenue.

Additional monetization of the BBW brand includes commercial revenue segment increased by nearly 20%, and continue to execute against recent agreements tied to entertainment and content development. Warner Music, Sony Pictures, Hallmark Channel, iHeartMedia, they expect to realize financial gains from these new entertainment initiatives, starting later in 2020.

Conclusion and Investment thesis summary

Build a Bear is moving the correct levers (productivity+ profitability+ capital structure)to drive a higher future ROE and stock price. The evolving brand strategy requires fewer assets, diversifies revenue sources, and retail locations. The plan includes expanding international franchising, Walmart, store in store, lower lease costs, deemphasizing the direct ownership of retail stores, vacation spots, eCommerce, outbound licensing, wholesale, and entertainment.

The 12.5% share count reduction from December 2014 and 26.30% total liabilities over the same period demonstrate shareholder-friendly and management’s awareness of capital structure critical role for shareholders. Insider ownership is around 7% coupled with insider buying. The largest shareholder David Kanen at 9.70% is now on the board.

The main short term risk is continued trouble in the UK, Walmart roll out fails, further decline in mall locations.                                                                        
Long BBW