Build-A-Bear Workshop: Back On Track For Now

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Build-A-Bear Workshop's (NYSE:BBW) guidance has done a terrific occupation helping move nan retailer around, and BBW banal is trading astatine a comparatively humble valuation if nan institution tin proceed to grow. However, a batch of nan low-hanging fruit appears to person been picked, and upcoming comps are difficult.

Company Profile

BBW is simply a specialty retailer wherever customers tin create their ain stuffed animal by stuffing, dressing, and accessorizing their ain teddy carnivore aliases different plush artifact animal.

The institution sells its ain branded plush toys, arsenic good arsenic licensed characters from Disney (DIS), DreamWorks, and others. Over 50% of its income are from non-licensed toys, according to nan company.

At nan extremity of January, nan institution operated astir 500 stores. It corporately owns 346 stores, pinch 305 successful nan U.S. and Canada and 41 successful nan U.K. and Ireland. It besides has 72 world franchised stores, arsenic good arsenic 61 locations wherever it sells to nan stores connected a wholesale basis.

About 65% of its unit portfolio is mall-based, pinch 35% of its locations extracurricular of a accepted mall. These see spot for illustration taxable parks, cruises, and different picnic spots. E-commerce, meanwhile, makes up astir 20% of its sales.

While seemingly a conception for children, 40% of income are to teens and adults. Meanwhile, nan institution estimates that astir 60% of nan visits to its shop are planned up of time, often for a typical juncture for illustration a birthday.

ICR Presentation

Opportunities

One of BBW's biggest opportunities is to proceed to diversify its shop guidelines distant from malls and into different locations. The institution has done a bully occupation of closing unprofitable mall-based stores, and now says that each of its North American promenade locations are EBITDA positive. This has allowed nan institution to spell into portion maturation mode successful nontraditional areas.

It opened astir 20 caller locations successful 2022. These see places specified arsenic connected Carnival Cruise Lines (CCL), Six Flags (SIX), Great World Lodge, and moreover nan Pro Football Hall of Fame. The institution is besides experimenting pinch caller formats, including 1 that has an arcade and statement rooms.

Company Presentation

In summation to caller shop openings, BBW is besides expanding its offerings into different adjacent categories. The institution has precocious launched a pajama shop arsenic good arsenic edgier products successful an age-gated shop. The institution besides continues to push nan narratives of its products arsenic gifts and collectibles.

E-commerce remains a large driver, pinch complete 160% maturation successful integer successful 2022 compared to 2019. The institution precocious updated its e-commerce tract successful Q3 to make it mobile first, which makes consciousness fixed that astir group acquisition online items done their smartphones these days. In precocious 2022, it besides introduced caller shop-in-shop landing pages to entreaty to different consumers and acquisition occasions. BBW has besides begun to employment Salesforce (CRM) exertion to thief amended its loyalty, marketing, and analytics capabilities.

Finally, nan institution is besides pursuing outbound licensing, fixed nan nickname of its brand.

Downside Risks

BBW had a very beardown 2022 coming retired of nan pandemic; however, it now faces difficult comps, particularly successful Q1 of 2023, which saw a 28% summation successful sales. How nan institution performs successful a much normalized environment, aliases moreover perchance a recessionary one, will beryllium a beautiful telling tale.

While nan institution has done a bully occupation of closing unprofitable promenade stores, that limb of nan BBW communicative is mostly complete successful North America. With each its North American mall-based shop profitable, it won't person that net uplift from closing stores. Meanwhile, it's easier to adjacent unprofitable stores than to turn profits astatine existing stores.

The institution is besides now much exposed to tourer postulation fixed its push into taxable parks, cruise ships, and different picnic spots. This isn't needfully a bad thing, and successful fact, BBW should beryllium benefiting from accrued leisure recreation coming retired of nan pandemic and consumers' desire to recreation aft being cooped up during nan pandemic. However, if location has been immoderate propulsion guardant successful leisure recreation and nan system weakens, these locations would return a income hit.

BBW has besides historically seen its income impacted by blockbuster children's movies aliases deed children's TV shows. A celebrated movie for illustration Frozen tends to thief thrust income arsenic customers swarm to get an Elsa Bear, which sells astatine a higher value than your non-licensed merchandise. The movie slate tin besides positively aliases negatively effect it income of much collectible bears arsenic well.

Valuation

BBW trades astatine an EV/EBITDA aggregate of 4.3x nan FY24 (ending successful January) statement of $76 million. For retailers, I for illustration to adhd 7x rent (about $44 cardinal a year) to their endeavor values, which would put nan aggregate astatine 8.3x

On a P/E basis, it trades astatine 7.5x nan statement calling for EPS of $3.21 successful FY24.

When BBW is generating profits, which isn't ever nan case, it has been capable to garner a P/E ratio of adjacent 20x successful nan past. On an EBITDA basis, it mostly has been betwixt 3-8x.

BBW Trailing P/E (FinBox)

BBW Trailing EV/EBITDA (FinBox)

Given its uneven history, I deliberation nan banal looks appropriately weighted astatine nan moment.

Updated Guidance

BBW guidance has been doing a batch of things right, which person shown up successful its beardown results and coagulated banal performance. In January, the institution raised its full-year guidance up of ICR. It now projects gross of $460.0 - $465.0 million, versus anterior income guidance of $455.0-$465.0 million. That's 12% maturation astatine nan midpoint, arsenic it had income of $411.5 cardinal successful FY22.

The institution besides bolstered its EBITDA outlook. It now expects EBITDA of betwixt $57.0-$63.0 million. It antecedently guided for EBITDA of $56.0- $63.0 million. The caller forecast represents maturation of 18% astatine nan midpoint.

Commenting connected nan guidance increase, CEO Sharon Price John said:

"We person continued to spot affirmative momentum successful our business passim nan existent 4th fourth and mixed pinch our record-breaking profit successful nan first nine-month period, we expect fiscal 2022 to present a double-digit summation successful profitability compared to nan anterior twelvemonth which would beryllium nan astir profitable successful our 25 years of operations, which comes connected apical of nan erstwhile grounds group successful fiscal 2021. Our institution has evolved to go a multi-channel, site-based acquisition and intermezo entity pinch divers categories that entreaty to a wide addressable demographic and market. Our disciplined execution of our strategical exemplary and cardinal initiatives has allowed america to build a instauration that we judge tin beryllium leveraged for further profitable maturation successful 2023 and beyond."

Conclusion

BBW has been doing a batch of things correct nether CEO Sharon Price John. Meanwhile, nan banal is beautiful attractively weighted if you deliberation it tin proceed to execute and turn same-store income and units from here.

However, I deliberation a batch of nan lower-hanging consequence has now been picked, and nan institution is going to person to do immoderate beautiful dense lifting to grow. Meanwhile, it faces immoderate reliable comps, particularly for Q1.

Weighing nan companies opportunities and risks, I deliberation nan banal looks beautiful appropriately weighted astatine nan moment. As such, I'd see it a "Hold."

However, I would go much willing successful nan sanction if BBW could onslaught a woody pinch a spot for illustration Chuck E Cheese. A shop-in-shop successful a celebrated children's statement franchise seems for illustration a earthy fresh that could create meaningful maturation for years to come. The pizza statement and arcade edifice has complete 550 locations crossed nan U.S.

Former Senior Equity Analyst astatine $600M long-short hedge money Raging Capital.