A company selling custom-made stuffed animals may not sound like the most interesting business. However, it is a relatively high-margin business, and Build-A-Bear Workshop continues to deliver record-breaking years consistently since the pandemic. It is also a fairly easy business to understand. Thus, it has the characteristics of a compelling investment. In this analysis, I will investigate whether it is the right time to invest in Build-A-Bear Workshop.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Build-A-Bear Workshop. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Build-A-Bear Workshop either. Thus, I have no personal stake in Build-A-Bear Workshop. If you want to purchase shares (or fractional shares) of Build-A-Bear Workshop, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
Build-A-Bear Workshop was founded in Missouri, United States, in 1997. Build-A-Bear Workshop operates as a multi-channel retailer of plush animals and related products. The company operates through three segments: Direct-to-Consumer, Commercial, and International Franchising. Its merchandise comprises various styles of plush products to be stuffed, pre-stuffed plush products, and sounds and scents that can be added to the stuffed animals. Additionally, they offer a range of clothing, shoes, accessories, and other toy and novelty items, including family sleepwear. The company operates its stores under the Build-A-Bear Workshop brand name and sells its products through its e-commerce sites and third-party marketplace sites. By the end of fiscal 2024, the company had 525 global locations through a combination of its corporately-managed, partner-operated, and international franchise models. This reflects 359 corporately-managed locations, including 320 stores in the United States and Canada, and 39 stores in the United Kingdom and Ireland. Additionally, there are 92 partner-operated locations that operate through the "third-party retail" model, where they sell products on a wholesale basis to other companies that then execute the Build-A-Bear Workshop's retail experience. There are also 74 franchised stores operating internationally, all under the Build-A-Bear Workshop brand. Over the last 26 years, Build-A-Bear Workshop has sold more than 240 million stuffed animals around the world. Thus, Build-A-Bear has become a brand with high consumer awareness, positive affinity, and strong retail influence, which is what gives Build-A-Bear Workshop its moat.
Management
The CEO is Sharon Price John. She joined Build-A-Bear Workshop to become the CEO in 2013. Prior to joining Build-A-Bear Workshop, Sharon Price John served as the President of Stride Rite Children's Group, a division of Wolverine Worldwide, which designs and markets footwear for children. She also held leadership positions at Hasbro, a multinational toy and board game company. She also founded and served as the Chief Executive Officer of Checkerboard Toys. Additionally, she has held positions at VTech Industries and Mattel, which indicates her extensive experience in the industry. She also serves on the Board of Directors of Jack in the Box. She holds a Bachelor of Science degree from the University of Tennessee, where she is recognized by the university as one of the top 100 graduates of the last 100 years. She also holds an MBA from Columbia University with a focus on international business. She also authored the book "Stories and Heart: Unlock the Power of Personal Stories to Create a Life You Love," where she candidly details the missteps and insecurities she overcame on her way to success. She is recognized for revitalizing the brand, navigating the economic uncertainty during the global pandemic, and delivering the company's three most profitable years to date in fiscal 2022, 2023, and 2024. Her experience in the industry and her results at Build-A-Bear Workshop mean that I'm very comfortable with Sharon Price John leading the company moving forward.
The Numbers
The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. We don't have any numbers from 2018 because Build-A-Bear Workshop changed their fiscal year from ending on the Saturday closest to December 31 to the Saturday closest to January 31 at the end of the company's 2017 fiscal year. Thus, there was a one-month fiscal transition period from December 31, 2017, to February 3, 2018. It also means that I wouldn't pay much attention to the numbers in 2017 and 2019. The numbers are a bit mixed as Build-A-Bear Workshop delivered inconsistent results before the pandemic, with only one year showing a Return on Invested Capital (ROIC) above 10%. Fiscal 2021 was disastrous due to the pandemic, which forced Build-A-Bear Workshop to close their stores for an extended period. Since the pandemic, Build-A-Bear Workshop has achieved a Return on Invested Capital (ROIC) above 40% each year, which is very encouraging. If Build-A-Bear Workshop can continue to deliver a Return on Invested Capital (ROIC) at this level, it could be a great long-term compounder.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. As explained previously, we do not have any data from 2018. Build-A-Bear's equity suffered during the pandemic, reaching a ten-year low. Since the pandemic, Build-A-Bear Workshop is a textbook example of how you would like to see equity grow. It has grown every year and reached an all-time high in fiscal 2024. Hopefully, this trend will continue.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. As explained previously, we do not have any data from 2018. Historically, Build-A-Bear Workshop has experienced years with a negative free cash flow, but it has been positive since fiscal year 2020, which is encouraging. Another encouraging sign is that Build-A-Bear Workshop also managed to generate a positive free cash flow during the pandemic, despite having to close down its stores for an extended period. Build-A-Bear Workshop has managed to grow its free cash flow every year since the pandemic, which is a great sign. Another positive indicator is that the levered free cash flow margin has increased every year, reaching its peak in fiscal year 2024. The free cash flow yield is also high, which indicates that the shares are trading at a favorable valuation, but we will revisit that later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. However, it is not possible to calculate the financial ratios for Build-A-Bear Workshop because they have no debt, which is another positive indicator. Actually, Build-A-Bear Workshop has been debt-free for over 20 years, a fact that I personally appreciate.
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Risks
Based on my findings so far, I believe that Build-A-Bear Workshop is an intriguing company. However, no investment is without risk, and Build-A-Bear Workshop also has its fair share of risks. One risk is macroeconomics. Given that purchases of Build-A-Bear Workshop's products rely on discretionary spending by their customers, the company's financial performance is susceptible to fluctuations in general economic conditions that impact consumer spending. A slowdown, especially in the North American or European economies, or uncertainty regarding the economic outlook could decrease discretionary spending or lead to a shift in consumer discretionary spending towards other products. Build-A-Bear Workshop has mentioned that macroeconomic factors, such as inflation, impacted their business operations in the last couple of years. These factors had an adverse impact on their business throughout the years, as they experienced a decrease in the dollar per transaction. Furthermore, there are several reports indicating that the toy industry as a whole will face challenges in 2024.
Relying on consumer traffic. Build-A-Bear relies to a great extent on consumer traffic in the malls and tourist locations where they are situated. Build-A-Bear Workshop relies on the presence of anchor tenants in malls, typically large department stores, as well as the sustained popularity of malls and tourist spots as shopping hubs to draw significant consumer footfall. While Build-A-Bear Workshop has significantly expanded its e-commerce presence since the pandemic, the majority of their sales still come from their physical store locations. Many factors that are out of Build-A-Bear Workshop's control can affect consumer traffic. One of these factors is the weather. For instance, management has stated that store sales have been impacted by bad weather historically.
Competition. Build-A-Bear Workshop operates in a highly competitive environment characterized by low barriers to entry. Build-A-Bear Workshop competes with a diverse range of competitors. Because they have mall-based locations, they view their competitors as other retailers vying for prime mall locations. As a retailer whose signature product is a stuffed animal typically purchased as a toy or gift, they also compete with big-box retailers, toy stores, and manufacturers that sell plush toys. And since they offer their guests an experience as well as merchandise, they also view their competition as any company that competes for consumers' time and entertainment dollars, such as movie theaters, restaurants, amusement parks, and arcades. In addition, there are several small companies that offer "make your own" teddy bear and stuffed animal experiences in retail stores and kiosks.
Reasons to invest
There are also numerous reasons to invest in Build-A-Bear Workshop. One reason is the opening of new stores. Build-A-Bear Workshop experienced a net new unit growth of nine stores in 2022 and 37 stores in 2023. Build-A-Bear Workshop expects its net new unit growth to include at least 50 additional retail locations globally in 2024. Build-A-Bear Workshop anticipates that a significant portion of the growth in fiscal 2025 will stem from the opening of an additional 50 new locations. The reason that opening new stores is important for Build-A-Bear Workshop is that store visits are the most common first step in a customer's Build-A-Bear experience. Additionally, their top-tier store economics and independent research show a clear market opportunity for additional stores. Furthermore, once customers visit the stores, many sign up for the loyalty program. As a result, Build-A-Bear Workshop has loyalty club data for more than 80% of their customers.
Therefore, another compelling reason to invest in Build-A-Bear is its loyalty program. Once a customer signs up for the loyalty club, it enables Build-A-Bear Workshop to directly communicate more meaningfully with them, driving further engagement and repeat purchases. This communication can occur through various channels, such as the Build-A-Bear website, watching content, sending gifts, or visiting a store, including their numerous tourist locations, during their next family vacation. The data Build-A-Bear Workshop has on its loyal customers allows them to create an ecosystem around these specific customers, which should drive lifetime value. Management believes that the loyalty program provides a tremendous opportunity to continuously extend the lifetime value. One reason customers sign up for the loyalty program is the creation of the "Birthday Treat Bear" by Build-A-Bear Workshop. This special bear allows customers to pay their age for a stuffed animal during the month of their birthday. However, customers must be part of the loyalty program to take part in the birthday treat program, making it Build-A-Bear's primary acquisition tool for attracting customers to the loyalty program.
Leveraging the brand. Build-A-Bear is investing in leveraging the brand to drive incremental profitable growth. At Christmas time, they released Build-A-Bear's first-ever animated theatrical film, "Glisten and the Merry Mission," based on the characters and storyline of the multi-year, top-selling holiday plush collection. Management has expressed satisfaction with the audience turnout at theaters to watch the film. However, they view this as an integral component of a broader content strategy aimed at enhancing the company's customer-facing communications. By leveraging characters and engaging narratives, the strategy aims to boost awareness, engagement, affinity, and ultimately, sales. This approach proved successful, as it led to a remarkable increase of over 65% in Merry Mission product sales compared to the previous year. With the movie, management believes they have created an evergreen concept that they don't have to reinvent the marketing for the holidays every year. They expect Glisten and the Merry Mission to become a part of Build-A-Bear Workshop's annual holiday tradition.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,62, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 7,8% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on Build-A-Bear Workshop's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $31,17. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Build-A-Bear Workshop at a price of $15,59 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 69, and capital expenditures were 18. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 13 in our calculations. The tax provision was 14. We have 14,172 outstanding shares. Hence, the calculation will be as follows: (69 – 13 + 14) / 14,172 x 10 = $49,39 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Build-A-Bear Workshop's Free Cash Flow Per Share at $3,29 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $37,79.
Conclusion
I believe that Build-A-Bear Workshop is an intriguing company. I really like the management as well. Build-A-Bear Workshop has delivered impressive results since the pandemic, and the management anticipates another record year in fiscal 2025. Macroeconomics poses a risk for Build-A-Bear Workshop as customers may opt for more affordable alternatives in the event of a prolonged recession. Build-A-Bear Workshop relies on consumer traffic in the malls and tourist locations where they are situated, which is beyond the company's control. The popularity of malls may decline as more people opt for online shopping. Additionally, factors like weather can impact tourist destinations, as seen in the past with the effect on Build-A-Bear Workshop's sales. It is never pleasant to face a risk that the company cannot control, but I trust that management has conducted their due diligence on locations before opening a shop. Build-A-Bear Workshop competes with other companies for locations, consumer spending, and time, which means that competition will always be a risk for Build-A-Bear Workshop. Build-A-Bear Workshop plans to continue opening new stores, as visiting a store is the most common initial step in a customer's Build-A-Bear experience. Therefore, it is probable that more customers will visit a Build-A-Bear Workshop store in the future. Once customers visit the store, they are likely to sign up for the loyalty program. This enables Build-A-Bear Workshop to build an ecosystem around these specific customers, ultimately driving lifetime value. Finally, I really like the creative way that Build-A-Bear Workshop is leveraging its brand, as the movie significantly increased product sales. If Build-A-Bear Workshop manages to make this an evergreen event every Christmas, it could become a recurring event with high sales potential. I really like Build-A-Bear Workshop, and I believe that purchasing shares below the Payback Time price of $37 could be a sound long-term investment. However, Build-A-Bear Workshop is still a small company, so I wouldn't allocate too large a portion of my portfolio to it.
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