Build a Position in Build-a-Bear?

 | Jun 19, 2012 | 2:30 PM EDT
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Most of us became familiar with retailer Build-a-Bear Workshop (BBW) several years ago when it was getting loads of attention for its unique approach to toys. The stock was trading for nearly $30 a share as its create-your-stuffed-animal concept was impressing consumers looking for a unique toy or gift idea.

Build-a-Bear has had a difficult time of late. But that difficulty has been over exaggerated in a valuation that now allows investors to buy a good, decent business at a fantastic price. Shares now trade just above $4, valuing the company at just under $70 million. Net out the $36 million in net cash on the balance sheet and this debt-free business that once was valued as high as $500 million is being offered for a little more than $30 million.

At the current EV of $33 million, BBW is swapping hands for less than 2x EV/EBITDA. This is low by all retailing metrics. Struggling retailer Best Buy (BBY) is trading at EV/EBITDA multiple that is nearly 50% higher than Build-a-Bear. And a children-themed retailer like Children's Place (PLCE) has a multiple of nearly 6. Given the fact that Build-a-Bear's valuation has dropped the company to micro-cap status, it has fallen off the radar of many investment funds who normally would load up on such a cheap business if only the market cap were bigger. So Mr. Market has created an opportunity for the more nimble, smaller investor.

But a low multiple is meaningless without a catalyst to growth. BBW seems to be seeing the missteps of the past and is working to correct them. First, growth for growth's sake is no more. The enormous fanfare showered on the company's unique concept led management to aggressively expand the store count. This led to clustered locations that cannibalized one another. The company plans to shut down 15-20 of its stores in North America against four to six new store openings. On the international front, the company plans to franchise 10 locations, which from an operational perspective are pure profit.

Since 2007, BBW has reported declining same-store sales every single year and revenues plateaued in 2009 at $400 million. Clearly expansion has not been successful and the goal of fewer, yet more profitable locations is a welcome change. For a retailer the business has a decent moat. For once, the threat of online competition is minimal as the experience of creating your own toy is what the company is all about.

Management is also has incentives.CEO Ben Clark owns 10% of the shares, while other senior executives own 5%. Additionally, value fund BML Investment Partners owns 13% and in April 2011 BML got a board seat. Since then BML has bought more stock in the open market.

A successful resurrection with a return to sales growth is probably worth a doubling, if not tripling of the stock price. And 2012 will be a clean-up year, but at current prices, the upside potential vastly overcomnsates for any potential short-term hiccups.



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