A R G U S R E S E A R C H C O M P A N Y • 6 1 B R O A D W A Y • N E W Y O R K, N.Y. 1 0 0 0 6
September 4, 2024
BUILD-A-BEAR WORKSHOP, INC.
(NYSE: BBW)
COMPANY HIGHLIGHTS
* A Driver of Mall Trafc: Build-A-Bear Workshop is a global brand that creates
unique consumer experiences and personalized relationships by marketing a wide
array of customized plush toys and accessories. We see Build-A-Bear Workshop’s
prime retail thrust driving planned and repeated trafc to malls, and fostering
favorable lease-renewal rates over time.
* Emerging Omni-Channel Capabilities: In recent years, Build-A-Bear has
utilized data and technology as part of a digital strategy that has enhanced the
in-store experience, enabled the capture of rst-party customer interaction data to
support customized, and unied marketing and loyalty programs. The strategy also
seeks to seamlessly integrate the company’s online presence with new products
and media content distribution. We think these initiatives represent a signicant
barrier to entry for potential competitors.
* Protable Across All Retail Segments: Build-A-Bear has achieved robust
operational results, with all of its North America retail stores being protable.
The average contribution margin is over 25% and there is a less than two-year
investment payback period. These results have driven higher returns on invested
capital compared with retail peers. The company also enhanced its supply-chain
processes, achieved warehouse, inventory and distribution efciencies, and lev-
eraged technology to unify multiple corporate functions.
KEY STATISTICS
EQUITY RESEARCH REPORT
PRICE CHART
COMPANY SPONSORED REPORT. SEE LAST PAGE FOR DISCLOSURES.
(continued on next page)
Based in St. Louis, Missouri, Build-A-Bear Workshop, Inc. is a global brand that
develops and markets a wide array of consumer focused toys and experiences through
more than 500 interactive brick and mortar locations, through an array of corporate-
ly-managed, third-party retail, and international franchise locations. The company
also markets its products through e-commerce/digital channels and is expanding its
brand beyond retail by creating engaging content through social media channels.
Key Stock Statistics
Recent price (9/3/24) $33.49
Fair Value Estimate $49.00
52 week high/low $34.80/$21.24
Shares outstanding (M) 13.6
Market cap ($M) 455.5
Dividend $0.80
Yield 2.4%
Sector Overview
Sector Consumer Discretionary
Sector % of S&P 500 10.0%
Financials ($M, as of 8/3/24)
Cash & Mkt Securities 25.2
Debt/Lease Liabilities 0/102.1
Working Capital 37.2
Current Ratio 1.5
Revenue (TTM) 483.4
Net Income (TTM) 50.1
Net Margin (TTM) 10.4%
Free Cash Flow Margin (%, FY23) 9.2%
Risk
Beta 1.53
Inst. ownership 86%
Valuation
P/E Forward EPS 8.9
Price/Revenue (TTM) 0.9
Price/EBITDA (TTM) 5.9
Price/BV 3.6
Top Holders
Pacifica Capital Investments LLC
Vanguard Group Inc.
BlackRock Inc.
Management
President/CEO Ms. Sharon Price John
CFO Mr. Voin Todorovic
COO Mr. Christopher Hurt
Company website www.buildabear.com
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EQUITY RESEARCH REPORT
* Expanding Footprint: In our view, Build-A-Bear is success-
fully expanding its operational footprint. It has an increasing
number of locations under an “asset light” model that utilizes
partner-operated and capitalized stores that enhance protability
and cash ow (with minimal operating capital risk) by selling
products at wholesale costs. The company also has international
franchise relationships, from which it receives sales royalties.
Many of these locations are at leading global tourist destina-
tions, as well as high-trafc international locations. We expect
more than 50 new locations to open in scal 2024.
* Robust Licensing Model: Build-A-Bear Workshop enhances
its visibility and organic growth by creating proprietary and
often-evergreen products and content, complemented by strong
licensing partnerships with over 75 world-class collaborators.
Its customer reach and focus has expanded to include adults and
collectors, who account for approximately 40% of end users, and
an increasing presence in the multibillion-dollar gifting category.
* Strong Balance Sheet: As of August 3, 2024, Build-A-Bear
Workshop had cash and cash equivalents of $25.2 million,
compared to $44.3 million at the end of scal 2023 (February
3, 2024), which we attribute to BBW returning $23.9 million
to shareholders through dividend payments and share repur-
chases. Since scal 2022, the company has returned more than
$100 million, and instituted a quarterly dividend (currently
yielding approximately 2.4%). Importantly, the company had
no borrowings on its revolving credit facility.
* Fiscal 2024 Outlook: The company’s scal 2024 guidance calls
for revenue growth in the low- to mid-single-digit range over
scal 2023, despite one less week in the 2024 scal year. It also
anticipates pretax income growth in the low-single-digit range.
* Fair Value: Based on the company’s strong fundamentals and
return of capital to its shareholders, we see the current valua-
tion of the shares, trading around 9-times our scal 2024 EPS
estimate of $3.75 and slightly below one-times our scal 2024
revenue estimate of 493 million, as considerably below what we
think is warranted, compared with a peer EPS multiple above
16-times. Applying a narrower discount to peers’ 13-times
multiple on our scal 2024 EPS estimate, we arrive at a fair
value estimate of $49 per share.
COMPANY/INDUSTRY BACKGROUND
Build-A-Bear Workshop was founded in 1997 and has since be-
come a globally recognized brand, delivering positive customer
experiences through its sale of nearly 250 million teddy bear and
animal friends and the associated store experiences. In 2024, the
PEER COMPARISON
company was recognized in Newsweek/Statista’s 2024 “Best of
the Best” list of American brands.
As of August 3, 2024, the company had 548 global locations,
through a combination of corporately managed, (direct-to-con-
sumer, 361), partner-operated retail, (wholesale, 107) and interna-
tional franchise (royalty, 80) models. All of these entities operate
under the Build-A-Bear Workshop brand. In addition to stores, its
products are sold on the company’s e-commerce sites, third-party
marketplaces and franchisee sites and through retailers’ wholesale
agreements.
In scal 2023, the company opened 37 new corporate and
partner-operated stores. It opened 23 new locations in the rst half
of 2024, leaving the company on track to achieve its target of more
than 50 new locations.
In our view, the Build-A-Bear experience is unique and sup-
portive of its premium market position, in that customers can create
their own products to feature customized sounds, scents, accessories
and names, each with a product birth certicate. Furthermore, in-
store products are stuffed in front of the customer, creating a very
personalized experience that we think represents signicant barriers
to entry for potential competitors. We believe these features differ-
entiate Build-A-Bear products from peers including Vermont Teddy
Bear, Funko and Ty, as well as more general toy manufacturers
including Mattel, Hasbro, Lego, Ganz, and Steiff.
Importantly, the Build-A-Bear Workshop experience is atyp-
ical among retailers, as it tends to be a driver of mall trafc, rather
than being reliant upon it for its sales. According to company exit
surveys, it estimates that up to 80% of its store visits are planned
as a special trip. In scal 2023, for the third consecutive year, all
of its retail stores in North America were protable on an EBIT
basis, with an average contribution margin over 25%, which has
more than doubled since 2012.
Over time, the company has optimized its location footprint,
thus achieving superior sales per square foot. In scal 2023, aver-
age net retail sales per store were nearly $1.3 million, more than
double the $0.6 million of scal 2020, which marked the start of
the COVID-19 pandemic. We believe these factors will provide
ongoing leverage in negotiating favorable lease terms with mall
operators, since company locations tend to drive trafc to other
stores in the malls in which they operate.
Also, the company is successfully diversifying its revenue
base with the emergence of new channels, including e-commerce,
third-party, and franchising, which has resulted in more than 35%
of its locations being located outside of traditional malls.
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Recent 52-Week 52-Week Mkt. Cap 1-yr Price 1-yr Rev 1 YR EPS
Company Ticker Price ($) High ($) Low ($) ($MIL) Change (%) Growth (%) Growth (%) P/E Ratio Beta Yield (%)
BUILD-A-BEAR WORKSHOP INC NYSE: BBW 33.49 34.80 21.24 455 29 4 19 9.2 1.53 2.4
HASBRO INC NASDAQ: HAS 67.26 73.58 42.66 9377 -7 -15 NM NM 0.60 4.1
MATTEL INC NASDAQ: MAT 18.70 22.37 15.87 6356 -16 0 NM 31.2 0.80 NA
1-800-FLOWERS.COM INC NASDAQ: FLWS 7.53 11.42 5.98 484 15 -9 NM NM 1.62 NA
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EQUITY RESEARCH REPORT
We view Build-A-Bear’s brand as a key value driver, and
think that recognition among North America’s most-inuential
retailers, as recently recognized by brand analytics platform BAV,
and by Newsweek, as mentioned earlier, underscores the customer
experience that has been cultivated. In our view, this visibility and
growth has been supported by Build-A-Bear’s emergence as a co-
brand, with a strong licensing portfolio of more than 75 world-class
collaborators and licensees, many of which are pop culture icons
such as Harry Potter, Pokemon, and Star Wars, among others.
While licensed products have supported the growth of the
Build-A-Bear brand, we note that a majority of its product mix
consists of core, evergreen products that have an established track
record of customer acceptance. That said, the company continues
to innovate its mix, most recently introducing a smaller line of
products called Mini Beans, which carry a lower price than a full
size bear but are, in many cases, based on established characters.
We think this opens up new opportunities to introduce the brand
to additional customers over time, and to launch through partner
channels.
In recent years, Build-A-Bear Workshop has also diversied
through its use of data and technology to provide customers with
value-added sales channels, new products and media content
distribution. In our view, this digital transformation has enabled
the company to broaden its consumer base beyond the traditional
children’s demographic, to be more multi-generational and achieve
penetration among teens and adults as well, who currently repre-
sent approximately 40% of its customers. This user base has been
expanded to include collectible enthusiasts, corporate gifting and
brand building, among other groups.
Importantly, these relationships and co-branded products
retain the essence of the Build-A-Bear brand while appealing to the
licensor’s fans who tend to be in an older targeted demographic. We
estimate that licensing activity impacts more than one-third of its
total business. We also see licensing supporting a premium-pricing
model that enables Build-A-Bear Workshop to maintain and, in
some cases, expand its product gross margin.
Through its third-party retail model, partner companies bear
the cost of workshop build out and operation, while Build-A-Bear
Workshop sells them inventory on a wholesale basis. Revenue
from the commercial segment increased by approximately 37%
in scal 2023, following a 60% increase in scal 2022. While
currently accounting for a modest 5% of Build-A-Bear’s scal
2023 revenues (6% in the rst half of scal 2024), we view the
protability of these locations, the minimal capital requirements
and their high margins as accretive to Build-A-Bear’s cash ow,
which supports its capacity to invest across the business.
We are encouraged by the strategic partnerships in this seg-
ment to date, with such leading hospitality vendors as Carnival
Cruise Line, Great Wolf Lodge Resorts, Six Flags, and Kalahari
Resorts. These relationships enable Build-A-Bear to drive engage-
ment in additional markets, particularly among tourists. Similarly,
we note that some recently opened locations, both company-man-
aged and partnered, have been in strong tourist-attracting cities,
including Las Vegas, New York City and Chicago, among others.
Lastly, the company is expanding its presence globally, both
under company owned and franchising models. Under the franchise
model, Build-A-Bear can produce solid returns on capital from
product royalties, with modest direct investment required. To date,
it has entered markets including England, China, India, Ireland,
and Columbia. Since September 2023, six locations have opened
in six cities across Italy and an initial location in Paris, France.
We like the penetration into continental Europe, which we view
as potential high-growth opportunities over time.
INVESTMENT THESIS
In fiscal 2023, revenues increased by approximately 4%, as
Build-A-Bear navigated several retail sector challenges, related
to inclement weather and consumer spending trends, as well as
slower e-commerce sales due to the revamping of its website and
other technology-driven issues. Despite near-term choppiness, we
see Build-A-Bear executing its growth strategy by maintaining
sufcient capital to invest in growth initiatives, while expanding the
brand’s global footprint and returning capital to shareholders. For
scal 2024, the company expects to achieve its fourth consecutive
record year for revenues and pre-tax revenue.
In our view, the company’s strong fundamentals are driven by
its ability to capture rst-party customer data during its interactions,
including customer demographics (with an estimated 85% capture
rate among store visitors). BBW leverages this data to offer new
and personalized loyalty club and marketing programs to drive
lifetime engagement. We believe such capabilities support store
trafc growth, even during periods of softness seen across the retail
sector.
Between scal 2012 and 2021, Build-A-Bear was able to
leverage its brand value and pricing power with co-developed
product tie-ins to produce a 50% increase in average dollar per
transaction (to over $53 from $35). Over the last two years, how-
ever, the company has seen retail trafc supported by marketing
promotions that tend to result in lower average revenue per trans-
action over the short-term. But they are a key customer acquisition
and marketing tool to drive loyalty club expansion and return trafc
that has consistently remained ahead of national store trafc rates,
and ultimately lead to increased total revenue.
These marketing programs include the company’s loyalty
club’s Count Your Candles program and the sale of Birthday
Treat Bears, where a customer can purchase a bear for the age
they are turning. We see these programs supporting customer
acquisition and lifetime engagement with the brand, thus driving
future purchases. We also see in-store parties as part of the in-store
and customer acquisition experience, though parties have been a
more-modest contributor to company growth since the COVID-19
pandemic.
Overall, we think that BBW’s inventory management is an
under-appreciated aspect of its broader execution, as its vertical
retail model provides exibility in its inventory management to
help drive higher margins. Build-A-Bear Workshop is able to test
new products in various channels, including e-commerce, before
introducing them to its physical store locations
The company is also diversifying its sourcing factory foot-
print and ships product directly from its stores, leveraging its store
xed costs to serve as distribution centers for online orders, while
utilizing technology to determine optimized shipping routes. We
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EQUITY RESEARCH REPORT
note that the company tends to realize swift redemptions of gift
cards, with many customers spending more than the value of the
redeemed gift card. In addition, it sees below industry-average
product returns, given the ubiquitous sizing of many of its items.
We believe these trends contribute to effective inventory manage-
ment.
In addition to the favorable in-store operating metrics, we
believe that Build-A-Bear Workshop remains in the early-stages
of driving additional organic revenue growth through its emerging
digital and omni-channel approach. In recent years, the company
has made signicant investments in its IT infrastructure, including
its e-commerce business that experienced softness in scal 2023,
but has shown increased demand in recent months and remains
well above pre-pandemic levels. We are encouraged by BBW’s
investments to optimize its omni-channel integration, which has
improved its position in organic search results, among other en-
hancements. We also note that ecommerce activity often results
in store trafc and purchases, supporting the integrated approach.
Beyond traditional e-commerce, we have a positive view of
Build-A-Bear’s digital transformation that is integrating its prod-
ucts into new mediums and digital channels to further expand the
company’s marketing and customer engagement ecosystem. The
company leverages its social media platform to generate incremen-
tal annual media impressions. Recent programs include its After
Dark product line, Baby Yoda (Star Wars) and a its partnership
with Axion Space to y a teddy bear named GiGi into space along
with a team of astronauts. Most recently, BBW cited a PR/media
campaign that generated an estimated 285 million impressions
and a viral event for its Pumpkin Kitty launch, capitalizing on its
Hello Kitty tie-in.
For the 2023 holiday season, Build-A-Bear produced its
rst animated feature, based on its seasonal Glisten and the Merry
Mission collection, which has generated more than $150 million
in revenue since its 2014 launch. The lm was released digitally
on streaming devices and in limited theatrical release through a
partnership with movie chain Cinemark, with tie-in merchandise
and movie tickets in various co-located U.S. malls. Ahead of the
movie’s release, Build-A-Bear cited more than 4 billion social me-
dia impressions, and the company introduced its rst animatronic,
interactive bear based on the movie’s characters. The movie was
also supported by the launch of a gaming app, music videos, a
tie-in with a Roblox game, and other integrated features that we
see highlighting the capabilities of its omni-channel strategy.
RECENT DEVELOPMENTS
Build-A-Bear Workshop shares are listed on the New York Stock
Exchange (NYSE) under the symbol “BBW”. In 2023, the stock
declined by 4%, compared with a 24% increase for the S&P 500.
Year-to-date in 2024, the stock has risen 46%, versus an increase
of 17% for the S&P 500.
In August 2024, Build-A-Bear reported results for the second
quarter of scal 2024, which was highlighted by a 2.4% increase
in revenues and a 10% increase in pre-tax income from higher
gross margins and expense controls. Earnings per share came in
at $0.64, compared with $0.57 in the year-ago period, marking
the company’s most-protable second quarter in its history. Im-
portantly, Build-A-Bear reiterated its full-year outlook for scal
2024, calling for revenue growth and pretax income growth in the
mid-single-digit range, compared with the non-GAAP, normalized
52-week scal 2023.
In August 2024, Build-A-Bear Workshop introduced an ex-
clusive Fiftieth Anniversary Hello Kitty
®
make-your-own plush,
and plans for a rst-of-its-kind Workshop location in the prestigious
Westeld Century City in Los Angeles, designed in collaboration
with Sanrio
®
, the parent company of Hello Kitty
®
and Friends.
In July 2024, Build-A-Bear Workshop announced the opening
of a new workshop on Chicago’s Magnicent Mile, housed within
the historic Wrigley Building.
In 2024, Build-A-Bear was recognized among Newsweek/
Statista’s 2024 “Best of the Best” list that recognizes brands that
excel in customer experience across a range of metrics, including
brand image and overall customer trust, joy of use, and customer
service.
In May 2024, Build-A-Bear announced an in-store collabora-
tion with Paramount Pictures to celebrate its feature lm, IF, which
included the transformation of three company-owned locations to
feature movie imagery and related promotions. This included an
in-store heart ceremony by creator, writer, director and star John
Krasinski.
In May 2024, Build-A-Bear launched a new TV advertising
commercial showcasing its “The Stuff You Love” campaign,
highlighting the in-store experience for its customers.
In March 2024, Build-A-Bear disclosed the opening of a
second retail location in continental Europe, in Rome. During
scal 2023, a store was opened in Milan.
In March 2024, Build-A-Bear’s board of directors authorized
a quarterly dividend program, consisting of a $0.20 per share
payment, which yields approximately 2.5% at recent levels.
In early 2024, Build-A-Bear launched its new “Mini Beans”
collection of hand-held sized furry friends, inspired by many of its
traditional styles. Through the second quarter of scal 2024, BBW
has cited having sold more than 1.5 million units since launch.
EARNINGS & GROWTH ANALYSIS
We forecast scal 2024 revenues of $493 million and scal 2025
revenues of $515 million, which would represent growth of 1%
and 4%, respectively, compared with scal 2023’s $486.1 million.
We note that scal 2024 is 52 weeks long, compared with the 53
weeks of the prior scal year.
We expect 2024 revenue growth (1% decline in 1H24) will
accelerate in the second half, consistent with the company’s outlook
as new locations open throughout the year and new holiday-themed
products ramp up (including Halloween, for which Build-A-Bear
has signaled encouraging launch feedback). We also anticipate
improvement from e-commerce channels, which saw lower sales
in scal 2023, but still drive trafc to its stores as part of its om-
ni-channel strategy.
We expect commercial revenues (which currently represent
only 6% of total revenues) to increase at a higher percentage rate
than company-owned stores, as we expect a majority of new store
openings across scal 2023 and 2024 to fall under this model. Over
the long-term, we think that global location footprint could rival
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EQUITY RESEARCH REPORT
the U.S. presence, given the ample room for growth and market
acceptance, though we note that the partner model would account
for different revenue structures compared with company-operated
locations.
In our view, the company is well positioned to maintain its
gross margins near scal 2023 levels above 54%. This compares
favorably to the 40%-45% prior to the COVID-19 pandemic, as
Build-A-Bear has realized efciencies in its retail footprint, and
leveraged its xed occupancy costs across an expanding revenue
and merchandise base, which has helped to offset higher depreci-
ation expenses. We forecast gross margins of 54.6% in scal 2024
and scal 2025, though we see potential for some volatility from
freight costs amid geopolitical conicts globally.
We expect operating expenses to remain somewhat elevated
compared to scal 2023, as Build-A-Bear invests in its digital
infrastructure and marketing for long-term growth, and navigates
the impact of ination in the retail channel, particularly from higher
labor costs. We expect that the company’s margin prole will be
enhanced by expansion of its partner-operated model, which sells
products at wholesale, but requires minimal internal resource allo-
cation besides product inventory. In scal 2023, SG&A expenses
were 40.9% of total revenues, compared to 39.3% in scal 2022.
We anticipate comparable SG&A expenses as a percentage of
revenues around 41% in scal 2024, and foresee a moderation
to 40.5% in scal 2025, driven by expansion of the asset-light
partnered location model.
Based on an estimated depreciation and amortization expense
of around $15 million in scal 2024 and scal 2025, we project
scal 2024 EBITDA of $82.4 million and scal 2025 EBITDA of
$87.6 million, compared with $79.1 million in scal 2023.
We forecast pretax income growth of 3% for scal 2024 and
8% in scal 2025, compared with 7% in scal 2023. We project
earnings per share of $3.75 in scal 2024 and $4.02 for scal 2025.
That would represent 3% growth from scal 2023’s $3.65 (10%
growth over adjusted scal 2023 EPS of $3.42, which excludes a
one-time tax allowance that boosted scal 2023 results) and 7%
growth in scal 2025.
Despite some variability, we forecast a tax rate around 25%
in scal 2024 and 26% in scal 2025. With approximately 13.6
million shares currently outstanding, which has been supported by
share repurchases, we believe Build-A-Bear Workshop has inherent
earnings growth leverage.
FINANCIAL STRENGTH & DIVIDEND
Our nancial strength rating for Build-A-Bear Workshop is High.
At August 3, 2024, the company had $25.2 million in cash and
equivalents, compared with $45.3 million at the end of scal 2023
(February 3, 2024). We attribute the decline to BBW’s return of near-
ly $24 million to shareholders from dividends and share repurchases
in the rst half of the scal year. Working capital was $37.2 million,
resulting in a current ratio of near 1.5. Importantly, the company had
no borrowings outstanding on its revolving credit facility.
As of August 3, 2024, inventory was $67 million, up from
$66.3 million in the year-ago period. Over the past few years,
inventories have been managed to avoid potential supply-chain
disruptions amid higher freight costs (heightened by geopolitical
conicts), and while preparing for new store openings. Given its
strong balance sheet and working capital position, Build-A-Bear
seems well positioned to manage its inventory levels, particularly as
distribution and inventory levels can uctuate when partner-driven
locations stock and then replenish their inventories over time.
In scal 2023, capital expenditures were $18.3 million and
depreciation and amortization amounted to $13.7 million. In our
view, Build-A-Bear Workshop is sufciently capitalized to invest
in capital expenditures as it grows its business. We expect near-
term capital expenditures to remain around current levels, with a
focus on growth and technology investments, over those aimed at
store maintenance. In scal 2023, Build-A-Bear incurred $13.7
million in depreciation and amortization expense, up from $12.5
million in scal 2022. We expect such expenses to rise to around
$15-$16 million in scal 2024 and scal 2025.
We view Build-A-Bear Workshop as well positioned to
maintain robust free cash ow that enable continued investments
and capital returns to its shareholders. We think that the company
has generated superior returns on invested capital compared to its
retail peers, which is underappreciated by investors.
Over the past three years, Build-A-Bear has returned more
than $100 million to its shareholders, through the issuance of spe-
cial dividends, share repurchases, and, most recently, the initiation
of a regular dividend policy. The company paid special one-time
dividends of $1.50 and $1.25 per share in scal 2023 and scal
2021, respectively. In March 2024, it initiated a quarterly dividend
of $0.20 per share, which represents an annualized yield around
2.4% at the company’s recent stock price.
In scal 2023, Build-A-Bear Workshop used $20.4 million
to repurchase shares. In the rst half of scal 2024, the company
used $18.2 million to repurchase more than 685,000 shares, and
an additional $1.7 million to repurchase 63,667 shares following
the end of 2Q. As of August 3, 2024, Build-A-Bear was nearing
completion ($6.2 million remaining) of its current $50 million
stock-repurchase program.
With approximately 13.6 million shares outstanding, we note
that the company has repurchased more than 5% of its outstanding
shares year to date in scal 2024, and approximately 15% since
the end of scal 2021.
In scal 2023, net cash provided by operating activities was
$64.3 million ($47.3 million provided in scal 2022). Cash used in
investing activities in scal 2023 amounted to $18.3 million ($13.6
million used in scal 2022). Cash used by nancing activities in
scal 2023 was $43.9 million ($25.1 million used in scal 2022)
MANAGEMENT
Sharon Price John has served as Build-A-Bear’s president and
chief executive ofcer (CEO) and was appointed to the board of
directors in June 2013. Previously, Ms. John served as president
of children footwear designer and marketer Stride Rite Children’s
Group. Earlier in her career, she had held various roles of increas-
ing responsibility at multi-national toy company Hasbro, Inc. and
Mattel Inc., and founded and served as CEO of Checkerboard Toys
and as vice president of the U.S. toy division at VTech Industries,
Inc. She also serves on the Board of Directors of Jack in the Box
Inc., a publicly traded restaurant company.
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EQUITY RESEARCH REPORT
Voin Todorovic has served as Build-A-Bear Workshop’s
chief nancial ofcer (CFO) since September 2014. Previously,
Mr. Todorovic served as the head of nance and operations for the
Lifestyle Group of global footwear and apparel company Wolverine
Worldwide, Inc. His experience also includes executive leadership
roles at brands such as Stride Rite, Collective Brands, Inc. and
Payless ShoeSource.
Build-A-Bear’s board of directors includes six independent
directors of the seven total members, which we view favorably for
its corporate governance.
RISKS
Risks to an investment in Build-A-Bear Workshop include its
sensitivity to discretionary spending by consumers, which can
be affected by economic conditions including ination, levels of
employment and consumer condence and weather related issues
that can reduce store trafc or result in closures; protability that
can be impacted by supply chain issues such as freight costs and
inventory transportation availability; demand from and continuity
in relationships with brand licensors for its co-branded products
and experiences; and reliance upon maintaining an available
e-commerce platform to test various products and direct consumer
trafc. Lastly, we note that Build-A-Bear Workshop does not own
or operate its production factories and that in recent years, the
company has purchased 77% of its merchandise from ve vendors,
which represents some concentration risk.
VALUATION
Since 2023, the shares have traded in a range between $21.24 and
$34.80, and are currently trading near the high end of the range. We
are encouraged by Build-A-Bear reiterating its full-year outlook
amid challenging retail market conditions and by its robust share-
holder capital-return strategy, which we see supporting investor
condence in the company.
Despite its robust stock performance year-to-date, increasing
by more than 45%, the shares continue to trade below a basket of
leisure-product peer companies that includes toy makers Mattel
and Hasbro, among others. This is based on various metrics,
including forward P/E (around 9-times our 2024 EPS estimate
versus more than 16-times for the peer group), Enterprise Val-
ue-to-Revenues (below 1-times versus 1.2-times), and EV/EBIT-
DA (5.2-times, including its lease liabilities [6.2-times, excluding]
versus 8.7-times).
We believe the company’s pricing power as a premium brand
can be impacted by broader measures of consumer sentiment and
macro-economic factors, such as the company experienced during
the fourth quarter of scal 2023, which, along with costs associ-
ated with operating its corporate-managed store footprint, does
represent some risk during declining economic periods. That said,
over the past three years, the company has successively produced
its best periods since inception.
That said, the current valuation does not, in our opinion,
appropriately reect Build-A-Bear Workshop’s long-term organic
revenue growth, margin expansion, proprietary media creation,
superior inventory management, strong balance sheet, and com-
mitment to returning capital to investors. Additionally, we think
the company is poised to continue expanding its footprint, with
additional store openings planned, further supporting its revenue
growth prospects.
While we foresee some of these challenges persisting over
the near-term, we expect the labor market will remain tight and the
company will continue to leverage its premium market reputation,
which we believe warrants a valuation closer to this market peer
group.
Thus, we apply a multiple of 13 to our 2024 EPS estimate of
$3.75 to arrive at a fair value of $49, compared with current levels
around $33.50.
Steve Silver,
Argus Research Analyst
A R G U S R E S E A R C H C O M P A N Y • 6 1 B R O A D W A Y • N E W Y O R K, N.Y. 1 0 0 0 6
EQUITY RESEARCH REPORT
INCOME STATEMENT
Growth Analysis ($MIL) FY 2021 FY 2022 FY 2023 Q1 2024 Q2 2024 Q3 2024E Q4 2024E 2024E Q1 2025E Q2 2025E Q3 2025E Q4 2025E 2025E
Revenue 411.5 467.9 486.1 114.7 111.8 114.6 152.0 493.1 119.5 116.8 119.4 159.3 515.0
Gross Profit 218.0 245.9 264.4 269.0 281.0
SG&A 167.7 183.9 199.0 201.8 208.7
Operating lncome 50.3 61.9 65.4 67.2 72.4
EBITDA 62.6 75.0 79,1 18.3 15.0 15.5 33.6 82.4 19.9 16.3 16.3 35.0 87.5
Net Interest 0.0 0.0 0.8 1.0 1.0
Pretax Income 49.4 61.9 66.3 15.0 11.5 11.8 29.8 68.1 16.4 12.8 12.8 31.5 73.5
Tax Rate (%) 23 24 22 25 26
Net Income 38.3 47.0 52.8 51.0 54.3
EPS ($) 2.37 3.08 3.65 0.82 0.64 0.65 1.64 3.75 0.90 0.70 0.70 1.72 4.02
Diluted Shares 16.1 15.2 14.5 13.7 13.5
Dividend Per Share ($) NA NA NA 0.80 0.80
Growth Rates (%)
Revenue 61 14 4 1 4
Operating Income NM 23 6 3 8
Pre-Tax Income NM 25 7 3 8
Net Income NM 30 12 NM 6
EPS NM 23 19 3 7
Valuation Analysis
Price ($): High 23.50 26.87 30.49 NA NA
Price ($): Low 4.65 12.47 17.85 NA NA
PE: High NA 11.3 9.9 NA NA
PE: Low NA 5.3 5.8 NA NA
PS: High 1.5 1.0 0.9 NA NA
PS: Low 0.3 0.5 0.6 NA NA
Yield: High NA NA NA NA NA
Yield: Low NA NA NA NA NA
Financial & Risk Analysis ($MIL)
Cash 32.8 42.2 44.3 NA NA
Working Capital 32.6 46.2 44.0 NA NA
Current Ratio 1.3 1.5 1.5 NA NA
LTDebt/Equity (%) NA NA NA NA NA
Total Debt/Equity (%) NA NA NA NA NA
Ratio Analysis
Gross Profit Margin 53.0% 52.5% 54.4% 54.6% 54.6%
Operating Margin 12% 13% 13% 14% 14%
Net Margin 9% 10% 11% 10% 11%
Return on Assets 11.9% 14.2% 14.8% NA NA
Return on Equity 58.7% 45.1% 42.5% NA NA
Op Inc/Int Exp NM NM NM NM NM
A R G U S R E S E A R C H C O M P A N Y • 6 1 B R O A D W A Y • N E W Y O R K, N.Y. 1 0 0 0 6
EQUITY RESEARCH REPORT
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