Is Build-A-Bear A Value Trap?

Build-A-Bear (BBW) isn’t a popular stock.

Heck, it ranked 19th out of 35 in searches by financial pros for specialty retailers.

But this tiny company kept popping back up on our scanners over and over.

Especially since it jumped over 600% in 2021!

Normally, that would be a sign the stock is overbought.

But then we started digging into the company’s financials and growth plans.

What we found paints a pretty bullish picture for the company.

Build-A-Bear’s Business

BBW doesn’t have a complicated business model.

The company sells teddy bears and other stuffed animals and characters.

People like them because they enjoy going to their workshops, or online, and designing their custom-tailored stuffed animals, selecting everything from their outfits, scents, sounds, and outfits.

In 2013, the company embarked on a transformation as sales stagnated.

Without getting too deep into the financials yet, management delivered on their promises.

While Build-A-Bear’s brand centers on women and tweens, they actually have a pretty broad customer base.

In 2021, BBW focused three key areas:

With strong branding and name recognition, BBW’s growth relies on enhancing the customer experience while expanding where they reach consumers.

Like many retailers, digital transformation has become essential as malls become less frequented. Instead, the company is partnering with Ntanix to create an interactive online shopping experience as well as pivoting to locations in hotels and resorts.

Financials

As we noted earlier, BBW embarked on a skillful transformation that expanded margins and improved shareholder return starting in 2013.

You can see how earnings turned positive in 2014, only going negative in 2018 and 2020 as margins compressed.

Otherwise, the company has done remarkably well with it hitting its best margins in the last 12 months.

That’s also led to its best cash flow since 2013.

Considering the turnaround in the last year, it’s not hard to see why shares have skyrocketed.

We also want to note that BBW announced a $1.25 special dividend back in November that paid out in late December as well as a $25 million stock buyback plan.

Lastly, BBW holds just shy of $50 million in cash on its balance sheet with no long-term debt and only $82.7 million in capital leases.

That leaves management with strong financial leverage to invest in the company’s future.

Valuation

Despite shares sextupling in the last year, valuations for the company still look attractive.

We like that the forward Non-GAAP P/E is below the current TTM non-GAAP P/E, as analysts expect revenue to grow from $393.4 million (estimated) this year to $431.64 million the following year, or a 9.7% increase.

With a price to cash flow of 11.69x, growth just south of 10% is still extremely attractive.

Our Opinion – 9/10

Despite its tiny size, BBW has an incredible business that we believe can be leveraged for serious future growth.

That said, shares could easily pull back to $15 (currently trading over $20). So understand this stock comes with high volatility.