BUILD-A-BEAR WORKSHOP INC BBW
June 22, 2010 - 3:04pm EST by
andreas947
2010 2011
Price: 7.50 EPS $0.00 $0.00
Shares Out. (in M): 20 P/E 0.0x 0.0x
Market Cap (in $M): 150 P/FCF 5.5x 4.5x
Net Debt (in $M): -53 EBIT 0 0
TEV ($): 100 TEV/EBIT 0.0x 0.0x

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Description

 

Build-A-Bear Workshop (BBW)

BBW is a specialty retailer of make-it-yourself stuffed animals primarily for children ages 3 to 12 years old located mostly in malls in North America and Europe.  The company has 291 company-owned stores in North America, 54 company-owned stores in Europe, and 65 franchised stores internationally.  Stores average about 2,800 square feet.  The company is the 9th largest toy retailer in North America.  BBW has a current market valuation of about $150m ($7.50 per share x 20m shares), no debt, and $53m in net cash for an Enterprise Value (EV) of $100m.  BBW generates very substantial amounts of cash flow.  Cash from operations (CFO) was $56m in FY07, $24m in FY08, and $24m in FY09.  LTM CFO has risen to $34m and LTM capital expenditures are $8m. 

We expect BBW to generate free cash flow of approximately $18m to $20m in FY10 for an unleveraged FCF yield of 18% to 20%.  We think BBW is in the early stages of a turnaround which could drive profits and free cash flow higher over the next few years.  BBW has a very solid balance sheet with a net cash position of $53m as of 4/3/10.  Due to strong free cash flow generation we expect this net cash position to grow during FY10 and FY11 (mostly in Q4 which is the major quarter for EBITDA and cash generation).

BBW sells a discretionary product and has struggled with sales during the economic downturn.  Comp store sales have been in a long slide with comps for North American stores of -9.9% in FY07, -14% in FY08; and -13% in FY09.  BBW undertook an aggressive expansion plan opening 35 stores in FY06, 50 stores in FY07, and 25 stores in FY08 and paid the price with awful comp store sales and financial results.

During FY09 CEO Maxine Clark (largest shareholder with 13%) and her management dramatically reduced overhead (by $25m) and capital expenditures (by $14m) to build cash and maintain a strong balance sheet.  They also implemented a focused strategic plan (see below) which includes product innovation, cost engineering, and tighter integration of product launches, marketing, and store operations.  Pricing has also been shifted to more of the value-orientation which today's consumer requires.  The result has been gradually improving comp stores sales results - it would have been hard for them to get much worse - and a possible glimmer of hope in Q1 of FY 2010 with positive comp store sales in North America (+1.9%) for the first time in 17 quarters.

We think BBW's franchise is unique and viable and reaches a large and attractive customer base.  We think that management has at least stabilized the steep sales declines with its cost reductions and more focused strategy.  We believe BBW is being heavily discounted by the market.  We think BBW could achieve EBITDA for FY10 of $30m without a dramatic economic recovery.  BBW currently trades at about 25% of LTM revenue, 3.3x our estimate of FY10 EBITDA and an 18% to 20% FCF yield on our estimate of FY10 FCF of $18m to $20m.

Strong Free Cash Flow

BBW has modest working capital needs with few receivables and high inventory turns.  The Company does close to $400m in annual sales with $45m to $50m of inventory (see Quarterly Balance Sheets below).  Since FY09 management has sharply curtailed new store growth (only one or two new stores expected in FY10) to optimize the comp store sales and profitability of the existing store base.  Capital expenditures have come down significantly from $32m in FY 07 and $22m in FY08 to only $8m in FY09 and $12m estimated in FY10.  With D&A expense estimated at $28m for FY10, BBW is generating significant amounts of free cash flow.  Cash from operations was $56m in FY07, $24m in FY08 and FY09 - despite the slow economy - and we expect $30m to $32m for FY10.  Our free cash flow (cash from operations less capital expenditures) estimate for FY10 is $18m to $20m or almost $1 per share.

 

Strong Balance Sheet and Growing Net Cash Position

The Company's net cash position has been consistently improving on a year-over-year basis (see Quarterly Balance Sheets below).  BBW's Q1 net cash position was $53m as compared to $34m for Q1 prior year.  We think BBW could end FY10 with a net cash position of $75m to $80m or $3.50 to $4 per share (FY09 ended with $60m of net cash or about $3 per share).

We believe BBW's strong balance sheet provides good downside protection and gives the company the flexibility to emerge from the current downturn as one of the survivors in a stronger competitive position.

Trades at A Large Discount to Replacement Cost

We believe the replacement cost of BBW's 345-store chain is at least $200m or 2x the current EV.  BBW has attractive positions in most major malls in North America.  From 2005 to 2009, BBW (which already had 170 stores) spent $155m in capital expenditures and an additional $39m for an acquisition of 40 stores located in the U.K. (about $1m per store).  Today BBW has an EV of about $100m or about $280k per store or roughly half this recent investment.   Some of these capital expenditures were ill-advised and do not earn their cost of capital but we think the large investment in its store network is a significant competitive advantage for BBW going forward.  And we are purchasing it at a very large discount to its replacement cost.

We believe it costs about $500k net of allowances to open a new store plus at least $100k in working capital for a total investment of about $600k per store.

Retailers are criticized as investments because they are easy to duplicate.  However, when you purchase a viable chain at more than a 50% discount to its replacement cost, you should have significant advantage.  BBW most certainly sells a discretionary product, but it has a limited amount of direct competitors and there are very few toy retailers residing in malls today.

Focused Strategic Plan in FY10

In recent years BBW has exited tangential activities (Ridemakerz LLC and Friends 2B Made LLC) and taken write-downs in order to focus more completely on its core retail operations.  The Company focused on reducing costs and capital expenditures in FY09.  In FY10 management is seeking to drive top line growth and profitability.  Management is focused on driving profitable growth at the current base of stores rather than expanding the store base and we think this makes a lot of sense.  Management is using five key strategies to do this.  These include:

  • 1) Product innovation to improve the design and value of animals and increase size of product launches.
  • a. strong results in Q1 with limited edition animals to drive urgency;
  • b. well-coordinated with clothing & accessories to drive average transaction value;
  • c. worked with vendors to reduce cost of animals;
  • d. averaging about one new product launch per month and most of these are limited editions;
  • e. Q1 themes included i-Carly Bear in January, Be Mine Dalmation in February, and Blossom Bunny and Easter Chick for Easter in March;
  • 2) Fully integrate product, marketing, and store operations to create a strong sense of urgency for each launch
  • a. one product statement supported by one focused message and one strong promotion to drive sales and traffic;
  • b. own "must win" periods of holidays and times when kids are out of school and in malls;
  • c. gifts with purchase - e.g., Easter basket and candy, crown, sound;
  • d. strong visual impact of merchandise at lease line;
  • 3) Selectively adding complementary interactive-type toys like Zhu-Zhu Pets to assortment
  • a. lower gross margins but take advantage of extra store space, help drive traffic, and add to overall gross margin dollars;
  • b. Zhu Zhu Pets was rolled out to all company stores in U.S. in late March
  • 4) Growing engagement in virtual world (www.buildabearville.com)
  • a. internet sales grew over 10% in FY10 Q1 and children are spending 30 minutes per visit online;
  • b. one of three guests visit online before visiting a store; and
  • 5) Creating new opportunities for products to be sold outside retail store base
  • a. 65 international franchised stores; expect 3 new international franchised stores in FY10 and company thinks there is potential for up to 300;
  • b. Agreements with franchisees in 16 countries currently;
  • c. Signed licensing agreements in several product categories.

In particular, we think there is significant long-term growth potential, which is not capital-intensive, through franchising and licensing and thereby further leveraging the Build-A-Bear brand name throughout the world.

FY10 Q1 Results Were A Good Start

FY10 Q1 results showed some evidence of progress on these strategies.  North American comp store sales increased for the first time in 17 quarters to +1.9%.  Gross margin improved over 400 basis points compared to prior year.  SG&A expense increased modestly (we think there will need to be some add-back to the dramatic cuts of FY09).  The result was a small operating profit of $2.8m versus an operating loss of $1.5m prior year.  FY10 Q1 EBITDA was $10m compared to $6m prior year.  FY10 Q1 cash from operations also improved from -$11m in FY09 Q1 to -$1m in FY10 Q1 due to improved profits and better working capital management.

It is important to note the improved comp store sales numbers for FY10 Q1 were helped by the shift of Easter (a very big holiday for BBW) into Q1 from Q2 in FY09.  However, on the Q1 conference call management noted that comp store sales for FY10 March and April combined were slightly positive as compared to FY09.

Another fact to consider is that the upcoming Q2 (ending around 6/30) is BBW's seasonally weakest Q.  We expect BBW to reduce its operating loss in Q2 FY10 as compared to prior year.

FY10 EBITDA and FCF

Our estimate for FY10 assumes a 3% increase in comp store sales (versus -13.4% in FY09), improved gross margin to 41% (versus 37.6% in FY09) and slightly increased SG&A expense.  These assumptions would result in a small $2m operating profit for FY10.  We expect D&A expense for FY10 will be about $28m and capital expenditures to be $12m.  Our FY10 EBITDA estimate is $30m.

BBW is going to be rolling over some very weak comp stores sales numbers in North America in Q2 (- 17.5%), Q3 (-16.0%) and Q4 (-13.5%) of FY10 and we expect this factor plus the streamlined cost structure and strategic plan to help financial results in FY10.

Valuation and Target Price

BBW is trading at a $100m EV or 3.3x our FY10 EBITDA estimate of $30m and 5.5x our FCF estimate of $18m for FY10.

We think there could be upside to these numbers if the North American and European economies surprise to the upside (probably not going to happen).

Based on $18m of FCF in FY10 (close to $1 per share) and a net cash position of $70m to $80m ($3.50 to $4 per share) at FYE, we think BBW could trade at a share price of $13-$14 (80% above $7.50 current price).

We think downside is reasonably protected.  $6 per share implies market cap of $120m less $50m net cash equal $70m EV which would be pretty low for $350m to $400m revenue business that has positive cash flow and no leverage.

Furthermore, we think BBW could make an interesting strategic acquisition for an acquirer that seeks to connect with its substantial customer base.  When you consider the high name recognition of this brand and its position throughout the world through international franchise operations, we would not be surprised if someday BBW attracted a bid from a strategic investor.

Build-A-Bear Workshop

Price per share

$7.50

 

               

Shares outstanding

19.4

 

               

Market value

$150

                 
                       

52 week range

$3.02

$9.76

               
                       

Income statements

 

 

   

 

 

     3 mos

     3 mos

   

   FYE 12/31

2004

2005

2006

2007

2008

2009

2009

2010

   
                       

Sales

 

$302

$362

$437

$474

$468

$394

$98

$101

   

Gross profit

$151

$181

$210

$215

$197

$148

$36

$42

   

SG&A expenses

$116

$134

$159

$177

$186

$162

$37

$40

   

Adjusted EBITDA

$48

$61

$69

$64

$41

$15

$6

$10

   

Adjusted EBIT (1)

$33

$43

$47

$38

$12

($14)

($1)

$3

   

Net income

$20

$27

$29

$23

$5

($13)

($1)

$2

   

EPS - continuing ops

$1.07

$1.35

$1.44

$1.10

$0.24

($0.66)

($0.04)

$0.09

   

 (1) Non GAAP operating income represents total operating income, excluding net charges related to impairment of intangible assets,

      stock based compensation, and restructuring.

             

 

                     

Cash flow statements

 

   

 

 

     3 mos

     3 mos

   

   FYE 12/31

2004

2005

2006

2007

2008

2009

2009

2010

   
                       

Net income

 

$20

$27

$29

$23

$5

($13)

($1)

$2

   

Dep & amort

$15

$18

$22

$26

$29

$29

$7

$7

   

Non cash adjust

$1

$2

($0)

$0

$8

$14

$0

$1

   

Working capital chgs

$13

$7

$1

$7

($18)

($6)

($18)

($11)

   

Cash fr operations

$49

$54

$53

$56

$24

$24

($11)

($1)

   
                       

Capital expenditures

($17)

($31)

($53)

($32)

($22)

($8)

($2)

($3)

   

Dividends

 

($10)

$0

$0

$0

$0

$0

$0

$0

   

Share repurchases

$26

$4

$2

($4)

($14)

$0

$0

($1)

   

Acquisitions / Investmts

$0

($5)

($39)

($4)

($3)

($1)

$0

$0

   

Est. free cash flow

$32

$23

$0

$24

$2

$16

($14)

($4)

   
             

 

 

 

   

Balance sheets

                   

   FYE 12/31

2004

2005

2006

2007

2008

2009

4/3/10

     
                       

Cash

 

$67

$91

$53

$66

$47

$60

$53

     

Total assets

$189

$246

$300

$340

$300

$285

$269

     

Total debt

 

$0

$0

$0

$0

$4

$0

$0

     

Shareholder equity

$96

$130

$164

$194

$168

$165

$161

     
   

 

                 
 

 

 

 

 

 

 

       
                       

End of Year Stores

                   
                       

   North America

170

200

233

272

292

291

291

     

   Europe

 

0

0

38

49

54

54

54

     

      Total

 

170

200

271

321

346

345

345

     
                       

Comp Store Sales

18.1%

-0.2%

-6.5%

-9.9%

-14.0%

-13.4%

1.9%

     

Avg Net Sales Per Store

$1,857

$1,864

$1,761

$1,576

$1,329

$1,044

       
                       
                       
                   

Average Daily Volume

 

131,000

 

 

                     
                     
                           

 

Major shareholders

   

Maxine Clark

2,652

12.8%

 

BML Capital Mgmt

2,240

10.9%

 

Paradigm Capital

1,995

9.7%

 

Crescendo Partner

1,159

5.6%

 

Dimensional Fund

1,129

5.5%

 

Tina Klocke

249

1.2%

 

 

Quarterly Results

         
             
             

FYE 12/31

   

  Q1 10

  Q2 10

  Q3 10

  Q4 10

             

Revenues

   

$101.4

     
             

Gross profit

 

$42.3

     

Gross margin %

 

41.7%

     
             

SG&A expenses

 

$39.5

     

SG&A %

   

39.0%

     
             

Operating Income (1)

 

$2.8

     
             

Comp store sales

         

   North America

 

1.9%

     

   Europe

   

3.2%

     

   Consolidated

 

2.1%

     
             
             
             
             

FYE 12/31

   

  Q1 09

  Q2 09

  Q3 09

  Q4 09

             

Revenues

   

$97.3

$82.4

$91.7

$123.0

             

Gross profit

 

$36.3

$27.8

$34.7

$49.6

Gross margin %

 

37.3%

33.8%

37.8%

40.3%

             

SG&A expenses

 

$36.9

$37.5

$39.3

$48.0

SG&A %

   

37.9%

45.5%

42.9%

39.0%

             

Operating Income (1)

 

($0.6)

($9.7)

($4.6)

$1.6

             

Comp store sales

         

   North America

 

-20.5%

-17.5%

-16.0%

-13.3%

   Europe

   

5.6%

8.2%

2.5%

4.5%

   Consolidated

 

-17.8%

-13.9%

-12.9%

-9.9%

             
             
             

FYE 12/31

   

   Q1 08

  Q2 08

   Q3 08

   Q4 08

             

Revenues

   

$123.8

$94.7

$107.3

$142.1

             

Gross profit

 

$55.1

$35.3

$43.8

$63.3

Gross margin %

 

44.5%

37.2%

40.8%

44.5%

             

SG&A expenses

 

$44.8

$42.2

$43.5

$55.1

SG&A %

   

36.2%

44.5%

40.5%

38.8%

             

Operating Income (1)

 

$10.3

($6.9)

$0.3

$8.1

             

Comp store sales

         

   North America

 

-13.1%

-20.5%

-14.4%

-19.0%

   Europe

   

14.5%

2.2%

8.2%

6.7%

   Consolidated

 

-10.5%

-17.9%

-11.6%

-15.7%

             
             
             

FYE 12/31

   

   Q1 07

   Q2 07

   Q3 07

   Q4 07

             

Revenues

   

$115.9

$100.4

$109.8

$147.4

             

Gross profit

 

$53.6

$42.8

$48.4

$69.5

Gross margin %

 

46.3%

42.6%

44.1%

47.2%

             

SG&A expenses

 

$41.4

$39.3

$42.5

$54.0

SG&A %

   

35.7%

39.1%

38.7%

36.6%

             

Operating Income (1)

 

$12.2

$3.5

$5.9

$15.5

             

Comp store sales

         

   North America

 

-6.9%

-9.4%

-10.1%

12.6%

   Europe

   

      ---

      ---

      ---

      ---

   Consolidated

 

-6.9%

-9.4%

-10.1%

12.6%

             
             

 (1) Operating income before store pre-opening costs, store closing costs, and equity losses from investment in affiliate

             

Balance Sheet Info

 

  Q1 10

  Q2 10

  Q3 10

  Q4 10

 

             

 

Cash and equivalents

 

$53

     

 

Net receivables

 

$4

     

 

Inventory

   

$47

     

 

Prepaid expenses

 

$17

     

 

PPE, net

   

$96

     

 

Goodwill

   

$32

     

 

             

 

Accounts Payable

 

$31

     

 

Gift cards and customer deposits

$25

     

 

Deferred rent

 

$34

     

 

Shareholders equity

 

$161

     

 

             

 

             

 

             

 

Balance Sheet Info

 

  Q1 09

  Q2 09

  Q3 09

  Q4 09

 

             

 

Cash and equivalents

 

$34

$31

$27

$60

 

Net receivables

 

$4

$5

$5

$5

 

Inventory

   

$43

$48

$49

$44

 

Prepaid expenses

 

$15

$20

$23

$19

 

PPE, net

   

$117

$113

$108

$101

 

Goodwill

   

$31

$34

$33

$34

 

             

 

Accounts Payable

 

$21

$27

$28

$33

 

Gift cards and customer deposits

$24

$23

$21

$29

 

Deferred rent

 

$40

$38

$36

$35

 

Shareholders equity

 

$167

$169

$164

$165

 

             

 

             

 

             

 

Balance Sheet Info

 

  Q1 08

  Q2 08

  Q3 08

  Q4 08

 

             

 

Cash and equivalents

 

$41

$16

$27

$47

 

Net receivables

 

$6

$6

$7

$8

 

Inventory

   

$50

$47

$48

$51

 

Prepaid expenses

 

$16

$20

$15

$16

 

PPE, net

   

$137

$138

$133

$123

 

Goodwill

   

$43

$43

$40

$30

 

             

 

Accounts Payable

 

$31

$24

$30

$38

 

Gift cards and customer deposits

$25

$23

$22

$29

 

Deferred rent

 

$38

$44

$44

$42

 

Shareholder's equity

 

$191

$185

$176

$168

 

             

 

             

 

                           

 

Catalysts

  • 1. Improving profitability in Q2, Q3, and Q4 of FY10
  • 2. Better comp store sales results.
  • 3. Strong cash generation in FY10 (mostly in Q4) should increase net cash position on b/s.
  • 4. Established global brand name and unique retail - entertainment niche.
  • 5. Unleveraged FCF yield of 18% or more.
  • 6. If North American or global economy is stronger than we expect, there could be upside to our estimates, especially into FY11.

 

Risks

  • 1. Economic downturn worsens in H2 of FY10 and results suffer accordingly.
  • 2. Q2 is weakest Q and will not have Easter in FY10. We expect a smaller loss in Q2 as compared to prior year.
  • 3. People stop shopping at malls.

 

 

 

Disclaimer

 

Disclaimer:  We own shares of BBW.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

 

 
     

 

Catalyst

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    Description

     

    Build-A-Bear Workshop (BBW)

    BBW is a specialty retailer of make-it-yourself stuffed animals primarily for children ages 3 to 12 years old located mostly in malls in North America and Europe.  The company has 291 company-owned stores in North America, 54 company-owned stores in Europe, and 65 franchised stores internationally.  Stores average about 2,800 square feet.  The company is the 9th largest toy retailer in North America.  BBW has a current market valuation of about $150m ($7.50 per share x 20m shares), no debt, and $53m in net cash for an Enterprise Value (EV) of $100m.  BBW generates very substantial amounts of cash flow.  Cash from operations (CFO) was $56m in FY07, $24m in FY08, and $24m in FY09.  LTM CFO has risen to $34m and LTM capital expenditures are $8m. 

    We expect BBW to generate free cash flow of approximately $18m to $20m in FY10 for an unleveraged FCF yield of 18% to 20%.  We think BBW is in the early stages of a turnaround which could drive profits and free cash flow higher over the next few years.  BBW has a very solid balance sheet with a net cash position of $53m as of 4/3/10.  Due to strong free cash flow generation we expect this net cash position to grow during FY10 and FY11 (mostly in Q4 which is the major quarter for EBITDA and cash generation).

    BBW sells a discretionary product and has struggled with sales during the economic downturn.  Comp store sales have been in a long slide with comps for North American stores of -9.9% in FY07, -14% in FY08; and -13% in FY09.  BBW undertook an aggressive expansion plan opening 35 stores in FY06, 50 stores in FY07, and 25 stores in FY08 and paid the price with awful comp store sales and financial results.

    During FY09 CEO Maxine Clark (largest shareholder with 13%) and her management dramatically reduced overhead (by $25m) and capital expenditures (by $14m) to build cash and maintain a strong balance sheet.  They also implemented a focused strategic plan (see below) which includes product innovation, cost engineering, and tighter integration of product launches, marketing, and store operations.  Pricing has also been shifted to more of the value-orientation which today's consumer requires.  The result has been gradually improving comp stores sales results - it would have been hard for them to get much worse - and a possible glimmer of hope in Q1 of FY 2010 with positive comp store sales in North America (+1.9%) for the first time in 17 quarters.

    We think BBW's franchise is unique and viable and reaches a large and attractive customer base.  We think that management has at least stabilized the steep sales declines with its cost reductions and more focused strategy.  We believe BBW is being heavily discounted by the market.  We think BBW could achieve EBITDA for FY10 of $30m without a dramatic economic recovery.  BBW currently trades at about 25% of LTM revenue, 3.3x our estimate of FY10 EBITDA and an 18% to 20% FCF yield on our estimate of FY10 FCF of $18m to $20m.

    Strong Free Cash Flow

    BBW has modest working capital needs with few receivables and high inventory turns.  The Company does close to $400m in annual sales with $45m to $50m of inventory (see Quarterly Balance Sheets below).  Since FY09 management has sharply curtailed new store growth (only one or two new stores expected in FY10) to optimize the comp store sales and profitability of the existing store base.  Capital expenditures have come down significantly from $32m in FY 07 and $22m in FY08 to only $8m in FY09 and $12m estimated in FY10.  With D&A expense estimated at $28m for FY10, BBW is generating significant amounts of free cash flow.  Cash from operations was $56m in FY07, $24m in FY08 and FY09 - despite the slow economy - and we expect $30m to $32m for FY10.  Our free cash flow (cash from operations less capital expenditures) estimate for FY10 is $18m to $20m or almost $1 per share.

     

    Strong Balance Sheet and Growing Net Cash Position

    The Company's net cash position has been consistently improving on a year-over-year basis (see Quarterly Balance Sheets below).  BBW's Q1 net cash position was $53m as compared to $34m for Q1 prior year.  We think BBW could end FY10 with a net cash position of $75m to $80m or $3.50 to $4 per share (FY09 ended with $60m of net cash or about $3 per share).

    We believe BBW's strong balance sheet provides good downside protection and gives the company the flexibility to emerge from the current downturn as one of the survivors in a stronger competitive position.

    Trades at A Large Discount to Replacement Cost

    We believe the replacement cost of BBW's 345-store chain is at least $200m or 2x the current EV.  BBW has attractive positions in most major malls in North America.  From 2005 to 2009, BBW (which already had 170 stores) spent $155m in capital expenditures and an additional $39m for an acquisition of 40 stores located in the U.K. (about $1m per store).  Today BBW has an EV of about $100m or about $280k per store or roughly half this recent investment.   Some of these capital expenditures were ill-advised and do not earn their cost of capital but we think the large investment in its store network is a significant competitive advantage for BBW going forward.  And we are purchasing it at a very large discount to its replacement cost.

    We believe it costs about $500k net of allowances to open a new store plus at least $100k in working capital for a total investment of about $600k per store.

    Retailers are criticized as investments because they are easy to duplicate.  However, when you purchase a viable chain at more than a 50% discount to its replacement cost, you should have significant advantage.  BBW most certainly sells a discretionary product, but it has a limited amount of direct competitors and there are very few toy retailers residing in malls today.

    Focused Strategic Plan in FY10

    In recent years BBW has exited tangential activities (Ridemakerz LLC and Friends 2B Made LLC) and taken write-downs in order to focus more completely on its core retail operations.  The Company focused on reducing costs and capital expenditures in FY09.  In FY10 management is seeking to drive top line growth and profitability.  Management is focused on driving profitable growth at the current base of stores rather than expanding the store base and we think this makes a lot of sense.  Management is using five key strategies to do this.  These include:

    In particular, we think there is significant long-term growth potential, which is not capital-intensive, through franchising and licensing and thereby further leveraging the Build-A-Bear brand name throughout the world.

    FY10 Q1 Results Were A Good Start

    FY10 Q1 results showed some evidence of progress on these strategies.  North American comp store sales increased for the first time in 17 quarters to +1.9%.  Gross margin improved over 400 basis points compared to prior year.  SG&A expense increased modestly (we think there will need to be some add-back to the dramatic cuts of FY09).  The result was a small operating profit of $2.8m versus an operating loss of $1.5m prior year.  FY10 Q1 EBITDA was $10m compared to $6m prior year.  FY10 Q1 cash from operations also improved from -$11m in FY09 Q1 to -$1m in FY10 Q1 due to improved profits and better working capital management.

    It is important to note the improved comp store sales numbers for FY10 Q1 were helped by the shift of Easter (a very big holiday for BBW) into Q1 from Q2 in FY09.  However, on the Q1 conference call management noted that comp store sales for FY10 March and April combined were slightly positive as compared to FY09.

    Another fact to consider is that the upcoming Q2 (ending around 6/30) is BBW's seasonally weakest Q.  We expect BBW to reduce its operating loss in Q2 FY10 as compared to prior year.

    FY10 EBITDA and FCF

    Our estimate for FY10 assumes a 3% increase in comp store sales (versus -13.4% in FY09), improved gross margin to 41% (versus 37.6% in FY09) and slightly increased SG&A expense.  These assumptions would result in a small $2m operating profit for FY10.  We expect D&A expense for FY10 will be about $28m and capital expenditures to be $12m.  Our FY10 EBITDA estimate is $30m.

    BBW is going to be rolling over some very weak comp stores sales numbers in North America in Q2 (- 17.5%), Q3 (-16.0%) and Q4 (-13.5%) of FY10 and we expect this factor plus the streamlined cost structure and strategic plan to help financial results in FY10.

    Valuation and Target Price

    BBW is trading at a $100m EV or 3.3x our FY10 EBITDA estimate of $30m and 5.5x our FCF estimate of $18m for FY10.

    We think there could be upside to these numbers if the North American and European economies surprise to the upside (probably not going to happen).

    Based on $18m of FCF in FY10 (close to $1 per share) and a net cash position of $70m to $80m ($3.50 to $4 per share) at FYE, we think BBW could trade at a share price of $13-$14 (80% above $7.50 current price).

    We think downside is reasonably protected.  $6 per share implies market cap of $120m less $50m net cash equal $70m EV which would be pretty low for $350m to $400m revenue business that has positive cash flow and no leverage.

    Furthermore, we think BBW could make an interesting strategic acquisition for an acquirer that seeks to connect with its substantial customer base.  When you consider the high name recognition of this brand and its position throughout the world through international franchise operations, we would not be surprised if someday BBW attracted a bid from a strategic investor.

    Build-A-Bear Workshop

    Price per share

    $7.50

     

                   

    Shares outstanding

    19.4

     

                   

    Market value

    $150

                     
                           

    52 week range

    $3.02

    $9.76

                   
                           

    Income statements

     

     

       

     

     

         3 mos

         3 mos

       

       FYE 12/31

    2004

    2005

    2006

    2007

    2008

    2009

    2009

    2010

       
                           

    Sales

     

    $302

    $362

    $437

    $474

    $468

    $394

    $98

    $101

       

    Gross profit

    $151

    $181

    $210

    $215

    $197

    $148

    $36

    $42

       

    SG&A expenses

    $116

    $134

    $159

    $177

    $186

    $162

    $37

    $40

       

    Adjusted EBITDA

    $48

    $61

    $69

    $64

    $41

    $15

    $6

    $10

       

    Adjusted EBIT (1)

    $33

    $43

    $47

    $38

    $12

    ($14)

    ($1)

    $3

       

    Net income

    $20

    $27

    $29

    $23

    $5

    ($13)

    ($1)

    $2

       

    EPS - continuing ops

    $1.07

    $1.35

    $1.44

    $1.10

    $0.24

    ($0.66)

    ($0.04)

    $0.09

       

     (1) Non GAAP operating income represents total operating income, excluding net charges related to impairment of intangible assets,

          stock based compensation, and restructuring.

                 

     

                         

    Cash flow statements

     

       

     

     

         3 mos

         3 mos

       

       FYE 12/31

    2004

    2005

    2006

    2007

    2008

    2009

    2009

    2010

       
                           

    Net income

     

    $20

    $27

    $29

    $23

    $5

    ($13)

    ($1)

    $2

       

    Dep & amort

    $15

    $18

    $22

    $26

    $29

    $29

    $7

    $7

       

    Non cash adjust

    $1

    $2

    ($0)

    $0

    $8

    $14

    $0

    $1

       

    Working capital chgs

    $13

    $7

    $1

    $7

    ($18)

    ($6)

    ($18)

    ($11)

       

    Cash fr operations

    $49

    $54

    $53

    $56

    $24

    $24

    ($11)

    ($1)

       
                           

    Capital expenditures

    ($17)

    ($31)

    ($53)

    ($32)

    ($22)

    ($8)

    ($2)

    ($3)

       

    Dividends

     

    ($10)

    $0

    $0

    $0

    $0

    $0

    $0

    $0

       

    Share repurchases

    $26

    $4

    $2

    ($4)

    ($14)

    $0

    $0

    ($1)

       

    Acquisitions / Investmts

    $0

    ($5)

    ($39)

    ($4)

    ($3)

    ($1)

    $0

    $0

       

    Est. free cash flow

    $32

    $23

    $0

    $24

    $2

    $16

    ($14)

    ($4)

       
                 

     

     

     

       

    Balance sheets

                       

       FYE 12/31

    2004

    2005

    2006

    2007

    2008

    2009

    4/3/10

         
                           

    Cash

     

    $67

    $91

    $53

    $66

    $47

    $60

    $53

         

    Total assets

    $189

    $246

    $300

    $340

    $300

    $285

    $269

         

    Total debt

     

    $0

    $0

    $0

    $0

    $4

    $0

    $0

         

    Shareholder equity

    $96

    $130

    $164

    $194

    $168

    $165

    $161

         
       

     

                     
     

     

     

     

     

     

     

           
                           

    End of Year Stores

                       
                           

       North America

    170

    200

    233

    272

    292

    291

    291

         

       Europe

     

    0

    0

    38

    49

    54

    54

    54

         

          Total

     

    170

    200

    271

    321

    346

    345

    345

         
                           

    Comp Store Sales

    18.1%

    -0.2%

    -6.5%

    -9.9%

    -14.0%

    -13.4%

    1.9%

         

    Avg Net Sales Per Store

    $1,857

    $1,864

    $1,761

    $1,576

    $1,329

    $1,044

           
                           
                           
                       

    Average Daily Volume

     

    131,000

     

     

                         
                         
                               

     

    Major shareholders

       

    Maxine Clark

    2,652

    12.8%

     

    BML Capital Mgmt

    2,240

    10.9%

     

    Paradigm Capital

    1,995

    9.7%

     

    Crescendo Partner

    1,159

    5.6%

     

    Dimensional Fund

    1,129

    5.5%

     

    Tina Klocke

    249

    1.2%

     

     

    Quarterly Results

             
                 
                 

    FYE 12/31

       

      Q1 10

      Q2 10

      Q3 10

      Q4 10

                 

    Revenues

       

    $101.4

         
                 

    Gross profit

     

    $42.3

         

    Gross margin %

     

    41.7%

         
                 

    SG&A expenses

     

    $39.5

         

    SG&A %

       

    39.0%

         
                 

    Operating Income (1)

     

    $2.8

         
                 

    Comp store sales

             

       North America

     

    1.9%

         

       Europe

       

    3.2%

         

       Consolidated

     

    2.1%

         
                 
                 
                 
                 

    FYE 12/31

       

      Q1 09

      Q2 09

      Q3 09

      Q4 09

                 

    Revenues

       

    $97.3

    $82.4

    $91.7

    $123.0

                 

    Gross profit

     

    $36.3

    $27.8

    $34.7

    $49.6

    Gross margin %

     

    37.3%

    33.8%

    37.8%

    40.3%

                 

    SG&A expenses

     

    $36.9

    $37.5

    $39.3

    $48.0

    SG&A %

       

    37.9%

    45.5%

    42.9%

    39.0%

                 

    Operating Income (1)

     

    ($0.6)

    ($9.7)

    ($4.6)

    $1.6

                 

    Comp store sales

             

       North America

     

    -20.5%

    -17.5%

    -16.0%

    -13.3%

       Europe

       

    5.6%

    8.2%

    2.5%

    4.5%

       Consolidated

     

    -17.8%

    -13.9%

    -12.9%

    -9.9%

                 
                 
                 

    FYE 12/31

       

       Q1 08

      Q2 08

       Q3 08

       Q4 08

                 

    Revenues

       

    $123.8

    $94.7

    $107.3

    $142.1

                 

    Gross profit

     

    $55.1

    $35.3

    $43.8

    $63.3

    Gross margin %

     

    44.5%

    37.2%

    40.8%

    44.5%

                 

    SG&A expenses

     

    $44.8

    $42.2

    $43.5

    $55.1

    SG&A %

       

    36.2%

    44.5%

    40.5%

    38.8%

                 

    Operating Income (1)

     

    $10.3

    ($6.9)

    $0.3

    $8.1

                 

    Comp store sales

             

       North America

     

    -13.1%

    -20.5%

    -14.4%

    -19.0%

       Europe

       

    14.5%

    2.2%

    8.2%

    6.7%

       Consolidated

     

    -10.5%

    -17.9%

    -11.6%

    -15.7%

                 
                 
                 

    FYE 12/31

       

       Q1 07

       Q2 07

       Q3 07

       Q4 07

                 

    Revenues

       

    $115.9

    $100.4

    $109.8

    $147.4

                 

    Gross profit

     

    $53.6

    $42.8

    $48.4

    $69.5

    Gross margin %

     

    46.3%

    42.6%

    44.1%

    47.2%

                 

    SG&A expenses

     

    $41.4

    $39.3

    $42.5

    $54.0

    SG&A %

       

    35.7%

    39.1%

    38.7%

    36.6%

                 

    Operating Income (1)

     

    $12.2

    $3.5

    $5.9

    $15.5

                 

    Comp store sales

             

       North America

     

    -6.9%

    -9.4%

    -10.1%

    12.6%

       Europe

       

          ---

          ---

          ---

          ---

       Consolidated

     

    -6.9%

    -9.4%

    -10.1%

    12.6%

                 
                 

     (1) Operating income before store pre-opening costs, store closing costs, and equity losses from investment in affiliate

                 

    Balance Sheet Info

     

      Q1 10

      Q2 10

      Q3 10

      Q4 10

     

                 

     

    Cash and equivalents

     

    $53

         

     

    Net receivables

     

    $4

         

     

    Inventory

       

    $47

         

     

    Prepaid expenses

     

    $17

         

     

    PPE, net

       

    $96

         

     

    Goodwill

       

    $32

         

     

                 

     

    Accounts Payable

     

    $31

         

     

    Gift cards and customer deposits

    $25

         

     

    Deferred rent

     

    $34

         

     

    Shareholders equity

     

    $161

         

     

                 

     

                 

     

                 

     

    Balance Sheet Info

     

      Q1 09

      Q2 09

      Q3 09

      Q4 09

     

                 

     

    Cash and equivalents

     

    $34

    $31

    $27

    $60

     

    Net receivables

     

    $4

    $5

    $5

    $5

     

    Inventory

       

    $43

    $48

    $49

    $44

     

    Prepaid expenses

     

    $15

    $20

    $23

    $19

     

    PPE, net

       

    $117

    $113

    $108

    $101

     

    Goodwill

       

    $31

    $34

    $33

    $34

     

                 

     

    Accounts Payable

     

    $21

    $27

    $28

    $33

     

    Gift cards and customer deposits

    $24

    $23

    $21

    $29

     

    Deferred rent

     

    $40

    $38

    $36

    $35

     

    Shareholders equity

     

    $167

    $169

    $164

    $165

     

                 

     

                 

     

                 

     

    Balance Sheet Info

     

      Q1 08

      Q2 08

      Q3 08

      Q4 08

     

                 

     

    Cash and equivalents

     

    $41

    $16

    $27

    $47

     

    Net receivables

     

    $6

    $6

    $7

    $8

     

    Inventory

       

    $50

    $47

    $48

    $51

     

    Prepaid expenses

     

    $16

    $20

    $15

    $16

     

    PPE, net

       

    $137

    $138

    $133

    $123

     

    Goodwill

       

    $43

    $43

    $40

    $30

     

                 

     

    Accounts Payable

     

    $31

    $24

    $30

    $38

     

    Gift cards and customer deposits

    $25

    $23

    $22

    $29

     

    Deferred rent

     

    $38

    $44

    $44

    $42

     

    Shareholder's equity

     

    $191

    $185

    $176

    $168

     

                 

     

                 

     

                               

     

    Catalysts

     

    Risks

     

     

     

    Disclaimer

     

    Disclaimer:  We own shares of BBW.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

     

     
         

     

    Catalyst

    Messages


    SubjectMaintenance capex
    Entry07/29/2010 12:50 PM
    Memberotaa212
    What is your estimate of maintenance capex? Is it lower than depreciation? Do you think that the capex cuts last year and this year are just deferring expenditures that will be needed to make the store experience what it should be?
    Thank you
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