Build-A-Bear Workshop, Inc (BBW): Special Opportunity Within Custom Consumables?

Build-A-Bear Workshop, Inc. (NYSE:BBW) stock has bounced in recent days from an earnings preannouncement along with the CEO announcing plans to retire from that post.   Build-A-Bear is a specialty retailer of bears and other plush animals which are customizable with clothes, shoes and accessories.  Declining sales over the past two years led to underperformance in the shares of BBW.  The stock has steadily rebounded from its low of $3.36 on Oct 22, 2012 and surged on the recent preannouncement.

Build-A-Bear offers Customizable Experience

BBW’s direct competitors – Vermont Teddy Bear as well as other toy and hobby stores – are all privately held.  Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) as well as Amazon (AMZN) are all players in the toy category.  BBW is different and offers an experience, not just a place to buy a stuffed animal like WMT and TGT. Wal-Mart and Target have many other things to sell in order to make their $464 billion and $72 billion in sales.  There is a broad trend in people paying a premium to have an experience where they can customize their selection.  Starbucks (SBUX) is an example of the premium consumers will pay to customize what they buy.  Build-A- Bear benefits from this trend.  It offers a full interactive experience versus the anesthetized one of its competitors like Wal-Mart and Target.

Valuation – BBW Hit its Floor, Balance Sheet Healthy

BBW trades at 0.67x book value, which looks relatively inexpensive.  However, negative return metrics, return on assets of -6.6% and return on equity fo-11.9%, indicates the stock should trade at a discount to book value.  Book value is often looked at as a price floor for a stock, but that is not a good measure for BBW.

A look into the market value of the assets can establish a floor and also show the overall health of the balance sheet. The market value of certain assets of BBW requires some discount versus book value on the balance sheet.  For example, when you liquidate inventory, there is usually a steep discount applied.  If the PP&E was worth book value, the firm would likely generate a positive return on them.   After adjusting the assets to market value, the cash is used to pay debt and other certain liabilities.  The remaining cash is the breakup value to a shareholder.  This value should act as a truer price floor than book value.  For BBW, the following table results in an estimated market value of $3.89 per share following 3Q12 (stock bottomed at $3.36 noted above).  This quick analysis results in a level of support for the shares and an actual value of the marketable assets.