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

Restructuring at Build-A-Bear

Build-A-Bear stores have had declining sales over recent years although the magnitude fell to the low single digits from the 13.4% y/y decline in 2009 with and EPS loss of $0.66.  The loss in 2012 estimated at ~$0.40 per share is approaching those levels and in jump from the $0.11 loss in 2011 and profit of $0.01.

Management recognized the need for change and implemented a new store format, closing certain locations and a new marketing initiative.  The new store format utilizes technology in tandem with its current process.  The remodels drove a sales increase at those locations of 30% in 4Q12.  BBW plans to remodel 40-50 stores by the end of FY14.  This will likely utilize most of BBW’s free cash flow over that time period.   It estimates cash on hand of $45 million at the end of 4Q12, up from $22 million at the end of 3Q12.

The store rationalizations will occur over the next two years.  It will close 50-60 locations and target a size of 225-250 stores by the end of 2014.  Management noted in the past that 80% of the stores are profitable and it expects this number to reach 98% by the end of2014.  BBW does plan to continue to expand the number of locations in Europe from 87 largely through franchises.

The marketing initiative initiated in 4Q12 focuses on building additional brand awareness versus promotional activity.  The effectiveness of this is hard to measure and there is not update to report.

The preannouncement also gave some additional useful details.  Sales declined by 1.7%, which was not as bad as expected and ecommerce was up by 14%.  The departure of the CEO and founder is probably also a positive.  BBW can now find a CEO with greater expertise in restructuring and growing an established brand.

Conclusion

Build-A-Bear has bounced off its price floor and has started to rebound.   However, it may have gotten a bit ahead of itself.  The restructuring plan could still run into problems and expectations are for EPS losses into 2014.  The free cash flow, formerly a reason to own the shares, will largely go to the restructuring efforts.  Also, selecting the right CEO and their subsequent plan could still significantly impact the share price.

The article Special Opportunity Within Custom Consumables? originally appeared on Fool.com and is written by Mike Thiessen.

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