Build – A – Bear Workshops Review

On the 17th of February, I wrote up a piece about Build – A – Bear Workshops in which I expressed a bullish opinion on the company. Keeping all my company write ups on file, I periodically go back to see my thinking, and to see how my thought process matched with what happened in the price action. As luck would have it, BBW turned in my favor after reporting a profit for Q1 2017, which further bolstered my thesis for a company turnaround.

Below is the exact write up from the 17th of February in which I first was alerted to BBW. About two weeks later news came out that Steve Cohen bought around 7% of the companies shares, which was refreshing because Mr. Cohen is one of the many investors whom I read and try to pick their brains on the markets.

BBW

Build – A – Bear Workshop, Inc.

Company Overview – 10 – Q

17 February 2017

BBW Business Summary

Build-A-Bear Workshop Inc is a specialty retailer of plush animals and related products. It provides a “make your own stuffed animal” interactive retail-entertainment experience.

BBW Fundamentals

• Price to Earnings: 7.81
• Earnings Per Share: $1.22
• Market Cap: 188.6M
• Current Ratio: 1.39
• Return on Equity: 20.88%
• Return on Assets: 10.75%
• Dividend Yield: 0.00%
• Price to Sales: 0.51
• Price to Book: 1.96
• Price to Free Cash Flow: 33.06

Balance Sheet ($ in Millions)

• Total Cash increased $2.
• Total Current Assets increased $5.
• Total Assets increased $9.
• Total Current Liabilities increased $3.
• Total Liabilities increased $4.
• Total Stockholder Equity increased $3.

Income Statement ($ in Millions)

• Total Revenues increased $9.
• Income from Operations increased $9.
• Net Income increased $4.
• EBITDA increased $9.

Cash Flow Statement ($ in Millions)

• Net Cash provided by operating activities increased $23.
• Net Cash used in investing activities remained unchanged.
• Net Cash used for financing activities remained unchanged.
• Free Cash Flow increased $870.

Highlights from Last 10 Years

• Income Statement: Since hitting a low of ($48) in 2012, BBW has increased operating income every year, along with net income, earnings per share, and EBITDA.
• Cash Flow Statement: Since 2012, Net cash from operations has increased, however, there was a dip in 2015. Net cash used in investing increased significantly from 2014 to 2015. Net cash used in financing activities increased $24 from ’14 to ’15, something to be concerned about.
• Balance Sheet: Besides an increase in 2014, total cash remains almost unchanged since 2011-12. Total assets have been on the uptrend since 2012. Total current liabilities have been steadily rising, as well as total liabilities. Finally, total stock holders’ equity is rising since it’s decline in 2011 – 2012.

Entry Level: $9.50 and Below

• Technically, BBW has solid support at the $9.50 range, which is comforting, but with missing earnings, it will be interesting to see if they fail support, which could drag them down into the low $9s.
• The 50 & 200 moving averages signal an intermediate bullish sentiment, and the long-term prospectus looks good.
• BBW doesn’t pay a dividend, so it’s paramount to time the entry correct and not sacrifice too much on price. Patience for the right price is key with a stock that doesn’t pay dividends.

Exit Level: $20+

• Morningstar rates BBW at an 18% Discount, with a fair value of ~$12.
• I believe if the underlying business is solid, I would hold BBW into the $20 range, but would be taking profits around the $15, and dumping completely once it hits $20. At that point I would look for reentry.
• Another possible way to play it is to sell for profits, leave the principal, and ride out the principal to wherever it may go, if the underlying qualities of the business are solid.

Research

• Build – A – Bear screams, “Turnaround Project!”, and I agree. After hiring a new CEO, BBW is poised to take on the challenges in their markets, and to meet them head on.
• After going back over their last 5 annual reports, what I saw was a consistent theme, a trend that they kept too and didn’t deviate from. They had goals as a company, and continued to work on them each of the successive years.
• After closing stores, trimming down square footage overall, and enhancing their mobile and online e-commerce platforms, BBW is well positioned to capture the youth and their every shifting trend towards online / gaming.
• With the edition of Build – A – Bear ‘BearVille’ platform, BBW is tapping into not only the entertainment and gaming industry online, they have also opened themselves up to educational platforms for infants and toddlers.
• BBW is getting a much – needed cosmetic makeover. Alongside changing the look of their logo, BBW has changed the outlay of their store, both changes have seen increases in operating margins, and customer daily turnover.
• Finally, BBW has a large durable competitive advantage. When you think of BBW, the first thing that pops into your mind are fluffy teddy bears being held by children that are always smiling. It’s not an exaggeration to say that you or someone you know went to a BBW store and has their very own bear. BBW possesses something that you can’t quantify on a balance sheet, it’s intangible. They have brand loyalty, and a tremendously positive brand recognition.