Build-A-Bear Workshop (NYSE: BBW) stock has surged over 30% year-to-date, outperforming all major stock indexes. This performance is driven by three consecutive years of revenue and profit growth, stock buybacks, special dividends, and record-breaking gross margin at 54.39% and operating margin at 13.47%.
Potential for Further Growth
Despite the recent run-up in the stock price, there appears to be more room for upside. The company’s strong growth in high-margin segments and shift to e-commerce play a crucial role.
A discounted cash flow analysis suggests BBW is worth roughly $41.34 per share, representing a potential 43% upside from the current $30.00 per share.
Company Overview
Build-A-Bear Workshop (BBW) offers customers the chance to buy a stuffed animal and customize it with clothing, shoes, sounds, scents, glasses, and other items.
Customers even receive a birth certificate for their customized stuffed animals. The company operates 369 corporately managed stores, 92 third-party stores, and 74 international stores, along with two e-commerce sites.
In 2023, the average price per transaction at BBW was $50.59, up by approximately 43% since 2013, which is higher than the typical inflation rate of 2%. BBW commands premium pricing due to its unique offerings, unmatched by competitors at the same scale.
The company is also expanding internationally with stores in South Africa, China, Australia, Chile, and several Gulf states such as Kuwait and Dubai.
Growth Opportunities
BBW has two main avenues of growth: the commercial segment and e-commerce sales. The commercial segment, which includes revenue from transactions with other businesses (mainly wholesale activities and licensing intellectual properties), has grown significantly.
It represents around 5% of sales, up from 2.08% in FY2022. This segment has seen a 61% sales increase in FY2023 and 37.2% in FY2024, more than doubling over the past three years. Third-party stores have experienced the highest net openings, with 22 new openings and no closures in FY2024.
The commercial segment’s partners include wholesalers, cruise liners, airports, and resorts, which help distribute products to various markets and customer segments, potentially driving incremental sales. Partnering with high-traffic enterprises can expose the BBW brand to potential customers at no additional cost.
BBW’s shift to e-commerce is another growth avenue. The company has tripled its online sales since 2018 by offering exclusive online offers and through loyalty programs. While there was a 4% e-commerce decline in the latest quarter, this is seen as transitory, given the recent creation of the Chief Customer & Digital Officer position to enhance the digital strategy.
Investment Thesis
The investment thesis for BBW is based on strong financials, a solid product with premium pricing, and room for growth.
BBW’s growth in high-margin segments and low capital expenditures (3.3% of revenue) have more than doubled its free cash flow over the past three years. EBITDA and EBIT margins have increased by 100 and 110 basis points, respectively.
The company has a strong balance sheet with low leverage, strong working capital, and solid liquidity.
Macroeconomic Risks Ahead
However, BBW faces several macroeconomic risks, including high inflation, which pressures consumer spending. Another pandemic could also pose a significant challenge, as seen when the stock declined to $0.90 in 2020.
While competition is a concern, no other company offers the same scale and customization options as BBW.
High Potential Investment Opportunity
BBW is a simple business with great product offerings. The customer base is stable, with 80% being homeowners earning between $100,000 and $150,000. The company is financially healthy, has room for growth, and is trading at an attractive valuation.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
