Shares of Build-A-Bear (BBW) fell 30% last week after the company reported a lower-than-expected operating profit in its all important Christmas quarter. As a result, the company now trades for just a shade over $100 million despite a net cash balance of $46 million and decent operating cash flow over the last few years.
The company has been fairly friendly to shareholders over the last few years, slowing its expansion plans when results haven't materialized, and instead returning some cash to shareholders. The company has bought back $35+ million worth of shares in the last three years, and may do some more this year, considering the strong cash position and the share price weakness.
Since Build-A-Bear has been operating close to break-even for the last three years, management appears to be taking initiative on cutting costs going forward. The company will close 15 to 20 stores (out of its approximately 350) and relocate another 10 to 15 to smaller locations. Unfortunately, with five new store opening and five remodels also on the way, capex spend for 2012 is expected to match depreciation levels, suggesting the firm won't be generating cash like it did in 2010 and 2009 unless it is finally able to drive store profitability once again.
There is one major downside, however, relating to the company's leases. While Build-A-Bear has no "official" debt, it has minimum lease payments of almost $250 million due in the coming years. If business turns negative for some reason (a few failed films with which its products are associated, for example) things can go downhill in a hurry.
Can Build-A-Bear regain its footing as a profitable, cash-generating machine? Investors may not have to pay a whole to find out, but they do have to risk a lot!
Disclosure: No position