Monday, March 2, 2009

Build-A-Bear Renegotiates

Build-A-Bear (BBW) has a market cap of $80 million, with a cash position of $47 million and zero balance sheet debt. But as a mall retailer, it has certain fixed costs in the form of rent and labour which make investors very nervous when revenues are in general decline. (In a previous post, we saw that BBW has indeed been suffering from declining sales.)

While wage rates and labour hours can be reduced to a certain extent in order to be more appropriately aligned to demand, rent agreements are often fixed for a number of years. Indeed, previously we discussed how the magnitude of Build-A-Bear's operating leases could prove crippling if revenues continued to fall.

But the company has decided to make cost-cutting a priority and has undertaken efforts to cut rents while keeping stores open! Operating lease data is only required to be released in the annual report (which hasn't yet come out for 2008), but comments from Build-A-Bear's CEO on the 2008 Q4 conference call illustrate this point:

"We expect to improve our rent structure with minimal store closures at this point. We are a highly desired tenant with mall landlords...Importantly, in many cases we are negotiating shorter term renewals to maximize our real estate flexibility as we anticipate the mall landscape will change during these times...We’ve been successful in negotiating reductions in occupancy expenses, while maintaining future leased options to re-evaluate stores and ensure they are meeting our assumptions and expectations. Let me assure you in the current environment, improving store lease terms and optimizing store productivity is a top priority."

On it's last 10-K, the company reported future operating lease obligations of $423 million. If the company is meaningfully able to bring these costs down, it becomes far less risky, even to this stingy value investor.

Coupled with the fact that Build-A-Bear still managed to earn $5 million in its fourth quarter of 2008 (on a market cap of $80 million), investors may have something to get excited about. We'll be watching for an update on these lease obligations in the next 10-k due out in a few weeks!

Disclosure: None

No comments: