Wednesday, February 22, 2012

Build-A-Bear Or Run Away From It?

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


Greg said...

How do you think about the potential downside risk represented by lease payments? Especially for retailer given how common it is for operators to lease their stores in that space.

Obviously, one would need a sense of store growth (or closes) and to pull the lease payment data from the footnotes to gain perspective.

But beyond that, do you look at lease payments relative to either EBIT or Operating Cash Flow? Or do that on a per store basis? Or do you think of lease payments as analogous to interest expense?

Thanks! Greg

Anonymous said...

Retail leases and the determination of that leased based on profitability is a poor mans game. The only reason why Build a bear is still operating is due to shareholders and cash in bank. If the American concept was franchised it would be half the size becuase local franchisees cant loose money when they have a family to feed.

Bringing the bear building experience mobile will be the key. No rents, no parties on the floor and no more kids pushing up the cash register sale in their stores buying more then they need for a bear.

I operate a childcare center and I just received an email from a company called Stufflers - Made by you that does bears at my childcare for $5. That is a fair price to pay for a build-a-bear experience and I bet my local franchisee runs from his home!

Saj Karsan said...

Hi Greg,

I capitalize the leases and treat them as I would debt.