Build-A-Bear: Time to Take Private?

Ben Axler is managing partner of Spruce Point Capital Management

Teddy bears are soft and cuddly stuffed animals meant to be loved by their owners. Unfortunately, shares of interactive toy retailer Build-A-Bear Workshop (BBW Quote) are not receiving the love and attention they are due from the Street.

Build-A-Bear is a mall-based retailer that invites guests to come into the stores and create their own customized stuffed animals. Founded in 1997 and headquartered in St. Louis, the company operates company-owned stores and franchises worldwide on five continents.

Since going public in 2004, Build-A-Bear pursued a growth strategy that increased stores from 200 U.S. to 345 global locations. Amid sharply declining same-store sales in the current recession, the company curtailed its growth strategy, announced a strategic review and has focused on eliminating $18 million in costs.

In March 2008, with the share price down 55% from its IPO price, the board of directors determined that a $50 million share-repurchase program was in the best interest of shareholders.

To date, the company has repurchased $19 million worth of shares, should remain cash flow positive and ended second quarter 2009 with cash on its balance sheet of $31 million ($1.51 a share) and zero debt.

The stock appears significantly undervalued, lacking a "consensus" earnings view from analysts and is highly leveraged to improvements in consumer spending. Downside risk is mitigated by the aforementioned cash cushion, and the company's ongoing share-repurchase program. In the recent quarter, it bought back a half million shares at around $5.12 each.

Over the past year, the Dow Jones U.S. Specialty Retail Index is up 40% vs. 13% for Build-A-Bear's shares. The company's valuation is equally disconnected from the market. It trades at a paltry Enterprise Value/LTM EBITDA of 2.5 times vs. seven times for a median of toy/mall retail peers such as Mattel (MAT Quote), Gymboree (GYMB Quote), Children's Place (PLCE Quote) and Hot Topic (HOTT Quote).