Ben Axler is managing partner of Spruce Point Capital Management

Shares of

Build-A-Bear Workshop

(BBW) - Get Report

are slowly getting the attention they deserve from the Street as the company's core business fundamentals improve and it implements new growth strategies.

Still, shares remains considerably undervalued even after a recent rally from a low of $4.50 earlier this month.

Last week, Build-A-Bear posted sizeable adjusted earnings of 29 cents a share, easily beating analyst expectations for 10 cents a share.

Cash generation -- in our view, a better indicator of business performance -- was also strong, at $13.4 million for the 2009 fiscal year vs. -$19.2 million for fiscal year 2008, and left the company with $60 million in cash and no long-term debt as of Jan. 2.

This amounts to $3.20 a share of cash, or 53% of the current stock price value. The company also maintains an undrawn credit facility providing $40 million of available capital.

Total available liquidity, therefore, is more than $100 million, or nearly double the company's enterprise value.

How was management able to achieve such strong results? From a top-line perspective, the company's consolidated comparable same-store sales improved meaningfully year over year, from a decline of 15.7% in the 2008 fiscal year to a decline of 9.9% in the 2009 fiscal year.

The biggest source of improvement came from the company's North American operations, where declines are clearly moderating.

The company continues to show growth in Europe, where consolidated sales grew 4.5% year over year.

Real operating leverage came from management meeting its objective to eliminate $25 million of cost savings and hinting at further opportunities to drive that number higher in 2010.

What lies ahead for the company in 2010? For starters, management indicated on its conference call that the trend of improving comparable same-store sales continued into 2010, reaching negative single-digit levels in January and February, despite the difficult weather in the past few weeks. These trends were both in stores and online.

Through February, sales were flat from last year, even with a few days remaining in the month. These comments were in line with our observations from recent site visits, when we observed strong customer turnout and waiting lines during the Valentine's Day weekend.

New product introductions and innovation also offer the prospect of increasing sales.

For example, the first introduction of the highly popular Zhu Zhu pets, a line of artificially intelligent plush hamsters, is currently in 50 stores with strong results. It will be rolled out to all North American locations by March.

Other seasonal promotions for holidays like Easter may drive repeat visits by families.

Perhaps a more exciting growth strategy is the company's recently announced agreement with

A Squared Entertainment

, a global children's licensing company. Under this agreement, A Squared Entertainment will help Build-A-Bear to create a stronger external licensing program including merchandise that will be sold outside of Build-A-Bear Workshop stores. Such merchandise will include DVDs, accessories, apparel and books.

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In addition, A Squared will develop multimedia entertainment for future distribution online, on air and on other digital devices. A Squared will also collaborate to produce original programming to expand upon the success of Holly and Hal Moose and will include other Build-A-Bear Workshop properties.

With the worst likely behind it, the company has decided to increase capital spending by $4 million to $12 million from last year's level of $8 million for upgrades to infrastructure as well as the opening of three new stores: two stores in the U.K. in the fall and one new format store in the U.S.

On a relative valuation basis, Build-A-Bear continues to trade at a substantial discount to other toy and mall-based retailers such as

Mattel

(MAT) - Get Report

,

Hasbro

(HAS) - Get Report

,

Gymboree

( GYMB),

Children's Place

(PLCE) - Get Report

,

JAKKS Pacific

(JAKK) - Get Report

despite maintaining a stellar balance sheet and improving trends.

The ratio of the company's enterprise value to estimated 2010 EBITDA (earnings before interest, taxes, depreciation and amortization) is a meager 1.9, vs. 5.0 for its mean peer group.

From a sales perspective, the ratio of the company's enterprise value to estimated 2010 revenue is 0.10, vs. 0.90 for the same peer group.

At least one analyst has also taken notice of the company's brightened outlook and potential for valuation expansion. Needham & Company backed its buy recommendation and affirmed a $13 price target over the coming year.

Given the tangible improvements in the business, increasing investor/analyst sentiment and an already heavily discounted valuation, the bear thesis in BBW's share price appears increasingly tenuous.

At the time of publication, Axler was long shares of Build-A-Bear Workshop.

Ben Axler is managing partner and founder of Spruce Point Capital Management, a New York-based hedge fund. Prior to founding the company, Axler spent eight years as an investment banker advising, structuring and executing billions of dollars of financing, risk management and M&A transactions for leading Fortune 500 companies. Axler started his career with Credit Suisse in 2000, and from 2006 to 2008, was an associate director at Barclays Capital in the Diversified Industrials Group. Axler graduated from Yale University with a master's degree in statistics and received both a bachelor of arts degree in statistics and a bachelor of science in marketing and business administration from Rutgers College, where he graduated with summa cum laude and Phi Beta Kappa honors.