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
are notreceiving 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 owncustomized 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 companycurtailed its growth strategy, announced a strategic review and has focused on eliminating $18 million incosts.
In March 2008, with the share price down 55% from its IPO price, the board of directors determinedthat 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 onits 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 ishighly leveraged to improvements in consumer spending. Downside risk is mitigated by theaforementioned cash cushion, and the company's ongoing share-repurchase program. In the recentquarter, 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 paltryEnterprise Value/LTM EBITDA of 2.5 times vs. seven times for a median of toy/mall retail peers such as
On a price/book value and Enterprise Value/LTM sales basis, BAB trades at 0.70 times and 0.20 times vs.1.7 times and 0.50 times for that peer group, respectively. The disparity may be explained by the Street'suncertainty of future earnings, as analysts are projecting a range of 2011 earnings between a loss of(37) cents and a profit of 45 cents. BMO Capital Markets maintains the most optimistic view on thecompany, and yesterday increased its rating to outperform on signs of stabilization in sales.
There are nascent signs that retailers are faring better than expected and that holiday sales for toys mayhold steady from last year. For example, last week same-store sales figures at Children's Place rose 4%,far surpassing the estimated decline of -1.3%. Hot Topic and
Abercrombie & Fitch
sales,while declining for the month, fell less than analysts expected. Toys "R" Us, the largest toy retailer in thecountry, announced that its seasonal hiring plans would be unchanged from last year, and that it wouldopen 350 "Holiday Express" locations around the country. Management has also taken action to driveadditional sales through pricing promotions to address misperceptions of value by it customers.
Taken as a whole, these data points suggest that Build-A-Bear's prospects may not be as gloomy as themarket is anticipating. However, one has to wonder that if these actions do not correct BAB's extreme valuationdiscount, would Build-A-Bear be better served if it were taken private, sold, or merged?
In 2005,shareholders of
Vermont Teddy Bear Co.
reached the conclusion that going private was in the bestinterest of shareholders. Management and a private-equity group led the transaction, and cited itsundervaluation and burdensome cost of being a public company as reasons for the transaction.
At thetime, the deal valued Vermont Teddy Bear at $46 million, with an Enterprise Value/LTM EBITDA of seven times andEnterprise Value/LTM sales of 0.70x.
Should BAB pursue a sale or merger,
could be a natural partner, as could Toys "R" Us or a variety of international toy companies looking foran inexpensive platform into the U.S. market.
One potential suitor recently reported to be on the hunt fordeals is
Li & Fung
, China's biggest supplier of clothing and toys to the U.S. big-box retailers.With a business appearing to turn the corner, a rock bottom valuation, and solid balance sheet, sharesof this "beary" special company might be worth a little more if given some time, love, and attention byinvestors.
--Written by Ben Axler in New York.
At the time of publication, Axler was long BBW.
Ben Axler is managing partner and founder of Spruce Point Capital Management, a New York-baed hedge fund. Prior to founding the company, Axler spent eight years as an investment banker advising, structurign and executing billions of dolalrs 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 as master's degree in statistics and received both a bacheler 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 Betta Kappa honors.