Build-A-Bear-Workshop (Ticker: BBW): A “Beary” Interesting Company

My Moves:

Company Overview:

I have to admit that I stumbled on this stock accidentally as I have never even been to one of their stores, but if you have kids or have ever organized a child’s birthday party, the images above are likely familiar and tell you all you need to get the idea of what they do. In case you like to read the formal version, below is an official summary from their annual report:

“Build-A-Bear Workshop, Inc., a Delaware corporation, was formed in 1997 as a mall-based, experiential specialty retailer where children and their families could create their own stuffed animals. Over the last 25 years, Build-A-Bear has become a brand with high consumer awareness and positive affinity with over 225 million furry friends sold. We are leveraging this brand strength to strategically evolve our brick-and-mortar retail footprint beyond traditional malls with a versatile range of formats and locations including tourist destinations, to expand into international markets primarily via a franchise model, grow the total addressable market beyond children by adding teens and adults with entertainment/sports licensing, collectible and gifting offerings as well as add product categories beyond plush such as gift boxes and pajamas. Build-A-Bear's pop-culture and multi-generational appeal have also played a key role in our digital transformation which includes a meaningful e-commerce/omni-channel business that has delivered sustained growth, engaging consumer loyalty program and robust digital marketing and content capabilities with industry-leading partners.”

The company has three main channels of distribution:

● Approximately 360 company-owned stores and a website

● Approximately 74 International franchises

● Approximately 90 3^rd  Party stores i.e. a BBW shop on a cruise ship, etc., which sells products by BBW products but is not owned or operated by the company

Financial Performance

Current CEO Sharon John has been at the helm since 2013, and it feels like management got into a groove with consistent top and bottom-line growth, as well as expanding margins. The growth may not seem overly exciting, but the management did take a business $4MM of free cash flow in 2019 to $50MM in 2023 with COVID in the background. 

The business seems relatively simple; grow the number of locations and sell more bears per store. 12% of revenue comes from an online channel, but it doesn’t seem to be the driver of future growth. Management is projecting an additional 50 stores in 2024 and mid-single-digit revenue growth. 

Valuation Metrics:

Everyone tells you that there is no such thing as a free lunch on Wall Street, but this looks pretty close. In addition to covered calls, I bought shares on March 18^th, 2024 for $29.70 (sometimes I am good at calling tops).

Musings

“What you measure affects what you do. If you don't measure the right thing, you don't do the right thing.”

–Joseph Stiglitz, American Economist. 

A similar quote is attributed to Peter Drucker, a management consulting guru.

We recently had to purchase a car. After doing an exhaustive amount of research, and visiting several dealerships, near and far, we were offered a deal that seemed to be too good to be true, especially since they had a very similar car for about 8% more in their inventory. Of course, I decided to push my luck and asked for a further discount. The salesperson, as they all do, said he needed to talk to his manager. He left and came back a few minutes later, a bit flustered, and said there was a mistake, the price he gave me was mistyped in his system, so he couldn’t give me any additional discount. I asked if they were still ok transacting at the “wrong price” and he acquiesced. So we agreed that they would finish detailing the car and I would pick it up and pay for it in the morning. The following morning brought an attempt to change the price and after a spirited exchange involving the manager, the dealership, to their credit, honored their word. The mistake was ultimately found to be caused by a typo made in the back office. The salesperson realized that he had to either do the right thing for himself and sell me the car or for the dealership and fix the price, which would most likely lose a sale – and he acted in line with how he was being incentivized.

In my story, nobody got hurt. I got lucky, the salesperson got paid, and the dealership didn’t make as much as they could have, but life goes on. I think unfortunately the consequences of improperly aligned incentives can be a lot more catastrophic. I had a front-row seat to a Merrill Lynch blow-up in 2009, where because of the improperly set incentives, a handful of employees incentivized by multi-million annual cash bonuses signed the firm up for massive mispriced risks. The resulting fallout involved the destruction of the firm and impacted the livelihoods and savings of thousands of employees, who in most cases didn’t even know these people existed or the risks that they took. 

I am sure many industries at all levels are full of similar examples, where wrong incentives drive optimal results for individuals but not the overall business. However, financial services is a particularly interesting industry because instead of taking years or even decades to erode a good brand, mistakes in managing risk can lead to a very quick fatality.

Happy investing!

Behind the Curtain: The Story Behind Endgame Mindset Newsletter

After graduating from NYU’s Stern, I started my adult life as an Investment Banker in Lehman Brothers’ Mergers and Acquisitions group. I have spent the majority of my professional career as an investor, investing on behalf of large institutions such as Morgan Stanley, Merrill Lynch, and Bank of America, as well as a private equity fund and helping companies buy other companies.  In my free time, I spend a lot of hours researching stocks.  A lot. It is hard to save your way to retirement without making good investments. 

Recently, I have also started focusing on Covered Calls.  My goal with covered calls in the current rate environment is to generate a 10-12% unlevered return.  In writing this newsletter, I share my analysis and what I own with others, hopefully helping them earn steady and attractive returns as well.

Disclaimer:

Although the information contained in the newsletter is obtained from sources I believe to be reliable, I cannot guarantee its accuracy. Calculations made in this letter are based on my estimates and not only do I make mistakes but actual performance will almost certainly be different from my projections. The opinions expressed in the newsletter are mine and may change without notice. The information in the newsletter may become outdated and I have no obligation to update it. The information in the newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell, or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described were or will be profitable. I strongly advise you to discuss your investment options with your financial adviser before making any investments, including whether any investment is suitable for your specific needs.

Do your homework before putting money at risk!