If you have a young child in your life, you have probably heard of or actually been to a Build-a-Bear Workshop (NYSE: BBW) store. Conceptually it is a neat idea, with customers picking out a teddy bear "skin" that then gets filled with stuffing, bringing the toy to life. But there's more to like here than just a business concept.
Here are three reasons to watch the stock of this unique specialty retailer.
What it is today
The brief introduction to Build-a-Bear gives you an idea of what its stores do. But there's more to it than just generic bears. The company taps into current trends by offering stuffed animals related to key media properties, like My Little Pony and the many Marvel comic titles that have been turned into blockbuster movies. Basically, there's a reason why customers would come back again and again. And, notably, teens and adults account for 40% of the company's sales.
Image source: Getty Images.
At the end of the first quarter, Build-a-Bear had 349 company-owned locations. It also had 63 franchised stores and 70 third-party retail locations (more on this segment below). That's not exactly a huge business, noting that the company's market cap is just $300 million. This probably isn't a great investment option for risk-averse investors. And yet there are at least three reasons to like the stock for more aggressive types.
1. Its financials are solid as a rock
The first thing to note about this retailer is that it has an incredibly strong financial foundation. A quick look at the balance sheet tells you most of what you need to know. Long-term debt doesn't even show up on the list. In fact, in the first quarter the company actually generated $76,000 in interest income from its cash balance of nearly $33 million.
Cash isn't a notable revenue source for Build-a-Bear compared to its stores. But the fact that it has no debt is important. Companies without debt have a materially lower chance of going bankrupt than companies with heavy leverage. In other words, tiny Build-a-Bear has staying power.
2. Record results in fiscal 2022 continue into 2023
The second issue of note here is that in fiscal 2022 Build-a-Bear had the highest annual profit in its 25-year history. But, according to the first-quarter earnings release, management is projecting "Pre-tax income growth of 10% to 15% compared to fiscal 2022, surpassing the record high that the Company achieved in fiscal 2022."
Basically, Build-a-Bear is doing well right now and that isn't expected to change over the near term. To be fair, the stock rallied off its lows after it reported first-quarter results. But it is still down 13% or so year to date in 2023. If the company can live up to its guidance, there may be some additional upside.
3. Expanding in an interesting niche
The big push for Build-a-Bear right now is to grow its "store" count in third-party retail locations. These are basically locations inside of places like Carnival Cruise Line ships and Great Wolf Lodge resorts. Essentially, they are locations in places where people are already predisposed to spend money. Indeed, what better way to commemorate a family trip than to build a stuffed animal?
With only 70 of these locations today, it seems like there is a huge growth opportunity here over the long term. The company is hoping to open 20 to 30 additional locations in 2023 alone. If it can keep this segment going strong, it is reasonable to believe that financial results could continue to improve beyond 2023.
A stock worth watching
Build-a-Bear isn't likely to turn into a high-growth technology stock anytime soon (though it does sell bears over the internet). However, with no debt, record-setting results, and a viable growth platform in third-party locations, this could still be an attractive stock to watch. Notably, the company paid out a $1.50 per share special dividend in April. While you can't predict special dividends, it is a clear sign that the company plans to reward shareholders well when Build-a-Bear does well.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Build-A-Bear Workshop and Carnival Corp. The Motley Fool has a disclosure policy.
