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Build-A-Bear Workshop: Stellar Metrics, In-Depth Assessment, and Solid Strategies (NYSE: BBW)

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Many investors are wondering where to invest their money in this turbulent stock market environment. The overall stock market has been declining since late December 2021. However, Build-A-Bear Workshop (NYSE: BBW) retained better than the S&P 500 (TO SPY) so far this year. I expect this to continue due to the company’s strong financial metrics and growth strategies. The stock is poised to outperform the broader market over the long term.

As of January 29, 2022, Build-A-Bear had 346 corporate stores and 72 international franchise stores for a total of 418 stores.

Build-A-Bear Growth Strategies

Build-A-Bear Workshop invests in digital transformation to drive growth. This includes encouraging repeat purchases and improving customer engagement with the company’s 12 million contacts and Build-A-Bear Bonus Club members. The company runs a marketing campaign using its digital capabilities to deliver personalized experiences and advertisements.

Build-A-Bear also strives to acquire new customers by going beyond their primary customer base of children to expand the market to new tweens, teens and adults through targeted marketing. The company plans to use digital media, entertainment and marketing to increase sales to these groups.

The company also plans to expand its number of stores by adding 20 locations over the next 2-3 years. This includes third-party retail concepts and company-operated stores. There are also plans to leverage e-commerce business by offering same-day delivery through a partnership with Shipt. The company plans to increase sales and customer service efficiency by using stores as mini-distribution centers for the Buy Online Ship from Store and Buy Online Store Pickup shopping options.

Build-A-Bear has reintroduced the in-store party concept after a 2-year COVID break. This can help attract multiple families to stores to win potential future customers and retain current customers. The year 2022 also marks the company’s 25th anniversary, which can be used to generate excitement and customer interest.

Build-A-Bear makes continuous efforts to optimize its finances by maintaining a strong balance sheet. Efforts are underway for disciplined expenditure management during a difficult period of inflation.

All of these efforts can help generate strong future revenue and earnings growth to drive the stock higher.

Attractive low valuation

Build-A-Bear is one of the few companies that is profitable and successful and trades with a low PE ratio of less than 10. The stock has a back PE of 7.9 and a forward PE of 7.23. For comparison, the S&P 500 (SPY) is trading with a Final PE of 21.5 and a forward PE of 19.4. BBW is trading at a significant discount to the wider market.

Build-A-Bear’s price-to-sales ratio is also low at 0.71. The S&P 500 is trading with a price/sales ratio of 2.75. Thus, BBW is a bargain because it has never been offered at an overheated price and valuation like many stocks in the market.

At a valuation like this, one would think the company is in trouble or has a serious negative catalyst. However, this is not the case. Build-A-Bear has plenty of room upside due to this low valuation.

Solid financial measures

BBW has strong financial metrics and growth, which can help generate more equity gains from its low valuation level. Profitability metrics are solid as it has an ROE of 58.7%, ROIC of 16% and ROA of 17.8%. These are all significantly above the industry median ROE of 17.65%, ROIC of 8% and ROA of 6%. This demonstrates that Build-A-Bear gets what it pays for.

The company has a strong balance sheet with 1.5 times more total assets than total liabilities for total shareholders’ equity of $93.7 million. BBW also has 1.33 times more current assets than current liabilities. Thus, the company is in good shape to meet its long and short term obligations.

BBW more than doubled its operating cash flow to $28.1 million in FY22 from $13.4 million in FY21. The latest operating cash flow is also 30% higher than the pre-pandemic level of $21.6 million in fiscal 2020. BBW’s fiscal year ended in February 2020 that year, a few weeks before the start of the COVID-related closures. After being a net repurchaser of common stock, the company was still left with $21.6 million in free cash flow.

Thus, the company has the opportunity to expand its activities, carry out share buybacks and consider paying dividends in the future. The company does not currently pay dividends. Therefore, investors will have to rely on stock price appreciation for their gains.

BBW is expected to increase revenue by around 10% and profit by around 9.7% for FY23 which ends in January 2023 according to consensus estimates. This growth should help lift the stock for strong gains, that is, if the broader market cooperates.

High Looking Alpha Ratings

Stocks with the highest SA Quant ratings tend to outperform the S&P 500. BBW happens to have high buy ratings and outperforms the market as a whole.

Seeking high alpha ratings for stocks Outperforming the S&P 500

Looking for alpha stock quotes (Looking for Alpha)

Given the strong metrics BBW is achieving across multiple categories, the stock has a good chance of outperforming the market going forward.

The technical point of view

Build-A-Bear Workshop Stock Chart BBW RSI MACD Chaikin Money Flow

Stock charts

The stock has had a good rally since the trough of the pandemic. The price now appears to be consolidating as the broader market sells off. This is a good sign that BBW stock strength is holding up better than the wider market. The RSI has risen above 50 on the weekly chart. This is bullish because the price is showing positive strength. The MACD remains above zero, which is positive, but the green MACD line has not crossed the signal line, which can be used as a buy signal. The flow of money [CMF] has been increasing since around November 2021.

I would like to see the money flow increase above zero and the MACD line cross the red signal line for a buy confirmation. So far, the price is holding above the 50-day moving average, which is positive.

Build-A-Bear’s Long-Term Investment Prospects

Build-A-Bear looks like a great combination of a highly rated title with strong growth potential. The stock is still too low, likely due to the hit it took during the pandemic when stores had to close temporarily. Stores are open again and business is back to normal.

Risks to the business are possible future closures if another variant or new virus spins out of control, causing stores to close. Competition could be a risk if BBW’s offerings go out of style and consumers find more appealing alternatives.

Overall, BBW has solid strategies to continue its growth. In-store parties are back and e-commerce is alive and growing. Switching to the market to older age groups can increase the clientele over time.

Analysts have a one-year price target of $33 for the stock, about 85% higher than the current price. This seems reasonable given the company’s low PE ratio and expected strong growth. The price target of $33 would bring the PE ratio to around 12.7 based on an expected EPS of $2.60 for FY23.