Build-A-Bear Workshop: Priced At Around 4x EBITDA

Build-A-Bear Workshop: Priced At Around 4x EBITDA

Adam Bettcher/Getty Images Entertainment Investment Thesis

Build-A-Bear ( BBW ) has seen its share price soar this past year. However, looking ahead, even at this stage, the stock doesn’t strike one as particularly expensive.

Case in point, Build-A-Bear is probably going to report close to $70 million of EBITDA over the next twelve months. This puts the stock trading at around 4x EBITDA. Given that it has a clean balance sheet with more than $40 million of cash and no debt, I believe that this investment is an attractive opportunity. Investment Sentiment Facing BBW

Data by YCharts The past 6 months have been very volatile for shareholders. However, investors that had the stamina to withstand this volatility are now seeing more than 20% returns over the past 6 months.

Compared with other areas of the market, this has been a very strong return for shareholders, and no doubt, there’s a certain level of optimism now being priced in.

That being said, this doesn’t necessarily mean that there’s no more upside. In fact, I contend that the market is more often right than wrong. Build-A-Bear’s Revenue Growth Rates Are Choppy

Build-A-Bear revenue growth rates As you can see above, last year during shelter-in-place, Build-A-Bear saw negative revenue growth rates. Consequently, against that comparison, 2021 has seen very strong revenue growth rates.

Furthermore, Build-A-Bear’s guidance for Q4 2021 of approximately 39% y/y revenue growth rates at the high end are also clearly very attractive.

The biggest uncertainty facing shareholders right now is whether the risk-reward right now has become less attractive. Why?

Because, as 2022 comes up against the high revenue growth rates from 2021, any comparison with the prior year has the potential to disappoint investors. Why Build-A-Bear?

Build-A-Bear are stores that provide a ”make your own stuffed animal” entertainment experience. Build-A-Bear ICR conference As you can see above, its customer base’s household income is diverse. Build-A-Bear ICR conference What’s more, as you can see above, the brand is strong, with high awareness over infants and young children.

Accordingly, what we have is a brand that has the potential to be resilient and even if its revenue growth rates aren’t so strong going into 2022, we should minimally see a company growing at around 7% to 10% over the coming year, which is slightly higher than inflation.

Before discussing its valuation, let’s put a spotlight on its profitability profile. Build-A-Bear’s Record High Profitability

For 2021, Build-A-Bear expects at the high end to see $64 million of EBITDA. To put this figure in context, consider Build-A-Bear’s profitability profile for its two previous years. Build-A-Bear ICR conference Now, allow me to provide further perspective: During 2019, Build-A-Bear’s free cash flow was $9 million, on the back of $15 million EBITDA.

Then, for 2020, its free cash flow was approximately $8 million, on the back of negative $7 million of EBITDA.

The biggest change in the two years that drove free cash flow to remain around the $8 to $9 million figure was the capex usage went from $12 million all the way down to $5 million in 2020.

Therefore, it could be said that the business is stable, resilient, and capable of generating solid free cash flow.

Consequently, given that Build-A-Bear is guiding for capex in 2021 was approximately $8 million, we can assume that its free cash flow potential would reach around $50 million to $55 million over this past year. BBW Stock Valuation – Still Attractively Priced

Before going further into discussing the company’s valuation, allow me to offer some perspective: Build-A-Bear proxy statement As you can see above, longstanding CEO Sharon John owns just over 6% of the outstanding stock, with several executives also with a lot of skin in the game.Furthermore, as you can see in the table, there are many outside groups with a stake in Build-A-Bear, which are very much motivated to see the share price continuing to go higher.The biggest uncertainty for investors is what will Build-A-Bear’s revenue growth rates be over the next twelve months? Presently, analysts following the company expect approximately 10% y/y of revenue growth. This would imply that Build-A-Bear’s revenues could reach approximately $450 million over the coming year.In 2021, Build-A-Bear saw 15% EBITDA margins. If we presume that the same applies for 2022, this would mean that Build-A-Bear could perhaps see nearly $70 million of EBITDA this year.For a company that’s priced with a $300 million market cap, this probably translates into the stock being priced at about 4x this year’s EBITDA. Build-A-Bear ICR conference What’s more, Build-A-Bear holds no […]

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