A couple of months ago, my wife and I were strolling through a local mall, doing a bit of shopping. It was something of a Peter Lynch shopping trip, because we weren't looking for stuff; we were looking for companies.
One outfit that really turned our heads was Build-a-Bear Workshop (NYSE: BBW), an interactive retailer where kids put together their own stuffed animal through an elaborate and fun-looking process. It's simple, goofy, and slap-yourself-on-the-forehead obvious when you see it in action. In that way, it reminds me of concepts such as Netflix (Nasdaq: NFLX) or Buffalo Wild Wings (Nasdaq: BWLD).
The place was packed, and staff members told us that not only were children in on the fun, but teenage girls were also regular customers, often bringing boyfriends in tow for pre-prom cuddlies. Like Disney's (NYSE: DIS) best entertainment, the concept spans age groups. We heard that the store was pursuing relationships with well-known brands such as Limited Too (NYSE: TOO) and Skechers (NYSE: SKX).
We were quite impressed -- and more excited when we found out the firm was about to go public.
When fellow Fool David Meier penned his critique of the IPO, he found most of the nits that I noticed: With most of the shares coming from current holders, it looked a lot like an insider cashout; there were some scary comps drops; margins had eroded; and free cash flow was less than abundant.
On the other hand, we're talking about a growth company of sorts, where enterprise value-to-free cash flow (EV/FCF) ratios are often in the 30s and 40s -- if there's any FCF at all. So, today's release of third-quarter numbers offers us a chance to check in and see what exactly the bears are building. It's impressive enough.
Revenues were up 39% over last year's Q3, with much of the gain owed not to new stores but to near-19% comps growth. There was more great news on margins; a 5.3% increase keeps up the high levels recorded year-to-date, marking noticeable improvement over the past few years. There are other reasons to snuggle up to the firm, such as high insider ownership and its habit of expensing stock options right where we can see them.
And there could well be more growth on the horizon. In addition to upcoming bear locations, the firm is planning to open a pair of doll-building stores, the first of what looks like another winning idea in interactive retail. (Anyone seen the action at American Girl or Libby Lou?) If you're interested in Rule Breakers or Hidden Gems, take a peek at this nifty firm. It isn't exactly bargain-priced, but there's plenty of room for the experienced management to overdeliver.
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Seth Jayson hasn't built a bear yet, but he's knows his time is coming. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
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