Try Building a Client Base

Investors may be wondering what kind of a premium might be offered for Build-a-Bear Workshop (NYSE: BBW) as the stuffed-toy maker considers its "strategic options." But they won't exactly be heartened by today's third-quarter earnings report from the company. Same-store sales dropped yet again, and the pace of defection seems to be worsening.

Comps are an important retail metric, because they show sales generated organically, rather than from expansion. Build-a-Bear reported that revenue rose 8.2% in the third quarter, to $109.8 million, but it also opened 16 new stores: 12 here in North America and four abroad. New stores have been cannibalizing sales at existing stores, and comps dropped 10.1% in the quarter. That's on top of a greater-than-9.4% drop in the second quarter, and almost double the 5.8% decline a year ago.

It seems that the drop-off in customers has been ramping up, nearly doubling each quarter from the year before. In fact, it's been two years since Build-a-Bear has seen an uptick in same-store sales.

BBW Same Store Sales, % Chg	2007	2006	2005
Q4	n/a	(10.40%)	(0.60%)
Q3	(10.10%)	(5.80%)	1.30%
Q2	(9.40%)	(4.40%)	(6.90%)
Q1	(6.90%)	(3.80%)	5.40%

Source: Build-a-Bear Workshop SEC filings.

Having forked over a premium for a stuffed bear or two at privately held Vermont Teddy Bear Co., I can attest to the novelty wearing thin pretty quickly. What may once have been a cute gimmick to send a stuffed bear to someone as a gift grows old fast. How many bears does someone other than a collector really need? And after a party or two at a Build-a-Bear store, the kids will be clamoring for pizza and Skee-Ball at Chuck E. Cheese (NYSE: CEC) instead.

There have been a few names bandied about as candidates to buy the Workshop: toy makers like Mattel (NYSE: MAT) and Disney (NYSE: DIS), for instance, but I can't see what benefit they would derive from taking on this concept. Kids clothier Children's Place (Nasdaq: PLCE) has also surfaced as a possibility; perhaps it could co-brand its clothes with miniature suits for the teddy bears. Private equity, however, seems to be a more logical choice to try its hand at turning the business around, out of the glare of the public markets, where it can do some harsh cost-cutting.

Yet even with the stock enjoying a bit of a boost today, in seemingly misguided joy over the results, it's hard to imagine Build-a-Bear commanding prices anywhere near its 52-week high of $32 a share. Even the mid-$20s ,where it entered the summer, seem a rich value for a company hemorrhaging customers.

There may be a premium in the works, but it'll more than likely be on your next bear purchase.

Play with these related Foolish articles:

• Build-a-Bear Argument
• Build-a-Bear Digests U.K. Rival